This article on how to How to Minimize Futures Trading Risks is the opinion of Optimus Futures.
Imagine going long crude oil futures back on December 1st when it was trading at around $65 per barrel, with one contract. You’d be up about $35,000, in just three short months when it hit $100.
You see, for every one dollar crude oil futures rise, the trader with a long contract gains $1,000.
And you know what else?
The exchange margin for one crude oil futures contract is around $5100.
That’s a lot of leverage.
Trading futures is inherently risky.
While most traders are drawn into futures trading because of the leverage it offers and all the potential that goes with it, many of them struggle to minimize trading risk.
Today we’re going to look at three strategies designed to help you minimize trading risk when trading futures.
Implementing these strategies could save you lots of money or future heartache. And that’s why we believe it’s important you study them.
Define Price Levels
The top futures traders in the world didn’t get there out of sheer luck. They come into each trade with their price levels defined.
For example, the most basic trading plan will have at least two outs: A profit target and a stop loss. You want to know in advance where you plan to exit.
Why?
Because if you don’t, you are more likely to let your emotions get the best of you.
For some traders, accepting a loss is hard. Setting a stop loss helps emotional traders stay disciplined and minimize futures trading risks.
Setting a profit target can also be beneficial. Some traders will let greed get the best of them, and never take profits when they are staring them right in the face. Remember, it’s only a profit after you close out the trade.
Putting a plan together and clearly defining your outs is an excellent way to help minimize futures trading risks.
Before you enter any trade you should be able to define where you want to take profits, where you would stop out, as well as how.
For example, some traders will use price levels as strict targets and stops while others use them as guide levels based on candle closes.
Each has its benefits and disadvantages. You want to choose the one that works best for your strategy and you as a trader.
One thing to consider is whether you want to scale into our out of a trade.
Sometimes, a trader may encounter a situation where they identify multiple potential prices levels that may work as support or resistance for entering a trade.
Scaling into a trade means that you look to split up your entries across these points, whether you split your entries by dollar value, number of contracts, or even use some graduated system.
If you’re uncomfortable with the total risk associated with regular E-Mini contracts, Micro contracts are available with many popular products including major indexes, commodities, and more.
Scaling into a trade allows a trader to hedge their bets against putting all their money to work at one point when they aren’t sure.
Similarly, traders can hedge futures risk by defining multiple exists. Quite often, a market may run well beyond your initial profit target.
In order to maximize potential gains, traders can look to take part of a position off at each target with stop losses set back at break-even or that gradually rise with each exit.
Focus On Catalysts
It’s true, trading futures is risky. However, there are periods in which volatility contracts and expands that you should be familiar with. Knowing these ahead of time can help you hedge futures risk
For example, if you are trading crude oil futures contracts then you need to be aware of the upcoming events which have the potential to move that market.
There are scheduled catalysts like the EIA Petroleum Status report which typically is released on Wednesday and tells about the supply and demand dynamics of crude oil.
Past performance is not indicative of future results. But, a build-in crude oil supply typically sends prices lower, while a drop in supply typically sends them higher.
If you are trading crude oil futures you want to be aware of these events because they have the potential to make the market more volatile.
Sticking with crude examples, the same could be said when there is an upcoming OPEC meeting.
Outside of known catalysts, you should also be aware of the news cycle. For example, when Russia invaded Ukraine in late February 2022, it caused oil prices to spike. If you were following the news cycle then you would have known that volatility in energy was about to pick up.
Ideally, you want to create a calendar that lists out the major events that could impact the market you trade. It’s also a good idea to keep a trading journal to note how these catalysts move futures.
If you’re looking for a way to keep up with all the catalysts occurring in the futures market:, then make sure to bookmark this page.
Stay on top of market-moving headlines with Optimus News.
Use Futures Options to Hedge Futures Risk
Many traders never venture beyond futures contracts themselves. Yet, futures options are a fantastic tool when you’re looking for ways to hedge futures risk or make outright speculative trades.
You can hedge futures contracts by buying or selling options in the same underlying futures.
For example, let’s say on March 1, 2022, a trader notices that crude oil is experiencing a backwardation. The front-month contract is trading north of $100 and the September futures are trading at $88.
The trader believes crude oil futures will be higher as we get into September because of the expected rise in travel demand, as well as, the ongoing fear of rising inflation. However, there is always a chance the trader can be wrong. And having overnight risk in the futures market can be risky. To mitigate the risk, the trader could buy some put options.
Example: Trader is long September Crude Oil Futures at $88
They want to hedge their risk so they decide to buy September $80 puts for $8.00 per contract.
Because the trader is paying $8 in premium, they would need the futures contract to be trading at $96 to break even at the options expiration. However, their profit potential is not defined.
On the other hand, the $80 puts protects the trader all the way down to $72. In other words, if oil were to happen to collapse (which it has several times throughout history) having that put option would protect past $72. In other words, the trader is risking $16 per contract.
Of course, you’re never locked into an options contract. That means a trader can always exit before the expiration date, for either a profit or loss. Consider utilizing options to hedge your risk when trading futures contracts.
Plus, you can create complex options strategies including vertical spreads, iron condors, and more, along with futures to take directional trades for or against implied volatility in the underlying asset.
Bottom Line
Learning how to minimize futures trading risks is an ongoing process. It’s something you continue to practice and grow at.
Optimus Futures helps traders in their journey with access to the latest tools and technology, as well as a wealth of knowledge.
You can use our blog posts to learn more about topics from trade management to explore alternative strategies.
When you’re ready, Optimus Futures can have you up and running in a matter of hours.
Disclaimer: There is a substantial risk of loss in futures trading. Past performance is not indicative of future results. Despite any attempts to minimize risk, you may be called upon to meet your margins requirements, and your positions may be liquidated. You may lose more than your Initial investment.
