2024-10-03 risk adjustment / ATR / position sizing / different futures markets

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To trade the Soybean Futures Market and Crude Oil Futures with the same risk, considering the Average True Range (ATR) for setting stop losses and profit targets, you can use a method that balances the different volatility and contract sizes of the two markets. Here’s how to approach it:

Steps to Calculate:

  1. Determine the ATR:

    • The ATR gives you a measure of volatility. You can calculate the ATR for both Soybeans and Crude Oil over a chosen period (e.g., 14 days) or retrieve it from your charting software.

  2. Determine the contract size for Soybeans and Crude Oil:

    • Soybean Futures are traded on the CME (Chicago Mercantile Exchange) and represent 5,000 bushels per contract.
    • Crude Oil Futures (WTI) are traded on the NYMEX and represent 1,000 barrels per contract.

  3. Stop-Loss and Profit Target based on ATR:

    • Set your stop-loss and profit target in units of the ATR. A common approach is, for example, 1x ATR as a stop-loss and 2x ATR as a profit target (2:1 ratio).

  4. Risk Adjustment:

    • You want to keep the risk in both markets equal, meaning that you use the same $ risk per trade for both markets by adjusting the position size according to the ATR.

  5. Calculate the Position Size:

    • To determine the position size, use the formula:
      • {Position Size} = {Risk in $} / {ATR in $}
    • The ATR value needs to be converted into $ per contract as follows:
      • {ATR in $} = {ATR in points} * {value per point}
    • For Soybeans, the value per point is $50 (since one point = 0.01 and 5,000 bushels per contract).
    • For Crude Oil, the value per point is $1,000 (since one point = 1 and 1,000 barrels per contract).

Example:

  • ATR for Soybeans: 0.25 points
    • ATR (in $) = 0.25 points × $50 = $12.50 per contract
  • ATR for Crude Oil: 1.50 points
    • ATR (in $) = 1.50 points × $1,000 = $1,500 per contract

Risk per Trade (in $):

Let’s say you want to risk $500 per trade. The position sizes would be:

  • Position size for Soybeans:
    500 / 12.50 = 40 contracts
    Position size for Crude Oil:
    500 / 1500 = 0.33 contracts
  • Since you can’t trade fractional contracts, you’d either have to adjust your risk or reduce the position size for Soybeans.

Summary:

  • Calculate the ATR for each market.
  • Determine the ATR in $ per contract.
  • Set your risk per trade and calculate the corresponding position size, so you trade both markets with the same risk.

 

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