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Index Futures

"Indexes are based on equities
and are therefore excessively volatile."

Compared to commodities, stocks are extremely volatile. Therefore it is not surprising that stock index futures, though based on a large spread of equities, still contain much of this volatile character.

So what does this volatility mean to a trader?

Excessive volatility is not a good climate for most commodity trading systems because volatility and risk go hand in hand. Excessive volatility equates with excessive risk.

What is somewhat confusing is that volatility and profitability are positively related too. You need volatility in markets to be able to make profits too.

So how can this conflict be reconciled?

Provided you are using sound methods for assessing systems, the 'excessive volatility problem' will be dealt with as part of the normal evaluation process.

You evaluate your system against the markets you have chosen to trade, so you would discover that although your % return might be very good when trading index futures, the level of risk would be too high for your comfort.

In fact, you would probably not have selected an excessively volatile market in the first place - but if you did, your evaluation method would make your poor selection clear to you.

Newcomers to commodity trading are advised to stick to heavily traded markets and only choose commodities whose volatility is in sympathy with their personal attitude to risk.

Index futures are probably best avoided altogether by inexperienced traders.


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