More and more retail traders are either interested in or already trading equity future and many of those traders have smaller accounts. With potential volatility and market uncertainty, futures seem like the perfect instrument to trade for quick profits: take a position, get the direction right, watch them take off (don’t blink) and make money! Futures instruments can also be effective instruments to hedge existing positions. But the “regular” equity futures (/ES, /NQ or /RTY, known as “Minis”) can require a larger account due to significant margin requirements (especially if you’re trading multiple contracts) and can have considerable swings in value.
What if you have a smaller account and are just starting to trade equity futures or aren’t interested in taking a significant amount risk? Then Micros are your choice! Let’s discuss this alternative focused on the S & P 500 Micro futures.
Can I Trade S & P 500 Micro Futures with a Smaller Account?
Absolutely! You can start to trade the S & P 500 Micros with accounts as small as $1,500 or $2,000. This will be sufficient capital to manage bullish or bearish day trades through potentially multiple entries. Make sure you have a risk management plan in place and commit only capital that you can afford to lose before taking any trades with real money.
What are the S & P 500 Micro Futures that I Would Trade in a Smaller Account?
S & P 500 Micro futures are contracts that provide a trader or investor with an investment that’s based on the price of the S & P 500 index. Futures are called derivatives because their value is “derived” from the price of another instrument or benchmark; in this case the S & P 500 Index. These futures are an easy, capital efficient way to trade the direction of this basket of stocks or the general direction of equity markets.
How do S & P 500 Micro Futures Work?
Let’s say you’re bullish equity markets and want exposure to the overall market and don’t want the risk associated with trading an individual stock. One possibility is to buy one S & P 500 Micro futures contract; commonly referred to (and its symbol on many trading platforms) as the /MES.
Buying this contract is the equivalent of buying 50 shares of the $SPY. For every $1 move in the S & P 500 Index, the $SPY moves about $.10 (the $SPY is 1/10th the size of the Index).
So if the /MES is the equivalent of buying 50 $SPY shares, and the Index increases by 1 point, the $SPY increases by $.10 and the /MES will increase by $5 (50 $SPY shares X $.10 increase in price). A 10 point move in the Index results in a $50 move in one /MES contract. This is a very manageable risk profile for a smaller account.
The S & P 500 Micros are a Much More Efficient Use of Capital Than the $SPY
The /MES is a much more efficient use of capital. Let’s use a day trading example. The investment in 50 $SPY shares (with the $SPY at $445.00) is $22,250. A typical broker will require margin of 50% or $11,250 (if you have a margin account). If the Index moves 25 points, the $SPY will move $2.50 and you’ll make $125! The return on capital is about 1.1% ($125/$11,250) – not too bad for a day trade!
As an alternative, assume the margin requirement for 1 /MES contract, for a trade opened and closed on the same day, controlling 50 $SPY shares, is around $310. The margin requirement will be broker dependent; the margin calculation is more complicated than the single number presented here and will change (quickly – especially in a move against you) as the Index moves. The same 25 point move in the Index, will generate the same profit of $125 but will generate a return on capital of 40% ($125/$310)! That’s a lot of leverage resulting in a much more efficient use of capital! Of course, if you’re wrong, the losses and additional margin requirements can move against you very quickly.
Understanding Leverage for Small Account Traders
The advantage of a small account trader using the /MES futures is the ability to control over $20,000 in the S & P 500 while posting only a small amount of capital ($310 for a day trade). In effect, using futures multiplies your trade size significantly for a given amount of capital.
This leverage is a double-edged sword: Gains and return on capital accumulate quickly if the trade moves in your favor – but losses and additional capital requirements can also accumulate quickly if the trade moves against you.
Margin is the collateral that you have to post to take a trade. For the /MES day trade we’ve been discussing that margin is about $310. Think of it as the broker reserving or “removing” that money from your account. If you have a $3,000 account and trade 1 /MES futures, your available balance for left for trading will be $2,690. This capital will be freed up and available for trading once the trade is closed.
There are 3 types of margin you should understand:
- Initial Margin: The minimum amount of uncommitted capital in your account needed to initiate any trade – this is currently around $1,200 for the /MES depending on your broker.
- Maintenance margin: The minimum amount of capital needed to hold an /MES position overnight – this is currently around $1,100 for the /MES depending on your broker.
- Day Trading Margin: Minimum amount of uncommitted capital to trade during regular trading hours – this is currently around $310 for the /MES depending on your broker.
Margin requirements can change (increase!) rapidly – your trade may lose money or the exchange or your broker may increase margin requirements with little or no notice.
Trading Futures Relative Value – A Simple But Sophisticated Strategy to Trade a Small Futures Account
Trading relative value is one of Masters in Trading key concepts. Any futures instrument is not cheap or expensive on its own; it’s only cheap or expensive relative to another futures instrument. Masters In Trading has developed proprietary tools for tracking and analyzing relative value.
Here’s a comparison of the S & P vs. NASDAQ vs. Russell futures for the last 30 days using Masters In Trading’s Equity EDGE tool:
Which futures is relatively inexpensive? Which is the most expensive? What instrument would you buy if you’re bullish? What instrument would you sell if you’re bearish?
If you’re bullish, the Russell 2000 is relatively inexpensive, so you could buy the Russel Micro – /M2K.
If you’re bearish, the S & P 500 is relatively expensive, so you could sell the S& P 500 Micro – /MES.
If you want to take your trading to the next level, you could enter a reversion to the mean trade for the /M2K & the /MES to come “back together” – for the gap between the two to close. For that trade, you would sell the /MES and buy the /M2K.
Mistakes to Avoid When Trading a Small Account
There are a few significant mistakes that folks make when starting to trade futures with a small account:
- Not understanding how margin and commissions work before starting to trade.
- Trading without a trade plan detailing setups and trade triggers, when to take profits, when to exit losing positions, when to increase positions, etc.
- Trading with real money without practicing in a paper trading account.
Best Micro Futures to Start Trading for a Small Account
There are quite a few micros available to trade. Focus on trading just a few instruments if you’re just starting out with a small account. Here are 7 contracts to consider:
- S&P 500: /MES
- NASDAQ: /MNQ
- Russell /M2K
- Oil /MCL
- Gold /MGC
- Silver /SIL
- Dow /MYM
Finding a Broker For Trading a Small Account
There are quite a few brokers that will allow a small account futures trader to trade Micros. How do you evaluate all these choices to find the right broker?
Masters In Trading suggests focusing on the following criteria:
- Personalized setup and customer service
- Competitive commissions
- Competitive margins focused on SPAN margin, a system of standardized portfolio analysis of risk resulting in overall lower margin requirements
- Choice of a wide range of trading platforms
Masters In Trading has used this criteria in selecting Edge Clear as our futures broker partner (Edge Clear | Forward-Thinking Futures Broker & Trading Platform).
Please make sure you do your own research and remember – paper trade until you’re 100% prepared to risk your hard-earned money and manage your risk.