What Does Risk Management Mean to You?

11/12/2014 6:00 am EST

Focus: STRATEGIES

Michael Seery of SeeryFutures.com highlights the importance of traders being able to take a loss and emphasizes the importance of risk management by citing an example to illustrate how easily a small loss can turn into a loss of "ridiculous amounts of money."

What does risk management mean to you?  I generally tell people that the reason people lose money in commodities is not due to the fact that they are bad at predicting where prices are headed, however, they are bad when it comes to losing trades and refusing to take a loss, which results for heavy monetary losses that are difficult to come back from. For example, if a customer has $100,000 account, in my opinion, on any given trade, he or she should risk 2%-3% of the account value, meaning if you are wrong, the worst-case scenario is still a $97,000 remaining balance, however, what I always see is traders risking ridiculous amounts of money and instead of the 3% stop loss, will risk 20% to 30% on any given trade, or even higher, therefore, if you are wrong on two or three trades that $100,000 dollar account could dwindle down to nothing very quickly and I’ve  seen it many times throughout my career.

What many traders forget to realize is they might have four or five commodity positions on and if you have too many contracts on all at the same time and all of those trades go against you—which is very possible—the losses can add up to be staggering so what I am suggesting to you is if you have $100,000 account, risk between $2,000–$3,000 per trade, so if you lose on five straight trades, the worst-case scenario is that you’re down $15,000 and still have an $85,000 balance, which is very possible to still come back from and your still in the game.

By Michael Seery of SeeryFutures.com

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