1. Buying First Position
Corn is trading at $4.00. We decide we will buy corn and risk 2% each time we buy corn with our starting capital of $100,000.
Variables:
* Starting example account: $ 100,000
* Corn is trading at $4.00
* Tick value of corn is 1/4 cent equal to $12.50. (For every 1 cent move you gain $50).
* The current ATR of the corn market is 4 cents (16 ticks) or $200.00.
* We will use a 3 ATR stop or 12 cents (48 ticks) or $600.00.
* Our initial risk is 2% or $2000.00.
* Based on initial risk and 3 ATR stop we can purchase 3 contracts (2000/600 =3.3 rounded down to nearest contract or 3).
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We have 1 position (or unit) that consists of 3 corn contracts purchased at $4.00. We set our 3 ATR stop at $3.88.
2. Buying Second Position
Corn continues to rise. We decide that for every 1 ATR move (4 cents) in our favor we will risk another 2% and purchase another unit. Before we buy a second unit we need to determine what our Total Equity has moved up to.
Since we started with $100,000 and our first unit (3 contracts) has advanced upward by 4 cents ($600 gain) our Total Equity is now $100,600. 2% risk is $2012. ATR has stayed the same at 4 cents so our second unit also consists of 3 contracts.
Where are we now?
Corn goes to $4.04 and the second unit is purchased. We now have 3 contracts purchased at $4.00 and 3 contracts purchased at $4.04. However, our risk is not 4% since once we purchase the second unit at $4.04 we move the stops on the first unit up to the level of the second unit's stop. Thus we now have 6 contracts all with stops at
$3.92.
By moving our stops on the first unit up to the stop level of the second unit we now reduce our risk exposure. The concept of moving up stops to break even is crucial to risk reduction.
3. Buying Third Position
Now that we have 2 units consisting of 6 contracts of corn we see the market advance another 1 ATR and we can purchase a third unit at $4.10. First, we must check to see if ATR has changed and what our Total Equity is.
ATR has jumped to 5 cents.
What is our Total Equity? $102,400.
$100,000+ Unit 1 Gain (30 cents or $1500)) + Unit 2 Gain (18 cents or $900) Variables:
* Total Equity: $102,400
* Corn is trading at $4.10
* Tick value of corn is 1/4 cent equal to $12.50. (For every 1 cent move you gain $50).
* The current ATR of the corn market is 5 cents (20 ticks) or $250.00.
* We will use a 3 ATR stop or 15 cents (60 ticks) or $750.00.
* Our initial risk is 2% or $2048.00.
* Based on initial risk and 3 ATR stop we can purchase 2 contracts (2048/750 = 2.7 rounded down to nearest contract or 2).
Where do we stand now?
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3 @ $4.00 $3.95 15 cents or $750 3 @ $4.04 $3.95 27 cents or $1350 2 @ $4.10 $3.95 30 cents or $1500
Total Risk 72 cents or $3600 or 3.6% of original equity 4. Buying Forth Position
Now that we have 3 units consisting of 8 contracts of corn (3 units) we see the market advance another 1 ATR and we can purchase a forth unit at $4.20. First, we must check to see ifATR has changed and what our Total Equity is.
ATR stays at 5 cents. What is our Total Equity? $106,400.
$100,000+ Unit 1 Gain (60 cents or $3000) + Unit 2 Gain (48 cents or $2400) + Unit 3 Gain (20 cents or$1000) Variables:
* Total Equity: $106,400
* Corn is trading at $4.20
* Tick value of corn is 1/4 cent equal to $12.50. (For every 1 cent move you gain $50).
* The current ATR of the corn market is 5 cents (20 ticks) or $250.00.
* We will use a 3 ATR stop or 15 cents (60 ticks) or $750.00.
* Our initial risk is 2% or $2128.00.
* Based on initial risk and 3 ATR stop we can purchase 2 contracts (2128/750 = 2.8 rounded down to nearest contract or 2).
Where do we stand now?
Contracts Stops Total Risk to Original Equity 3 @ $4.00 $4.05 0
3 @ $4.04 $4.05 0
2 @ $4.10 $4.05 10 cents or $500 2 @ $4.20 $4.05 30 cents or $1500
Total Risk 40 cents or $2000 or 2.0% of original equity
Notice as the trend moves in your favor and stops move up, the risk to your original equity is reducing dramatically.
5. Buying Fifth Position
Now that we have 4 units consisting of 10 contracts of corn (4 units) we see the market advance another 1 ATR and we can purchase a fifth unit at $4.25. First, we must check to see ifATR has changed and what our Total Equity is.
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ATR stays at 5 cents. What is our Total Equity? $108,900.
$100,000+ Unit 1 Gain (75 cents or $3750) + Unit 2 Gain (63 cents or $3150) + Unit 3 Gain (30 cents or $1500) + Unit 4 Gain (10 cents or $500)
Variables:
* Total Equity: $108,900
* Corn is trading at $4.25
* Tick value of corn is 1/4 cent equal to $12.50. (For every 1 cent move you gain $50).
* The current ATR of the corn market is 5 cents (20 ticks) or $250.00.
* We will use a 3 ATR stop or 15 cents (60 ticks) or $750.00.
* Our initial risk is 2% or $2178.00.
* Based on initial risk and 3 ATR stop we can purchase 2 contracts (2178/750 = 2.9 rounded down to nearest contract or 2).
Where do we stand now?
Contracts Stops Total Risk to Original Equity 3 @ $4.00 $4.10 0
3 @ $4.04 $4.10 0 2 @ $4.10 $4.10 0
2 @ $4.20 $4.10 20 cents or $1000 2 @ $4.25 $4.10 30 cents or $1500
Total Risk 40 cents or $2500 or 2.5% of original equity You now have maximum 5 positions of corn established. 6. Corn
Explodes
The price of corn rockets upward to $5.50. As an example assume your exit signal has you exiting all corn positions at $5.25.
Where does that leave us?
Contracts Exit Price Profit
3 @ $4.00 $5.25 375 cents or $18,750 3 @ $4.04 $5.25 363 cents or $18,150 2 @ $4.10 $5.25 345 cents or $17,250 2 @ $4.20 $5.25 315 cents or $15,750 2 @ $4.25 $5.25 300 cents or $15,000 Total Profit 1698 cents or $84,900 85% return on your original starting capital.
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