Have a Maximum Loss Target

Failing to prepare is preparing to fail. When it comes to futures trading, never have truer words been spoken. Without a strong, measurable trading plan in place, your chances of succeeding against the markets over time are limited. No matter how or what they trade, every successful trader has prepared and planned his trading activity in advance to remove the risk of costly errors and make consistent, profitable trading over time a real possibility. As part of that planning process, knowing the limitations of your capital, and the effect of losses on your overall performance is critically important in formulating meaningful, interpretable trading data.

Every time you execute a futures position, you are risking capital to the threat of loss. You are effectively staking money against the chance that the value of the futures market falls away during your period of ownership. Knowing the extent to which these losses, when they do happen, affect your overall trading performance targets is valuable because it enables a more considered approach to financial and capital planning. As a result, it pays to be in a position, pre-transaction, where you already know the degree of capital loss you can sustain in the event of your trade turning sour.

Why Set Loss Expectations?

Setting expectations of your losses, as indeed profits, on a per transaction, per day and per month basis is an essential and highly recommended part of planning your trading activity. The risks of the markets are so great that you cannot afford to turn your back for a moment on losing positions, and you need to know instantly how long you can leave a losing position open for. At the same time, it can be foolish to close at the first sign of red if you’ve just entered a position you think will turn, so it’s important that you have recourse to an objective way of making these decisions. Having pre-set, pre-determined loss targets for each transaction, computed on a percentage of the transaction size (rather than capital damage) will enable you to see at a glance positions that you can no longer afford to keep.

When thinking about your loss expectations thinking about the decline in transaction size as a percentage is the simplest way to set your targets, Remember that this doesn’t give an accurate reflection of the underlying capital damage, once leverage and margin are factored in, but provides the easiest method for calculating on the fly, as you are trading, to determining whether a position is working for you.

How to Set Loss Expectations?

With loss targets and maximum loss expectations, there are automated ways of building in your trading strategy through your online brokerage platform. Guaranteed stop losses (and limits) can be deployed to set automatic cut off points, at which your position will be liquidated to prevent further losses. While stop losses attract an additional charge, they can be factored in to your loss targets to give an additional layer of security against wayward transactions.

When a market falls to a certain point at which you have positioned a stop loss, your broker will automatically, without further instruction, liquidate your position, saving you on potential losses and freeing you up to trade in other areas of your portfolio.

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