The Futures market is one of the most traded instruments in the financial market.
As an example, the E-Mini S&P500 Futures (ES) is one of the most liquid futures products around, with more than 1 million contracts traded daily.
However, some Futures products can be difficult for traders with a small capital to participate in due to the underlying margin requirement.
For instance, at the point of writing this post, the initial margin for E-Mini S&P500 Futures (ES) is set at USD12,320 (source: RHB futures). Meaning, in order for a trader to trade 1 ES contract, he/she needs to have at least USD12,320 deposited in his/her account to initiate the trade.
This is certainly not a small amount for everyday retail traders to allocate just for trading. Is there a solution to this?
Fortunately, the launch of Micro Futures makes it much more capital-friendly for everyday traders to participate in the Futures market even with a small budget.
So, what exactly is Micro Futures, and who should consider trading them?
Let’s find out in this post!
What is a Micro Futures contract?
Essentially, Micro Futures are smaller versions, usually 1/10th the size of a standard E-Mini Futures contract.
As an example, the standard E-Mini S&P500 Futures (ES) represents $50 times the price of the S&P 500 index, while the Micro E-Mini S&P500 Futures (MES) represents $5 times the price of the S&P500 index.
In other words, a trader that trades 1 contract of ES will gain $50 for each point that is going in his/her favor versus $5 for each point while trading the Micro Futures contract (MES).
The major benefit of Micro Futures is it allows traders with a small capital equal opportunity to participate in the Futures market, thanks to the smaller contract size and margin requirement.
The initial margin required for commonly-traded futures products and their Micro Futures counterpart (as of 31/5/2023):
| Initial Margin to initiate 1 contract* (Source: RHB futures) | Contract Size |
E-Mini S&P 500 futures (ES) | USD 12,320 | $50 x S&P 500 Index |
Micro E-Mini S&P 500 futures (MES) | USD 1,232 | $5 x S&P 500 Index |
E-Mini NASDAQ-100 (NQ) | USD 18,480 | $20 x Nasdaq-100 Index |
Micro E-Mini NASDAQ-100 (MNQ) | USD 1,848 | $2 x Nasdaq-100 Index |
E-Mini Dow (YM) | USD 8,800 | $5 x DJIA Index |
Micro E-Mini Dow (YM) | USD 880 | $0.50 x DJIA Index |
E-Mini Russell 2000 (RTY) | USD 6,820 | $50 x Russell 2000 Index |
Micro E-Mini Russell 2000 (M2K) | USD 682 | $5 x Russell 2000 Index |
When should you trade Micros Futures?
#1 Trade Micro Futures when you have a small capital size
The biggest benefit of Micro Futures is it allows traders to participate in the Futures market with a smaller capital.
The Micro E-Mini S&P 500 futures (MES), for instance, only require USD 1,232 as the initial margin compared to USD 12,320 for E-Mini S&P 500 futures (ES).
#2 Trade Micro Futures if you need more precise risk management
Risk management is crucial in all trading systems alike, and trading Micro Futures can be helpful for traders with a smaller risk allocation.
Let’s say a trader is planning to risk USD 150 on a trade with a stop-loss of 5 points from entry.
With a classic E-Mini S&P 500 futures (ES), the trader is not able to execute 1 full contract, as a 5-point stop loss is equivalent to a total risk of $250 (5 points x 1 ES contract x $50 per point), exceeding the trader’s risk budget.
Meanwhile, with Micro E-Mini S&P 500 futures (MES), a trader can easily size a 5-point stop loss within a USD 150 risk per trade. This is done by executing 6 MES contracts (5 points x 6 MES contracts x $5 per point).
In other words, Micro Futures enable traders with a smaller risk budget to better manage their position-sizing.
| E-Mini S&P 500 futures (ES) | Micro E-Mini S&P 500 futures (MES) |
Value per point (USD) | USD 50 | USD 5 |
Risk for a 5-point Stop Loss in USD | USD 250 (exceeded risk budget in my example) | USD 150 |
#3 Trade Micro Futures when your trading strategy requires you to scale in or out via multiple contracts
Traders with a small capital size, yet require to trade multiple contracts – be it to scale in, or scale out, should also consider trading Micro Futures.
Consider that the initial margin required to initiate 1 E-Mini S&P 500 futures (ES) contract is USD 12,320, 2 contracts of ES would require double the initial margin (USD 24,640). This is no small amount for an everyday trader.
With Micro E-Mini S&P 500 futures (MES), the initial margin to initiate 2 MES contracts is relatively lower at USD 2,464 (2 MES contracts x USD 1,232).
As such, trading Micro Futures also provide the space for traders to be creative and flexible with their strategies, such as scaling in or out.
#4 Test your new strategies with Micro Futures
Testing a new strategy in live conditions, but want to keep your risk exposure under control?
Micro Futures can be a good alternative, thanks to the smaller contract size relative to the standard E-Mini contracts.
Testing a strategy in a live market via Micro Futures keeps a trader’s risk low and manageable.
The downside of trading Micro Futures:
While trading Micro Futures presents many obvious benefits, it is not perfect,
One key downside when it comes to trading Micro Futures is the higher commission relative to the overall contract size.
Each futures brokers have a different fee structure, but generally speaking, the commissions on Micro Futures will take up a higher share of your gains compared to E-Mini Futures contracts.
For illustration purposes, consider a 10-point profit on a 1-contract S&P500 futures trade:
E-Mini S&P 500 futures (ES) | Micro E-Mini S&P 500 futures (MES) | |
Commission (In & Out, a.k.a. Round Turn) | USD 5 | USD 2 |
Gross Profit before commission | 10 point x USD 50 per point = USD 500 | 10 points x USD 5 per point = USD 50 |
Net Profit after commission | USD 495 | USD 48 |
% Commission relative to profit | 1% | 4% |
Verdict: Micro Futures opens up opportunities for traders with a small capital
The Futures market offer massive opportunities to trading community, and the introduction of Micro Futures make it more accessible for traders with smaller capital size to participate in the exciting Futures market.
Are you planning to begin your Futures trading journey? Definitely consider Micro Futures if you are getting started!
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Disclaimers
Any of the information above is produced with my own best effort and research.
This post is produced purely for sharing purposes and should not be taken as a buy/sell recommendation. Past return is not indicative of future performance. Please seek advice from a licensed financial planner before making any financial decisions.
Leverage is a financial tool that comes with its advantages and risks. Please learn and understand both the upsides and downsides of leverage before using it for trading.
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