To refresh your memory — the Wave system uses a 2, 10, 30 day MA, with an ADX and %R confirmation to trigger the entry point. The entry points are discussed in part 1, it can be found
http://www.traderplanet.com/articles/view/64512-a_straight_forward_futures_trading_plan_the_wave
Part 2 covers setting the initial stop loss point
Today I will cover how I determine position sizing. I am assuming a 100K dollar account, and the goal to limit losses to 2% in the trade. In part 2 I used the Wilder’s Average True Range (14 day MA) for setting the stop loss, and I like using 2X the ATR as my initial stop loss. In the example in part 2 I used a corn trade in AUG as an example, the ATR(14) was about $0.12, which I doubled to $0.24. Subtracting this from the entry price (413.5) determined my initial stop loss (389.5). Corn is $50 a point (5000 bushels X $0.01), so this put $1200 at risk for a single contract. For this trade and account size, 2 contracts would have exceeded my 2% rule (2000 loss on a 100K account). For a larger account, say 200K, the 2% rule would be $4000 MAX loss, and 3 contracts could be purchased (4000/1200 =3+).
MAX LOSS (2%)/Risk per Contract (2X ATR(14) = contracts allowed for risk profile
If you are using a smaller account, for example $30K, buying the standard contract would not fit the risk profile. But there is also a mini corn available, that is 1/5 the size ($10/point, 1000 bushels). On FRI DEC 10th, only 337 contract were traded in the March contract on Globex, with about 6K open interest. Liquidity could cause a bit more slippage, but 2 corn mini contracts would still be within the risk profile. Max risk for a 30K account at 2% is $600, the ATR(14) is still $0.24, but only 1000 bushels in the mini, so the loss per contract would be $240. (30K X 2% = $600 max loss, 600/ $240 = 2+ contracts).
There are mini’ available also in soybeans, wheat, silver, gold, oil and NAT GAS that could be used. All 3 of the grains trade only a few hundred contracts a day, the other 3 have reasonable volume.
But right now, the ATR(14) for many contracts would make taking positions in a 100K account with the 2% risk rule a challenge. Next time I will look at available ETFs that could be use to take positions that would be less leveraged, but also have less risk than a futures contract. I will also explore the use of options to take a position while managing risk.
Always happy to hear from you —tradesmith@att.net
Until next time… trade patiently, be profitable.
