Risk Management Protocol for Futures Prop Firms
Kardec Trader walks through position sizing for futures prop accounts using the formula risk divided by points risk divided by contract value. He covers three risk tiers (5%, 10% default, 20% high), trade management rules like moving stops on structure and taking partials at 2R, and behavioral safeguards including lockout software to prevent overtrading.
Chapters
Hello everyone. Welcome back to the channel. So today this video is on a highly requested topic, Risk management for futures prop firm accounts. So if you're here, you probably already know what a prop firm or funding company is. But if not, I'll probably be doing a series on them in the future, so stay tuned. Or you can check out my Intro to Futures webinar. I do talk about it a little bit more there, but essentially they are.
They are companies that offer you leverage and not risking your portfolio. And in exchange you got to pass their challenge. And there are more rules to follow. But moving on, what is risk management anyway? Right, the definition is using protocols to monitor and minimize the potential damage to your trading account while also maximizing the potential opportunities. So position sizing is the amount of money you want to risk for that trade divided by the contract value per point, which is also divided by the points of risk, which is your stop loss. Right. And again, if you want this in further detail, I do have a free Intro to Futures webinar. But just an example here. If you're risking $800 on a 20 point stop loss in NQ, the formula for that is $800 divided by 20 divided by 20 because on NQ one point is equal to $20. Okay, so that means on that trade you should take two contracts of nq. But there is an easier way to figure this out and I'm going to go over that just now or 20 contracts of the micro NASDAQ. Right? So don't forget about that and we're going to move on. So here's an easier way to calculate this. If you have a trading view, you can use the longer short tool and create a template and pretty much put your account size in there and how much you want to risk and it will let you know exactly how many contracts to take, right? So here I will pretty much put the drawdown, maximum drawdown on that challenge lot size, you just put one. And let's say I want to risk 10% of that maximum drawdown for a trade, it will literally tell me the quantity here, right? How many contracts I should take. So here I should just take one NQ or since it's 1.1, I can take 11 micro NASDAQ contracts. And to just further illustrate that, to give you a better idea, I will show that on my trading view right here. So this is an example of a trade I took. A fair value gap and discount stop loss was here. So essentially double click this it and you can put in your account size and whatever you Want to risk here, 10%, 5% of that maximum drawdown, more if you want, whatever. And then you click Save as template and you can see I have different templates saved here. You press. Okay, just put the lot size as one. And right here, if I want to put my stop at this swing Low calculates this, that's a stop of 90 points. So based on that it's already telling me what my position size should be. So actually no math involved in that. Pretty cool tool. Okay, moving on. There are three different tiers of risk. I do. The lowest tier, the first one is 5% of the maximum drawdown for that challenge account. The middle tier or the default tier which is what I use most of the time, is just 10% of the maximum drawdown. This means I would need 10 losing trades in a row or more because I will get to that in a minute to lose the account. Right. And lastly the highest tier of risk which is 20% or 1/5 of the maximum drawdown. So an example there is on a 150k challenge most of the times the maximum drawdown is 4500. So the default risk tier here is $450 per trade. So let's go over each tier of risk and the conditions in which I use them in. So first tier, lowest tier, I use them in low probability conditions or as we also call them high resistance liquidity run conditions or I'm on a losing streak. So if I have two losses in a row I going to go down to my lowest tier of risk until I make back half of my drawdown. Then I can go back to the standard tier. So let's go over, what do I mean by low probability conditions. Well, there's a checklist I go over every single day. Pretty much you will see me going over this on stream, sometimes out loud, sometimes just in my head, but something I consider every single day in the morning. It's a low probability condition. If London session expanded towards the drawn liquidity or if the London session took out both the Asia session high and the low or the drawn liquidity has been met before equities open. So this means if ES or NQ has already hit a daily point of interest or a weekly point of interest that I was already looking at before even 9:30 starts, then that means low probability conditions because we just had an expansion or a distribution. So it's likely we're going to go into consolidation conditions which are more difficult to trade in. Or another condition is DXY if it's not inversely correlated. To the indices, right? So typically we want DXY to be moving up while NQ or ES are moving down or the opposite we want DXY expanding lower towards sell side as ES and NQ are expanding towards the buy side liquidity. Lastly, if the indices are all out of sync, which means typically if YM or the Dow is making new highs on the day while NQ the NASDAQ is making new lows on the day, that means the indices are all out of sync and it's low probability conditions. Okay, standard tier of risk, I use this pretty much as the default. If it's not low probability conditions, I'm pretty much using this as my risk default. We were not in high resistance liquidity conditions and a setup presents itself according to my model, right? Lastly the highest tier of risk which is rare don't do this often. But if it's an A plus setup according to the trade criteria and on a red folder news day high impact folder news then I will probably take higher risk on that. Or if it's on an expansion day, right and the drawn liquidity has still not been reached and I already booked a win on a day then I will likely take a higher risk. So then I'm pretty much risking the profits I made on the day which means that the trade would pretty much losing the trade would only bring me back to break even on the day and not net negative. So what's important about this is that my account must not be in any kind of drawdown during this type of scenario or else it doesn't give you much room right to get back to where you were. Lastly, if this trade ends up as a loss you must stop trading for the day because it is just way too easy to let one high rev risk trade idea snowball into a blown account. And for most beginners I actually don't really recommend this highest tier of risk because it does require more energy and mental fortitude. So trade management always fully accept the risk before entering a trade. What does this mean? This means that you have to be thinking about okay if I lose out on this trade I'm totally okay with it and I'm going to move on. It's just the cost of doing business. You have to do this to be in the proper mindset to prevent getting back in and revenge trading. So it means if it's a loss, just the cost of doing business, we move on. How I typically manage my trades, if you watch my stream you probably know about this, but if it closes above an intermediate term higher low in My favor, I'll move my stop to the last swing that broke that higher low. So this will typically trim the risk by about 25 to 50%. Also, if price is about 80% of the way to the target, I will take a partial and I'll move the stop to break even even as well as when the trade gets to 2R, I'll take most of the position off and move the stop to break even. Now this is important. This is the number one thing to avoid in trading. It is overtrading. Okay, this is the biggest killer of accounts. You can easily get into tilt when you get stopped out of a trade and keep trying again. Or maybe you reverse yourself, you reverse yourself again and then you just get confused. Right? You can easily get blinded by price action. So you'll start to see things that are not there and try trade ideas that you typically won't take. How do we prevent over trading? Well, one thing I do is I have an external disruption. I have an alarm on my phone at 10:15am, pretty much in the middle of the trading day for New York AM session for a mental game reminder. And I have an alarm at noon basically to tell myself in case I am still in a trade. At that point it's time to wrap it up. So this serves as an external disruption so I don't have to do it myself essentially. And I can have a reminder, hey, bring myself out of that mindset if I'm feeling overconfident, if I'm feeling fearful or fomo, any kind of thing. It serves as a wake up call, so to speak. Another thing I do personally, I have a software that locks me out of my trading platforms. If I click it, it closes my trading view and my ninja trader for the day. But be careful with this because you don't want to be in a trade when that happens. So I pretty much manually will open up the software and lock myself out of my platforms. And the software is called cold turkey if some people are interested. I know some have asked me about that. Next, the number one thing you need to do is if you're tilted or over trading, you need to physically step away from the screens. You need to remove yourself, right? So it's either go outside, go for a walk, go to the gym, or you just go to another room and pace back and forth because it's the last thing you want to do is still be on the charts. Next, I do a journal. I brain dump. So anything that I'm feeling or what happened, just write it out with no sort of structure. Later, when you're at a better frame of mind, you review what happened so that you can map out a pattern and avoid it in the future. So you have to journal or review what happened or else you run the risk of holding residual emotion and repeating the same things in the next session. So that's how you avoid the number one reason people blow up accounts. And I hope that this PowerPoint has brought some clarity. Hit that like button and subscribe if you found this helpful, and I hope to see you in the next video.
