Thursday, 27 February 2014

How Big The Risk You Take In CPO Futures?

In reply to a CPO Futures reader, the futures trading that starts with a certain initial margin, as stated in the Bursa Derivatives Exchange circular, is actually not enough for technical trend traders to trade comfortably. The leverage is considered very high and technical trend traders may encounter difficulty to maintain the same positions especially after hitting multiple losing trades in a non-trending market as a start.

For example, initial margin for CPO Futures is RM4,500.00 at the moment and if a technical trend trader is started with multiple losing trades without first generating a good round of profit, the technical trend trader will keep getting margin calls from broker. These will seriously affect the psychology of trading even though the trader may have money to top up the deposit.

At a price of 2800 today, the CPO Futures per contract is actually worth RM70,000.00 and I believe not many traders will trade only ONE contract with RM70,000.00 in the trading account. If you are trading 10 contracts in your futures account, you are carrying a risk of RM700,000.00. 

Therefore, imagine that if you are losing 1% against the close previous trading day, you lose 28 ticks per contract or 280 ticks on your 10 contracts; or, to be exact... you are losing 1% of the RM700,000.00 or equivalent to RM7,000.00. 

Do you really see the kind of risk you are taking now! It is also like you are buying RM700,000.00 value of stocks in equity market and you do not have RM700,000.00 to pick up the stocks that you may have bought. How will you feel on the 1% down? Be serious to yourself if you are trading futures as a novice trader.