{"id":9113,"date":"2021-09-09T15:21:58","date_gmt":"2021-09-09T19:21:58","guid":{"rendered":"https:\/\/optimusfutures.com\/tradeblog\/?p=9113"},"modified":"2021-09-09T15:21:58","modified_gmt":"2021-09-09T19:21:58","slug":"micro-futures-pairs-trading","status":"publish","type":"post","link":"https:\/\/optimusfutures.com\/blog\/micro-futures-pairs-trading\/","title":{"rendered":"How To Create A Micro Futures Pairs Trade"},"content":{"rendered":"

This article on Futures Pairs Trading <\/strong>is the opinion of Optimus Futures.<\/strong><\/p>\n

\"Futures<\/a><\/p>\n

When someone asks you about futures trading strategies, what comes to mind?<\/p>\n

For most of us, two things immediately come to mind: directional and hedging.<\/p>\n

But what if we told you there was a third way…a way to use math and probabilities to your advantage?<\/p>\n

Sounds interesting, right?<\/p>\n

Let us introduce you to futures pairs trading.<\/p>\n

You\u2019ll often hear that this type of strategy is for \u2018advanced traders only.\u2019 Nothing could be further from the truth.<\/p>\n

In fact, we\u2019ll explain not only what it is, but how to do it with as little risk as possible, using one of our favorite instruments, micro futures.<\/p>\n

What Is Pairs Trading<\/h2>\n

People often think of trading as a directional bet.<\/p>\n

\u201cI bought E-Mini S&P futures expecting them to go higher.\u201d<\/i><\/p>\n

And there\u2019s nothing wrong with that approach.<\/p>\n

But it relies on you finding an edge within the charts or exploiting some arbitration opportunity buried in order flow.<\/p>\n

Pairs trading takes an entirely different approach.<\/p>\n

And believe it or not, it can be done (potentially) entirely without charts!<\/i><\/b><\/p>\n

Pairs trading is the simple act of buying one asset and selling another.<\/p>\n

Your goal is to profit from the relative over-performance of the product you buy and\/or under-performance of the one you sell.<\/p>\n

Take a look at the following charts of the Micro E-Mini S&P 500 (MES) futures (top) and the Micro E-Mini Nasdaq 100 (MNQ) futures (bottom).<\/p>\n

\"MES<\/a><\/p>\n

Generally speaking, these two indexes like to trade together.<\/p>\n

As noted by the white arrows, you can see how they form lows at roughly the same time.<\/p>\n

But every once in a while, one moves further in one direction, leaving a bit of a gap. The blue arrows highlight such an instance.<\/p>\n

Here, the MNQ bounced off its lows to top out just shy of the high of the day.<\/p>\n

On the other hand, the MES barely covered half its drop.<\/p>\n

A pairs trader could take this to mean that if these two assets normally trade close to one another, the MES should outperform the MNQ.<\/p>\n

So, they could buy the MES and sell the MNQ, hoping they revert back to the average.<\/p>\n

If you entered this trade roughly near the blue arrows and closed out around the second white arrow, you would have made: $330 – $160 = $170.<\/p>\n

What Are Micro Futures<\/h2>\n

Most retail traders get hung up on the amount of money they risk, which is a pressing concern.<\/p>\n

If you took that same trade above with the E-Mini contracts, your total profit would be $1,700.<\/p>\n

But you could have also lost just as much, if not more.<\/p>\n

With a large enough account, a $3,000 loss might make sense. For others, $300 is more in their ballpark.<\/p>\n

That\u2019s why micro futures are so crucial to the success of retail traders.<\/p>\n

Micro futures<\/a> have the same capital efficiency as standard contracts but are 1\/10th the size.<\/p>\n

So, while each tick in the E-mini S&P 500 futures (ES) is worth $12.50, the micro version is only $1.25 per tick.<\/p>\n

Micro futures provide all the same benefits as standard futures:<\/p>\n