S&P Futures Contract:
Daily Loss Limit and Leverage Discussion Video

Transcript
TRANSCRIPT:

“Okay, let’s talk about trading futures contracts on the S&P in regards to your daily loss limit and your leverage. How do those things relate? Well, we need to know three things. I need to know your daily loss limit, how many trades you’re willing to take as a loss, and what is your stop loss. Those are the three things you need to know. In fact, let me make a little note here: three things you must know are, what is your daily loss limit? That’s different for everybody. What’s your stop loss? And how many trades are you willing to lose?

With these three numbers, we can determine exactly how you should trade, and we’re going to talk about three scenarios with number three being my favorite. So let’s say you were willing to take a $300 daily loss limit, you’re willing to take three losing trades, and you have a strict 6-point stop loss. Now, all we have to do is some math.

Well, one MES, if you’re going to lose 6 points, you’re going to lose $5 a point, so you’re going to lose $30. That’s what it comes out to, $30. If we’re willing to lose $100, that would mean we could trade three MES contracts. Why? Three contracts times $30 loss equals a $90 loss. That keeps us within the parameters of losing no more than $300 on the day, and if we take three losing trades, we’re out.

Now, scenario two. Scenario two is, let’s say you did that with five trades. Well, you start doing the math, and you discover you can trade two MES contracts because what is, um, two times $30 bucks? That’s $60. And if we’re willing to lose five of those, $60 times five is $300. So, we just simply do some math and discover with five trades, I can only trade two MES.

But here’s my third way, my favorite way: it’s a scaling method. Come on, click this one. Here we go. So, if you’re willing to lose $300 in three trades, well, I have a high probability system so I do not expect to take a loss. But I do want to give myself the cushion of three trades, so I’m going to front-run my risk on the first trade. I’m going to allow myself to trade up to five MES contracts and lose the six points, which would put me at a $150 loss. If I take this loss, I have to scale down, which is super smart. Do not scale up after a loss. Do not do that. So, we’re scaling down, and I have to stay at the scaled-down level until I make back the profit I’m until I make back the loss on the previous level, and then I can scale up back to five contracts.

Let’s say the first trade you lose your six points, no big deal, that happens. Well, I’m going to scale down, and I can trade 3 MES. I have to stick with 3 MES until I make back everything I lost, then I can go back to five contracts. What if I lose, lose, and I’m down to two contracts? Oh well, stick with two contracts until you make back your $90, then go to three until you make back your $150, and then you can go to five contracts. The scaling approach is my favorite, and you need three things to do this math: What is my daily loss limit? What is my stop loss? Also, which contract am I going to trade? Because if this is a $3,000 number, then these are going to become MES, I mean, these are going to become ES contracts most likely. So, at this low level at $300, you are stuck with MES, no question about it. You do not need to trade the ES E-mini futures contract. Trade the MES because you can trade fractions of the ES. You can fine-tune your entries, you can scale out of trades, it’s just such a smarter way to trade. Okay, this is the ES futures contract leverage talk and the MES futures contract leverage talk.”