Forbes, Jim

Forbes Futures

Using a multitude of market models and trading techniques, risk professionals identify, value, price and manage the opportunities that lie hidden in the risks others refuse or unknowingly accept. Obviously, there are numerous strategies employed to manage risks and it is important to know where one fits within the risk continuum. I tend to trade the markets from an outright position taking approach versus an arbitrage or volatility spreading perspective. While I am not opposed to those latter strategies, it just that I find that the non-institutional investor usually cannot compete using those techniques due to prohibitive execution costs. In my opinion, using a position taking approach to trading commodities is much like playing professional baseball, 70% of the time you strike out and 30% you successfully connect with the ball, hitting some home runs with maybe an occasional grand slam. And mind you, a .300 batting average is considered to be very good, even for professionals. Yet, even with only a 30% or less profitable trade ratio, it is still quite possible to make profits. How? By using disciplined money management principles such as using trade stops, limit losing trades to only a small percentage of trade equity, adjust margin/equity ratios to volatility and look for potential trades that offer a high reward/risk ratio. Speculation in the futures markets is clearly not appropriate for everyone because it requires the financial resources and the emotional temperament to handle the volatility. Just as it is possible to realize substantial profits in a short period of time, it is also possible to incur substantial losses in a short period of time. Trading the futures markets is also a very frustrating business because one is wrong more often than one is right. Even with profitable trades, there is the frustration of knowing (in hindsight) that you could have made more if you had stayed in longer or exited earlier, traded more contracts, etc, etc. So how should an investor manage the financial and the emotional demands of a speculative investment in the futures markets? First, mentally accept the fact that this type of investment is based on volatility and uncertainty. Erratic performance is a natural extension of this environment. Second, limit any investment in futures to only a small portion of your investment capital. Third, set a percentage amount of equity risk. If your account decreases by certain percentage, then re-evaluate your investment and/or close your account. Do not try to armchair quarterback every trade.. Fourth, if your account realizes significant profits, (No claim is made that trading results will be profitable or that losses could not occur), then take some equity out and diversify into other investments, thereby keeping your investment in futures too only a small percentage of your investment capital.