Advice on Trading Futures for PA
I’m planning on trading futures on my Roth IRA account. It’s a pretty small capital base (around 2-3k since I’m a recent grad), so managing my leverage is prob the most important thing. Also how liquid are micro futures?
In terms of strategy, I’m planning on doing a trend following/turtle strategy with very tight/robust risk parameters. Thinking about trading mainly S&P E-Mini futures but could dive into commodities and bond futures (want to eventually expand my scope out a bit to be a bit more macro).
A couple of things I want to ask: What are some good platforms for futures trading? (Not too sure about the logistics but I do want the optionality to automate my trades since I can code in python. Does it make sense to have a discretionary portfolio allocation but systematic risk management system?)
Any advice/tips & tricks in terms of managing my risk & leverage? (Ex: calculating & managing each future’s vol. Good rule of thumb in terms of stop losses. calculating my PnL & Sharpe over time. doubling down on trades. Managing leverage vs the liquidity of my capital base)
Given my planned strategy, what are all of the possible ways I might get screwed over by the market?
Overall, I’m not looking to make a lot of money (would be great though). Just want to use this as a fun project given that I’m passionate about macro and don’t have a full time secured yet in this job market.
Advice is: don’t do it. And why in a retirement account?
There is little alpha that you’re going to be able to extract from the market by actively trading 1-2 contracts intraday. You’ll constantly be paying bid/offer to get in/out of positions and depending on liquidity you’ll find it very difficult to get filled even if futures briefly trade at your target price level. You basically run the risk of making a good call, futs rally to your price target and trade there for a bit, but you don’t take a fill then down tick and never come back.
There is billions of dollars in this space focused on extracting intraday edge — backed by extremely complex teams & strategies, this edge is finite. You will be hard pressed to extract one on your own using an IRA on a retail account. It’s a different story if you’re looking to buy & hold based on fundamental edge that you have.
if you’re dead set on day trading, perhaps choose something more liquid with tighter bid/offers so at least when you’re trading in/out of positions you aren’t giving free money to greedy algo traders :P
I was thinking of mostly buy and hold, but develop some sort of trading system to help manage the leverage and volatility of the portfolio. On the more tactical side, that would just mean developing sell signals (if possible) and stop losses to prevent any potential blowout (and anything else you might recommend). On the operations side, that would mean developing a system to monitor the leverage, margin, correlations and volatility of the assets (basically ensure that I can be liquid enough to manage any blowout). Just don’t know how exactly I should design that type of system.
And then on the portfolio side, maybe allocate based on a risk parity framework, with overweights and underweights decided by a fundamental/discretionary view of markets (based on macro).
Main idea is that I really don’t want to blow up my account so what are some advice in terms of smartly managing my risk for a buy & hold futures account. And what are some solid platforms for really small capital like me. The reason why I can’t trade stocks is cause of compliance (for my internship) and the hassle of getting approved for trades. Futures don’t require any disclosures tho + I like macro.
This sounds nice on paper but you won’t have enough capital to run a proper risk framework with offsetting positions and so on.
I’d say run it in a paper account and look into the options space where you can cap your gains & losses definitively through conservative options strategies (tight call spreads and put spreads to start), at the same time you will learn Greeks, will learn about how options expire in real time and will still use leverage, but to a less potent extent in illiquid futures. The options experience and knowledge would pay off in the real world. But options aren’t a joke either, you need to know your stuff before jumping in. So paper trade that as well.
you sound young, so there isn’t any benefit from having skin in the game. Keep your IRA in safe cash equities / ETFs and learn about options & futures on the side, you shouldn’t rush this stuff!
If you want something to buy and hold then just focus on ETFs.
Also managing risk in 1-2 futs on 3k of underlying capital in a delta-1 futures strategy is very difficult.
The massive leverage you’ll be on will cause extreme swings in PnL and put you at risk of being wiped out in a single day. The best chance you have is trading futures time spreads or cross-commod relative value spreads but this takes immense time & fundmental research to get right. You can’t just trade rolls intraday and think you’re safe!
One could also consider tight put spreads and call spreads in order to cap risk/reward.
Micro equity index futures for the major equity index products are very liquid so that is not going to be a concern. Micro bond futures are not fungible with standard bond futures and tend to be less liquid. Although futures trading in a retirement account would definitely be more tax efficient if you make profits you may have trouble finding a broker that allows margin trading (necessary for futures) in a retirement account as you can not easily add capital in case of margin calls or if the account goes negative. I also agree this will be a rather difficult way to make money as these products are extremely competitive although perhaps there is some educational value in which case you could also try in a regular account and if you initially lose money which is not unlikely then at least you have a tax loss.
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