This article on Managing a Small Futures Trading Account is the opinion of Optimus Futures. Trading Micro Futures or smaller contracts does not imply a higher level of trading success.
Everyone has to start somewhere.
Whether it was Paul Tudor Jones, John Paulson, David Tepper, or Warren Buffett, every big money trader and investor started smaller than they are today.
Beginner Traders often fall victim to the idea that only sizeable amounts matter when you trade.
That’s only true when:
- There exist cost advantages to trading in size
- You can’t trade for smaller lots
Otherwise, there is no reason that you can’t start with a small account.
Futures products used to preclude smaller accounts due to the size of their product margins.
Today, however, the introduction of E-Mini and micro futures across an array of categories provide small account traders the opportunity to hedge or speculate.
This article aims to provide you with an understanding of how to manage a small futures trading account including an explanation of differences in leverage and margin, common mistakes, the best products available, and a few strategies to get you started.
Can I Trade Futures With A Small Account?
Imagine a trader with a $100,000 account who likes to trade E-Mini S&P 500 futures 10 lots at a time trying to achieve 10 points for each trade. That gives him potential gains/losses of $5,000 or 5%/-5% of his total account.
A trader with a $1,000 account can achieve the same effect by trading one micro E-Mini S&P 500 contract where 10 points would net them $50.
This same dynamic holds true across products that run the gamut from indexes to commodities.
Depending on the products, traders don’t need more than a few hundred dollars to get started.
Did you know that you can open an account at Optimus Futures and start trading with as little as $500?
And while some brokers may require a minimum to open an account, Optimus does not.
However, that doesn’t mean you won’t need adequate funding to trade different products.
You must meet initial, day trading, and/or maintenance margin requirements for your positions. We’ll discuss this more in the next section.
(All amounts invested Must be risk capital-money you can afford to lose).
Understanding Leverage and Day Trading Margins in Futures
We want to cover two separate, yet important and related topics: leverage and margins.
Leverage allows traders to control a large notional value while only putting down a fraction of that value as collateral.
Futures products employ leverage to offer traders a chance to gain long or short exposure to a variety of assets. This lets traders use their capital more efficiently and optimize their portfolios.
For example, the micro E-Mini S&P 500 futures contract controls $5 x S&P 500 index or roughly $22,000 of notional value.
Traders can use as little as $40 to do this day trading using margin. (low margins recommend for those that have some experience trading).
Margin is the practice of using borrowed funds to trade an asset. In this case, margin allows a trader to control $22,000 of assets for just $40.
Now, there are three types of margin traders need to be aware of:
- Day Trading Margin – Minimum funds required to trade a product from 9:30 A.M. EST – 4:00 P.M. EST. This is typically much lower than overnight margins.
- Maintenance (Overnight) Margin – Minimum fund requirements to hold a futures position overnight. This is significantly higher than day trading margins.
- Initial Margin – Minimum fund requirements set by the exchange to initiate a futures position. Your broker can require additional funds on top. Initial margin is often used interchangeably with maintenance or exchange margin.
Let’s say you want to trade the micro E-Mini S&P 500 futures. As long as I open and close my trade between 9:30 A.M. EST – 4:00 P.M. EST you won’t need more than $40 for that margin.
However, if I want to hold that position overnight, that amount jumps to $1,150.
The table here gives you an idea of how the day trading and exchange margins differ across products at Optimus Futures.
While you can get by with just the minimum, should you take a loss on any trade and drop below the margin threshold, you will not be able to place another trade until you add funds to your account.
Even if you don’t plan on using the funds, if you’re an active trader, a little extra cushion can help avoid situations where intraday market swings that create losses keep you from entering a new trade.
Common Mistakes When Trading Futures with Small Accounts
There are two common mistakes that traders make when trading futures with small accounts.
The first is ignoring commissions.
While micro contracts provide the same capital efficiency, and the trading commissions are lower than larger products, the commissions are a larger percentage of the product’s total notional value.
For example. A round trip trade for the E-Mini S&P 500 futures might cost you $3 (plus exchange, clearing, and connectivity).
Each tick ($0.25) in the index is a profit or loss of $12.50. Theoretically, a trader could scalp one tick at a time and turn a profit.
A round trip trade for the micro E-Mini S&P 500 futures might cost you $1 (plus exchange, clearing, and connectivity).
Each tick ($0.25) in the index is a profit or loss of $1.25. Given that you would lose 80% of your profits to commissions, scalping one tick at a time with micro contracts isn’t a viable strategy.
The second common mistake when trading futures with small accounts is incorrectly sizing your trades relative to your total capital.
In an earlier example, we noted how a person with a $100,000 account that looks to risk 10 points using 10 lots would put $5,000 of their account at risk or 5% of their capital.
A $1,000 account could achieve a proportional trade with one micro E-Mini contract.
With small accounts, it’s especially important that traders understand the value and size of each tick and the margin requirements for day trading and overnight holds.
It’s easy to get swept up in the idea of making money without taking the time to define your risk.
Best Futures Products to Trade with Small Accounts
Today, futures products come in all shapes and sizes.
Folks with a small futures trading account can choose from a variety of contracts that come in standard, mini, and micro sizes including:
- Indexes – Major indexes such as the S&P 500, Nasdaq 100, Russell 2000, Dow Jones Industrial Average, and even non-stock indexes such as the CBOE Volatility index.
- Commodities – Various commodities including energies such as oil and natural gas as well as precious metals like gold and silver.
- Currencies – Take advantage of futures products on major currencies including the British Pound Sterling, Euro, Japanese Yen, Canadian Dollar, and more.
- Treasuries – Pick from various treasury maturity products including bonds and yields.
For some less volatile instruments such as Eurodollars, traders can begin with standard-sized contracts.
However, micro contracts provide a great proving ground to test out different trading strategies and ideas. In most cases, once you work your way up to 10 micro contracts, you can switch to one mini or standard-sized contract (depending on the product and its conversion).
Why Micro Futures Are Suitable for Small Trading Accounts
Digging a bit further into micros, while they aren’t ideal for high-frequency scalp trades, they work with most other styles including:
- Portfolio hedging
- Swing trades
- Directional speculation
- Pairs trades
Micro futures are available in a wide variety of instruments including major indexes, commodities, Treasury yields, and currencies.
The smaller size allows traders to optimize their positions while retaining the same capital efficiency as larger contracts.
And for small accounts, it opens up your trading to working more positions at once rather than being limited by capital and size to one trade at a time.
Simple Strategies to Trade a Small Futures Trading Account
When you trade futures in a small account, you want to make many small trades.
You see, each individual trade has a probability of success and failure.
By spreading out your risk over more trades, you allow the law of large numbers to work and smooth out variability in your results.
A few trade strategies you might consider include:
- Mean reversion trades – These trades fade extreme movements in favor of historical averages. This is especially popular with spikes in VIX and micro VIX futures.
- High reward to risk trades – Strategies like breakout trades with high potential rewards relative to your risk offer an opportunity to offset small losses with larger winners.
- Pairs trades – Pair trading involves buying one asset and selling another. A subset of mean-reversion trades, you look for periods where one asset has moved ahead of another and you expect the gap to close. Betting against micro Russell 2000 futures after a significant run and buying micro Nasdaq 100 futures is an example.
What Small Futures Accounts Should Add to their Trading Plan
Traders with small accounts need to focus on two essential rules.
While many traders think they can start small and then proceed to larger accounts, most accounts will not stand a chance if their trading is rooted in behavior based on instinctive reflexes and undefined rules.
Two Essential Rules That Separates a “Gambler” from a Trader
1) Gather Data Around Your Behavior and How You Act
This means you need to start tracking your trades, P&L, and how you acted around these results.
This is more than just a trading journal; it’s a record of your behavior and reactions so you can try to identify certain patterns and pitfalls.
For example, do price spikes affect your responses and your ability to stick to your plan?
2) Develop a Supervisory System
This means developing a supervision system that has strict rules for deciding when to trade, rather than relying on intuition where “looks good” is your trigger for trade entry.
Instead, try to define specific rules of risk and reward that determine when you should execute.
Remember, when you trade alone with a small account, no one will stop you from completing a trade. Develop a robust disciplinary system to help you with better decision-making.
Open Your Futures Trading Account
Optimus Futures wants to help new and experienced traders get the most out of markets.
That’s why we offer discount commissions along with dozens of tradeable products including E-Mini and micros.
Get access to our flagship Optimus Flow platform that includes our entire inventory of indicators and analysis right out of the gate including strategy backtester, footprint charts, market depth, market replay, and more.
Plus, stay on top of markets with our real-time news feed. And be sure to log your results with our automated trading journal.
Sign up today and get up and running in just a few hours.
Disclaimer: There is a substantial risk of loss in futures trading. Past performance is not indicative of future results. Trade only with your risk capital.
