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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