For the record, in 2010, the CME Group cleared 2.4 billion
contracts. Being a counterparty means that for every transaction made,
the exchange will guarantee each buy or sell side transaction.
If, for some reason, the party on the other side of your trade
defaults on their obligation to honor their losses, the CME Group will
make that transaction good by paying the loss to the winning party of
the transaction. During this 100 plus year period, there has never
been a failure of a clearing firm member resulting in losses to a
customer account.
Learning that, moving your stop loss just a bit further works
and keeps you in a trade that turns into a money making trade.
However, this is an very bad habit to develop. A question you should ask
yourself is "How many losing trades does it take to blow up an
account?" The answer is only one. How do you know? Is this the trade
that will keep going against us hundreds of pips or ticks causing us
to blow up our account, or wipe out several weeks or months of good
trading?
The only way a trader can be sure that this trade isn't the one that will
wipe out our account is to take the small loss and move on to the next
trade. If the trader follows this rule, you will be "right" on your
losses by following your plan!
One of the most successful "natural" traders you ever met was
someone who many considered to not be very smart dumb, even. He
laughed off any derogatory comments about his lack of intelligence.
One reason he was such a good trader so quickly after first sitting
down at the trading screens was his ability to get rid of money losing
trades without hesitation. So the moral is to close out your losing
trades.
This trader was used to doing poorly in school and getting
bad grades being "wrong" when answering questions. He considered a
money losing trade just being "wrong again" and immediately got rid of
the money losers. When a trade was going his direction, he just
enjoyed the ride and let his winners run. Sounds easy, doesn't it? He
often said to the rest of us on that trading floor, "Do you want to be
the smartest, or do you want to be the richest?" And then he would
laugh and walk away.
Why the CME Group monitors this volatility on a daily basis
is to asses a margin rate for every Futures contract traded on their
exchange. This margin amount is part of the risk management used to
protect traders and investors. Recently, the exchange raised margin on
the Gold contract for traders/investors who held Gold contracts
overnight.
After the Gold market had made a 35% increase in a very short time, I
would say it was about time. However, many around the world found this
margin increase to be a form of currency manipulation by the United
States government.
Most of the people complaining about this margin increase were the usual
undercapitalized traders who were forced to exit their positions
because they had acquired too many contracts on margin using leverage
from open trade equity. Little do these traders realize that when the
exchanges see a danger to investors, they will do their best to get
the weak hands undercapitalized traders out of the markets
simply because there is a good chance the market could see volatility
in the near future that could literally wipe out these
undercapitalized traders.
Margin is a percentage of the Futures contract value that you must
have available in your trading account before you can hold a Futures
contract past the regular trading hours session. Usually anywhere
between three to ten percent of the contract value is what margin
amount you will need.
For example, Corn currently trades at 767'0. The multiplier is fifty
dollars. That means one Corn contract has a dollar value of $38,350.
If a trader wanted to hold a Corn contract past the regular trading
session, they would be required to have a minimum of $2,363 in their
account for each contract held.
This is all you need to control $38, 350 worth of Corn! The margin
on Corn is currently a little higher than usual compared to other
times of the year. This is because we are just ending the critical
growing season for Corn. There are so many variables weather, crop
damage from insects, supply disruptions that could cause prices to
become extremely volatile and anybody who has traded Corn this year
knows what I mean.
With uncertainties, there will be volatile prices leading to higher margin
requirements. Once the crop is harvested and put in the grain
elevators, there is little to damage the crop and the price will be
driven more by normal supply demand distributions until the next
planting season next year. During this period of safety for the crop,
the margin rate will probably go back to its usual per contract $1,000
margin. The price volatility will decrease once the crop is stored,
hence, the lower margin requirements. |
