Overview
This lecture covers the essentials of risk management in futures trading, focusing on how to calculate ticks, points, and position sizing to control risk.
Understanding Ticks, Points, and Asset Movement
- Futures contracts (like S&P 500 and NASDAQ) move in increments called ticks, which group into points.
- S&P 500 (ES) and NASDAQ (NQ) both move in 0.25 point (tick) increments; 4 ticks = 1 point.
- Each ES tick is worth $12.50; thus, 1 point equals $50 (4 x $12.50).
- Each NQ tick is worth $5; 1 point equals $20 (4 x $5).
- Gold futures move in 0.10 increments, requiring 10 ticks for 1 point.
Calculating Risk Per Trade
- To calculate risk: Dollar value per point × number of points (stop loss) × number of contracts.
- Example: NQ with $20 per point, 5-point stop loss, 1 contract = $100 risk.
- Using 8 contracts with a 5-point stop loss on NQ means risking $800 per trade.
- For micros (smaller contracts), the risk is much lower (e.g., $80 instead of $800 for same setup).
Practical Chart Examples and Broker Setup
- Trading platforms like TradingView help visualize risk and position sizing.
- Example: ES with 5-point stop loss at $50 per point, 1 contract = $250 risk; 4 contracts = $1,000 risk.
- Platform tools (like TradingView) show real-time risk, but manual calculation is important for understanding.
- Not all futures brokers support direct TradingView trading—check broker compatibility.
Position Sizing Decisions
- Always align contract size with account size to avoid risking too high a percentage (e.g., avoid risking 80% of account).
- Use micros to trade the same setup with lower risk if account balance is small.
- Calculate conversions: points × 4 = ticks; use this for stop loss or target calculations.
Example Calculation for NASDAQ
- 20-point stop loss × $20 per point = $400 risk per contract.
- Using 5 contracts, total risk = $2,000 for that trade.
- To convert points to ticks: 20 points × 4 = 80 ticks.
- Take profit math: If risking $2,000 for a 1:2 risk/reward, potential profit is $4,000.
Key Terms & Definitions
- Tick — Smallest price increment for a futures contract.
- Point — A group of ticks; for ES and NQ, 1 point = 4 ticks.
- Contract — The unit size of a futures trade.
- Micro Contract — A futures contract 1/10th the size of a standard contract, reducing risk.
- Stop Loss — Predefined price where a trade is exited to prevent further loss.
- Risk/Reward Ratio — Compares potential profit to possible loss.
Action Items / Next Steps
- Practice manual risk calculations for various assets, stop losses, and contract sizes.
- Use demo accounts on platforms like TradingView to test strategies and risk management.
- Rewatch both parts of the video series for better understanding.
- Review how your broker integrates with TradingView if planning to use these tools.