What are "points"?
|March 7th, 2011, 12:28 PM||#21 (permalink)|
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Have to stop this, before Big Mike's turns into a forum for breeding Dalmatians.
Points are quite useful, as you can use the point value of the contract to determine the number of contracts to trade. Let us assume that you trade an account of $ 50,000 and that you are willing to risk 1% plus slippage per trade. Also assume that you trade a 15 min chart and that your trade setups require a stop loss of 1.5 times the average true range over the last three trading days. Then the point value is an easy way to calculate the number of contracts to trade. Here are some examples using the point values (in bold)
YM: ATR 14.5 points, stop loss 22 points, risk per contract 22 * $ 5 = $ 110 -> position size 4 contracts
ES: ATR 1.9 points, stop loss 2.75 points, risk per contract 2.75 * $ 50 = $ 137.50 -> position size 3 contracts
CL: ATR 0.33 points, stop loss 0.50 points, risk per contract 0.50 * $1,000 = $ 500 -> position size 1 contract
GC: ATR 1.9 points, stop loss 2.7 points, risk per contract 2.7 points * $ 100 = $ 270 -> position size 1 or 2*) contracts
*) if you accept a risk of $ 540 plus slippage
The point is that the ATR is displayed in points, and that you can use the point value of the contracts to calculate your position size. The calculation of the position size is a two-step process, the first step involves defining a stop-loss which is required for your trading strategy under current market conditions. The stop loss is independent of the size of your account. The point value is only needed for position sizing.
So the point is that you should understand what is a point and how to use points and point values, because otherwise your trading will be absolutely pointless.