You hear it over and over again as a trader, and it takes many different forms: “Money management is more important than great entry signals”, “The market can stay irrational longer than you can stay solvent”, “It’s more important to manage risk than to generate profits”, and so forth. So how do you put this advice into practice? I won’t propose a general theory of risk management here, but instead, I’ll discuss one helpful tool you can use as a trader of Futures and Options on Futures: the SPAN risk algorithm.
What Is SPAN?
The name stands for “Standardized Portfolio Analysis of Risk”, and it was developed by the CME in 1988. It is a scenario-based algorithm which attempts to compute the maximum loss your account might reasonably incur within one trading day. This amount is what the exchange requires you to hold in margin, or “performance bond” as it’s also called.