Lessons from the Pros


Micro Trading to Accommodate Risk in the Futures Market

Many new futures traders are being faced with problems of proper risk management using the 1% of account size rule while trading full sized Futures contracts.  With today’s market volatility, using a small stop is almost guaranteed to get you stopped out of your position before having a chance to turn profitable.  Plus, when trading Futures you are required to trade the full contract size and not in partials, unlike a stock where a trader can trade any number of shares that they wish to control risk.

It is important that traders have a written plan that contains a proven strategy for trading the Futures markets.  This plan will provide the rules that are needed to be successful while trading.  Without a plan or rules a trader is destined for failure!!

Free Trading WorkshopBut once a trader has this written plan they will need to actually trade it with some risk involved.  First they should simulate trade to get familiar with their trading platform.  They should do this for a pre-defined period and document all of their trades.  While it is nice to show a profit at the end of this simulation period, the most important question that needs to be asked is, “Did I follow my rules for the majority of these trades?”  Even if you were very profitable, if you did not follow your rules you are still not ready for live trading.  If you cannot follow your rules on a simulator, you will not be able to follow them when there is real money on the line.

Another frustrating part of learning to trade is to have poor risk management.  New traders who do tend to run out of money before that light bulb comes on and they get that, “Oh I’m getting this now” feeling.

For some new traders, having a Spot Forex account is helpful because they can actually trade their plan with real money while not risking a lot (or making a lot) by trading micro lots.  Each Pip (tick) is approximately 0.10 (ten cents).   With the small risk exposure of micro trading, it is easier to follow your rules as you are only risking 1% or less of your account on each trade.  Meanwhile, you are getting comfortable holding positions overnight (day trading micro accounts in Forex is not recommended).  Soon, with enough practice, you have learned to follow your rules and possibly may have actually added a few dollars to your account.  Then the transition to Futures is a little easier because you are more prepared skill wise and have a little more trading capital.

If you do not have a Spot Forex account then perhaps you might want to look at the micro Futures on some of the Currency markets.  A few years ago when these products were introduced I would not have thought about telling somebody about these products due to the illiquid nature of them.  Today the Euro and Australian Dollar contracts appear to have adequate volume for holding positions overnight for smaller account sizes.  There is still a huge difference in volume between the micro and the full size Futures contracts.  Currently the Euro and Aussie are the two markets that have sufficient volume in the micro contracts, avoid trading the other micro currencies.

These contracts trade on the Chicago Mercantile Exchange Group (CME) and if you already have the Globex data feed to trade Stock Indexes and other Futures you should be able to get these markets as well.  The contract trading hours and expiration months are the same as the full size contracts.  The differences come in the minimum tick size, margin required and contract size.

The full size Euro Currency Futures contract trades 125,000 Euros.  The Exchange traded symbol is EC plus month and year of expiration.  For each minimum tick of .0001 the tick value is $12.50 each.  Currently the average daily range is approximately 105 ticks or $1,312 per day range.  The capital required to trade is $3,650 per contract.  Traders will usually find the average daily volume to be about 275K contracts.

The micro size Euro Currency Futures contract trades 12,500 Euros.  The Exchange traded symbol is M6E plus month and year of expiration.  For each minimum tick of .0001, the tick value is $1.25 each.  Currently the average daily range is approximately 105 ticks or $131 per day range.  The capital to trade is $363 per contract.  Traders will usually find the average daily volume to be about 10K contracts.

The full size Aussie symbol is AD and the micro size symbol is M6A.

The prices are always very close to each other on both contract sizes for arbitrage reasons.  Therefore, you would use the full size contract to do your technical analysis and then place orders on the micro contract symbol.

Obviously, you would start out simulating these trades and documenting your results.  If you find there is too much slippage (bad fills) then you would not proceed to trade with real capital.  But looking over the micro Euro and Aussie contracts, they appear to be liquid enough for smaller accounts.  I would recommend not trading these around major reports like monthly employment numbers that always cause chaos in the markets.

“The only people with whom you should try to get even are those who have helped you”  John Southard

Don Dawson

DISCLAIMER This newsletter is written for educational purposes only. By no means do any of its contents recommend, advocate or urge the buying, selling or holding of any financial instrument whatsoever. Trading and Investing involves high levels of risk. The author expresses personal opinions and will not assume any responsibility whatsoever for the actions of the reader. The author may or may not have positions in Financial Instruments discussed in this newsletter. Future results can be dramatically different from the opinions expressed herein. Past performance does not guarantee future results. Reprints allowed for private reading only, for all else, please obtain permission.