Portfolio Heat: Directionless Volatility Will Kill Your Equity


Talk about portfolio heat...

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When the markets are directionless, and the volatility per contract is high, you can expect to lose between 5 and 20% of your equity for what seems like no reason.

Take a look at the chart I built tonight and look at the “$ Volatility” per contract. It is off the charts. It’s not until you get to the $400,000 account balance that the majority of these contracts can be traded if you are only looking to risk 1% of your equity per trade. That does NOT assume you are pyramiding either.

In the CTA world, an aggressive trader will commit between 10 and 15% of his equity to margin. So for the $400,000 account, the trader will have between $40,000 and $60,000 to use for margin. That does not leave a whole lot of wiggle room for wild days. In fact, silver and RBOB gasoline don’t qualify for this account size because the $ Volatility exceeds 1% of the account balance.

Your job…your #1 priority…is to be able to come back and trade tomorrow. Try and bull through a directionless market and you will get your a** handed to you. I’ve been there. Think of these annoying losses as tuition and sit on your hands for a while. In 5 years no one will remember if you took a few days off, but they will all remember how you vaporized their cash if you don’t.

What to do:

  • Don’t trade until the volatility decreases substantially
  • Trade the mini contracts
  • Trade commodity ETNs or ETFs
  • Take the time to learn about inter- and intra-commodity spreads



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Please note: I reserve the right to delete comments that are offensive or off-topic.

  • One point on the ETFs, some of them have very heavy carry forward charges and may go down even if the underlying goes up.

    Worse if you went long and short in 2 separate ETFs, you may show a loss in both even if the underlying has little movement in either direction.

    Correct me if I am wrong.

  • Anonymous

    That’s a whole other ball of wax…

  • Jaytrader

    Seems you could avoid worrying about this by simply charting the price action of the ETF or ETN on it’s own merit instead of just watching the underlying futures market.

  • Anonymous

    I look at crude oil and USO as two completely different vehicles. I’d
    recommend trading one or the other.