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Risk of trading micro futures


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Risk of trading micro futures

  #11 (permalink)
 
Blash's Avatar
 Blash 
Chicago, IL
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Here is a perfect example that just happened.

https://www.financemagnates.com/forex/brokers/interactive-brokers-loss-from-oil-collapse-swelled-to-104-million/amp/




Ron


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  #12 (permalink)
lostboy
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That was quite an extreme situation!

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  #13 (permalink)
lostboy
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Thanks for sharing the article

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  #14 (permalink)
 
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 josh 
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lostboy View Post
Basically I`m aware of the risk envolved in trading… I`m just wondering, how it can be possible to lose an amount greater then my deposit? If Im setting a stop loss and follow a risk management system?

Could anyone explane that to me pls?


It's a general disclosure. Not everyone uses a stop loss, and not everyone manages risk. When you open a position on margin, by definition you are effectively being 'loaned' money, and if the market does move quickly, you can be in a position such that your total loss is greater than what you have put up for margin. In this case, you will need to deposit funds to cover the margin.



In practice, most brokers will never let this happen and you will be automatically liquidated. Note this is only an issue really if you are really close to your max margin. For example, a broker gives $50 MES daytrade margin. You have a $1000 account. You foolishly open 20 contracts, which is the max allowable ($1000 / $50 => 20 contracts). If the market moves 10 handles against you, you will have no money left (-10 handles * $5 / handle * 20 contracts => -$1000) and will be auto-liquidated. In practice, they will liquidate you before this, as they require a minimum buffer, probably around $500.

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  #15 (permalink)
lostboy
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josh View Post
It's a general disclosure.

Thats what I thought. But wanted to be sure about it after I read their disclouser statment

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  #16 (permalink)
lostboy
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josh View Post

In practice, most brokers will never let this happen and you will be automatically liquidated. Note this is only an issue really if you are really close to your max margin. For example, a broker gives $50 MES daytrade margin. You have a $1000 account. You foolishly open 20 contracts, which is the max allowable ($1000 / $50 => 20 contracts). If the market moves 10 handles against you, you will have no money left (-10 handles * $5 / handle * 20 contracts => -$1000) and will be auto-liquidated. In practice, they will liquidate you before this, as they require a minimum buffer, probably around $500.

Thanks for the detailed example!

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  #17 (permalink)
 
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 Sandpaddict 
Vancouver, Canada
 
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Blash View Post
I will never forget the Flash Crash of May 6 2010. I was in the kitchen on the phone with Interactive Brokers and I saw, before my eyes, the Dow drop 700 points in just a couple of seconds.

I screamed.........lol.....

Ron

Wow that must have been crazy. But you never mentioned... were you long, short, flat?

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  #18 (permalink)
raskol
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slippage is definitely something to keep in mind especially when trading thinly traded contracts. Trading mini crude oil during an EIA number can cause a big loss... or big profit.

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  #19 (permalink)
 Billiwon 
Los Angeles, California
 
Experience: Intermediate
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Trading: Index futures, etc.
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Blash View Post
Markets can move....sometimes in extreme volatility situations there may not be anyone to take the other side of your trade nearby the price you want. Might be VERY far away.

If you get out like this the distance from entry might be greater than your account balance. BOOM, you now owe your broker more money than your account had.

Times like these are rare ... but can happen...hence the text from your brokers account opening papers.

Ron

Besides slippage adding to your stop loss, a stop loss may or may not stop your loss at where you wanted it. How is your stop loss order triggered, by a bar finishing on your chart, crossing over something? What if there is a data burst, or a data delay? And where is the stop loss order residing? On your computer, at the broker's server or exchange ? If you read the disclaimer you signed when opening the account with your broker, it says you are responsible for any problem due to computer, power outage, internet .. etc. So your stop loss order may not function as planned when something happens. These don't happen often, but can ...

Billiwon

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  #20 (permalink)
Mozart2112
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lostboy View Post
That was exactly the Information I was looking for! Now I got it

Thanks a lot

Just keep in mind leverage works both ways, to the upside and to the downside so you want to not over do it on the lot size especially in illiquid contracts.

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