This article on How To Trade Micro Futures is the opinion of Optimus Futures.
TAKEAWAY:
- Micro E-mini futures allow traders and investors to easily “fractionalize” their positions.
- Smaller contract sizes can allow traders to participate in markets that were previously inaccessible due to their capital requirements.
- Liquidity remains an important factor when trading micro futures contracts.
If your trading account is relatively “smallish,” you can now trade markets that, at one point, were inaccessible to you either due to high margin requirements or due to risks that come with a heavy dollar-per-tick price.
Now that the trading volume has increased tremendously for many of these relatively new contracts like the Dow Jones, S&P 500, Nasdaq 100, and Russell 2000 micros, their liquidity levels have made them attractive instruments for traders who want to participate in these markets while reducing market exposure.
If you’re new to Micro E-mini futures, you’re probably wondering about ways to best approach these unique instruments. We can help you along by providing a few tips.
First, let’s start with the basics. What are Micro E-mini futures contracts, and why does size matter?
What are Micro E-mini futures, again?
Micro E-mini futures (we’ll abbreviate it as simple “micro” futures) are futures contracts that are a tenth of the size of the standard E-mini futures contract. A tenth of the size might mean they carry less exposure than their larger e-mini counterparts.
This reduces their dollar-per-tick value, meaning your account gains or loses on a smaller scale as the markets tick up or down.
Does this mean that risk can be reduced? Sort of. Decreased market exposure can reduce gains and losses, but it really depends on how responsibly you trade.
What is certain is that their smaller size makes them more accessible to traders with smaller capital resources.
So, what’s the “big deal” about a smaller size?
Well, a lot. You can fractionalize your positions, decreasing or increasing your exposure to match the necessity of your strategy as well as your risk preference and capital resources.
Having this capacity might give you more flexibility when trading different market conditions. We’ll go over this in more detail, covering different market conditions from trending to non-trending environments.
Okay. How can you trade a volatile yet “flat” market?
There are many ways to trade a so-called “flat” or “sideways” or “ranging” market. This is where prices go back and forth between support (like a price floor) and resistance (like a price ceiling) for an extended period of time.
We can’t recommend any particular way to do this (some traders even avoid non-trending markets), but we can go over a relatively popular support/resistance tactic if only to demonstrate how micro futures might be helpful.
Take a look at the following chart of the Micro E-mini Russell 2000 (M2K)
M2K – Daily – February 2, 2021 – February 24, 2022
Notice how prices appear to ping-pong within a trading range for a number of months, before finally finding a direction.
Some traders like to trade these bounces; some will go short (S), some will just go long (L), and a few bold traders will attempt to do both (S and L).
We didn’t illustrate profit targets because those vary from trader to trader.
Some traders will take profits at the midpoint of the rectangle pattern while others might close their positions out anywhere between 60% to 100% of the range.
Occasionally, price will exceed support or resistance—a fake breakout of sorts—only to fall back within the range.
Case in point: take a look at the November breakout above. A short trade at S3 which might have been a losing trade for anyone holding a large position.
Why? The spike above resistance looked like it might have continued upward, spooking short-sellers to close their position in order to avoid further losses.
But in this case, the market reversed back into the trading range for a few more swings before eventually plunging downward below support.
The potential benefit of using micro futures to trade such a scenario is pretty evident: you can take smaller risks by fractionalizing your position. Instead of trading a full position, you can cut it down to 90%, half, or even a tenth of a standard E-mini position.
This principle applies to any sideways trading strategy BTW. Less exposure can mean less risk, as long as you’re trading responsibly.
Past performance is not indicative o future results.
What about trading a trending market?
This is one situation in which trading micros can make a big difference. Take a look at the chart below. The setup is clear, but the risk can be huge depending on the size of your trade.
YM – Daily Chart – December 3, 2021 – March 18, 2022
Imagine you’re at point [C]. Your outlook is bearish, and the YM has given you a favorable short-sell setup, declining from [A] to [B] and now retracing to [C]. The [C] point is within the range of a 61.8% Fibonacci retracement from the initial [A-B] swing.
This means that if you were to go short, the 61.8% level might have been a favorable entry point (read up on Fibonaccis to get a better sense of why traders might think in this manner).
The setup is clear and you’re ready to pull the trigger to go short. The problem is that the distance between your potential market entry and your stop loss at [A] is extremely wide.It’s 1,263 points away: a risk of $6,315 per contract for a profit target that’s 2,538 points below ($12,690 per contract).
Suppose your trading account has only a $10,000 total. Not only wouldn’t you be able to afford the loss of over 60%, you can’t even afford the margins of $8,500 per contract to hold your position beyond the market close.
In a world, before Micro E-mini’s this would have been a non-tradable scenario.
But micros now make this possible. By reducing your exposure to a tenth of the size trading the Micro E-mini Dow Jones Futures, aka the MYM, your risk per contract would be reduced to around $631.50 for a profit goal of $1,269.
Your margins would also be reduced to $850 per contract, which is arguably much more affordable.
Disclaimer: The placement of contingent orders by you or broker, or trading advisor, such as a “stop-loss” or “stop-limit” order, will not necessarily limit your losses to the intended amounts, since market conditions may make it impossible to execute such orders.
What can I do with micro futures when markets rise or decline steadily?
The answer is: it depends on whether you’re long or short, and whether you’re already in the market or still waiting to enter.
Your market tactics should generally be the same as any other futures contract, but micro futures do provide a few advantages:
Fractionalizing a position for partial exits: Instead of opening a position with one standard e-mini contract, you can open up to ten micro contracts for multiple profit targets or multiple stop loss levels.
- If you’re riding a trend, fractionalizing your position gives you the option of staying in your position in case your instrument continues to move in your favor.
- If the market is moving against you, you can lighten your load incrementally in case the market reverses in your favor.
Entering the market by taking partial positions: take a look at the scenario below.
The market has begun to decline and your intention is to buy the dip. Imagine that market sitting near the 38.2% retracement level.
Your ideal buy point is at 61.8%. However, there’s a possibility that the market might not reach that level. If you wait, there’s a chance you might miss the trade.
So, you need to get in now. You also realize that if you’re wrong and the market continues to sink, you can lose a good chunk of change, so to speak, if you’re wrong and the market continues to sink further.
So, instead of buying a standard e-mini futures contract at the 38.2% level, what if you break up your entry into smaller bits. For instance, 5 micro contracts at 38.2%, 2 micro contracts at 50%, and the last 3 contracts at 61.8%.
- In this way, if the market doesn’t retrace, you’ll have half a position (5 contracts) at 38.2%.
- If the market sinks past the 61.8% level, your loss can be reduced as long as you close the trade at a reasonable loss.
Adding to your position at breakout levels: Sometimes it can be smart to capitalize on your winning positions by adding more during breakouts. Why add to your position after a breakout?
Because it might mean that the market is favoring the direction of the breakout. Check out the image below. When markets trend, they never move in a straight line.
So, breakouts are an inevitable consequence (again, check out the image below).
But breakouts can fail and reverse against your directional preference.
So, do you really want to risk a full contract, or might you want to scale in at a smaller size?
If so, then using micro contracts can help, because at a tenth of the size of a standard e-mini contract, you have the flexibility to scale in (or out) in a customized manner.
If I’m willing to give it a try, which micro futures should I consider?
You’re probably wondering what are the “best micro futures contracts” to trade. There is no “best.” Maybe the best answer would probably be to go with a market you’re already familiar with.
But it also depends on your style of trading. And this is where liquidity comes into play.
What’s liquidity and why is it important when selecting a micro futures contract?
Liquidity generally means the ease with which you can get in and out of a contract.
If you’re a trader who scalps the markets for a few ticks, you need enough liquidity to get in and out of your position fast.
If there aren’t enough buyers or sellers in the market, then you might have a hard time buying or selling a contract.
ES vs MES: Take the standard E-mini S&P 500 futures (ES) versus its Micro E-mini version.
At the time of this writing (March 30, 2022), the total volume on the ES stood at 1,356,629 contracts. The MES total volume was 1,122,660. The liquidity for both was probably very similar.
GC vs MGC: But what if you traded gold? The standard gold contract (GC) had a daily volume of 355,088, far less than the ES and MES. But the Micro gold contract (MGC) had a volume of only 85,774 contracts traded. 85K is a far cry from 355K.
The MGC might have worked for a swing trade or a longer day trade, but it might have been difficult for a scalping strategy.
So, what contracts might be the most liquidly traded among micro futures?
The micro-futures markets, when compared across the same category, are probably correlated in volume and liquidity with their larger counterparts.
This means the stock indexes are probably the most liquid—MYM, MES, MNQ, and M2K—followed by Micro WTI Crude Oil futures—MCL—and finally, Micro Gold—MGC.
Bear in mind, however, that your strategy plays an important part in determining the kind of liquidity you need to trade a given market. So, you will have to try this in the live market to find out which micro futures instrument might work best for you.
Anything else I should know?
Yes, but it isn’t for all traders. We’re talking about options on Micro E-mini futures contracts. If you’re not already familiar with options trading, then it will require you to learn a whole new discipline in financial markets.
If you’re curious about it, we do have a complete strategy guide available.
Last thing: if you want a quick and general recap on Micro E-mini futures, check out our general explainer here. This should provide more detailed information if that’s what you’re after.
How to trade micro futures contracts?
If you’re new to micros or new to futures in general, it might help to get some guidance from an experienced futures broker. Optimus Futures can provide you with assistance in getting started.
There are quite a few instruments and exchange details you need to know about before you jump into the live market. Plus, it helps to have an experienced broker match your trading approach to the right platform.
So, if you want to get started trading these new instruments, please contact us.
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.
