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There are many benefits that come with day trading micro futures. Longer trading hours, easier to go short, better tax treatment, and more.
Futures contracts are leveraged. Meaning traders can control a hefty amount of underlying value (notional value) with a moderately small amount of money.
Before micros, the biggest downside to the futures market has been risk.
Capital requirements and the risks involved have kept many beginners away. But now that’s beginning to change.
With micros, you get all the same benefits of futures trading but on a smaller scale. The contract size simply works better with smaller accounts.
This makes micro futures an excellent way for beginners to start trading in the futures market.
What Are Micro E-mini Futures?
Futures contracts are agreements between investors to buy or sell a financial instrument or commodity on a specified date.
The original e-mini products were launched in the late 90s to circumvent the rising cost of the indices. The intention of micros is similar–to allow speculators with less capital to participate in the futures market.
Micro e-minis provide trading exposure in the four major US indices:
- S&P 500 – MES
- NASDAQ – MNQ
- Dow Jones Industrial Average – MYM
- Russell 2000 – M2K
The Chicago Mercantile Exchange Group (CME) introduced the micro e-mini futures products back in May of 2019. They began trading with explosive volume and have turned out to be a huge hit.
Micro e-mini futures are 1/10th the size and 1/10th the cost the e-mini contracts. Thanks to their smaller size, beginners can dip their toes in while risking less money.
How Do They Work?
Since micros are 1/10th the original e-minis, the contract multiplier is also 1/10th the size. A standard e-minis S&P 500 contract has a $50 multiplier. So, if the S&P 500 index’s value is 3,450, the total underlying or notional value is $172,500.
The multiplier for a micro e-mini S&P 500 contract is $5. With the index at 3,450, the micro’s notional value would be $17,250, instead of $172,500.
| Index | Contract | Multiplier |
|---|---|---|
| S&P 500 Index | Micro E-Mini MES | $5 x S&P 500 Index |
| NASDAQ-100 Index | Micro E-Mini MNQ | $2 x NASDAQ Index |
| Dow Jones Index | Micro E-Mini MYM | $0.50 x DJIA Index |
| Russell 2000 Index | Micro E-Mini M2k | $5 x Russell 2000 Index |
Tick Size
Tick size is a measurement of movement for a futures contract. The tick size for e-mini and micro S&P contracts is the same at 0.25, but the dollar value per tick is $1.25 instead of $12.50.
To better understand ticks, let’s discuss a quick example. Let’s say you bought (went long) 1 micro e-mini S&P 500 contract at 3425.
The price moved up to 3460, which is 35 points. Divide that by the tick size of 0.25 the index moved 140 ticks. The dollar amount per tick is $1.25– times it by 140, you have a gain of $175.00.
Now a movement like that with an original e-mini contract would result in a gain of $1750.00.
| Index | Contract | Min Tick | Dollar Value Per Tick |
|---|---|---|---|
| S&P 500 Index | Micro E-Mini MES | 0.25 Index Points | $1.25 Per Contract |
| NASDAQ-100 Index | Micro E-Mini MNQ | 0.25 Index Points | $0.50 Per Contract |
| Dow Jones Index | Micro E-Mini MYM | 0.50 Index Points | $0.50 Per Contract |
| Russell 2000 Index | Micro E-Mini M2k | 0.10 Index Points | $0.50 Per Contract |
Micros have the same quarterly expiration cycle as the e-minis. Contracts expire on the third Friday of March, June, September, and December.
Like other futures products, micros experience the most trading volume in the “front month” contract. The front month contract is usually nearest to the expiration date.
Options trading is also now available for micro e-mini futures.
Are There Other Types of Micro Futures?
Yes, there other micro futures products outside of the major stock indices. They include precious metals and foreign currency exchange products (FOREX).
| Product | Symbol |
|---|---|
| E-Micro AUD/USD | M6A |
| E-Micro GBP/USD | M6B |
| E-Micro USD/CAD | MCD |
| E-Micro EUR/USD | M6E |
| E-Micro JPY/USD | MJY |
| E-Micro CHF/USD | MSF |
| E-Micro Gold | MGC |
| E-Micro Silver | SIL |
How Does Margin Work?
Futures margin is different than securities margin. With stocks, margin is used to borrow against your portfolio to buy more assets. In the futures market, margin is the amount needed in your account to open a position.
Margin works the same with micro futures as it does with other futures products.
- Initial margin = Minimum amount required to enter a position.
- Maintenance margin = Minimum amount that must be maintained in your account after entering a position.
| Index | Contract | Initial Margin | Maint. Margin |
|---|---|---|---|
| S&P 500 Index | Micro E-Mini MES | $1,320 | $1,200 |
| NASDAQ-100 Index | Micro E-Mini MNQ | $1,760 | $1,600 |
| Dow Jones Index | Micro E-Mini MYM | $1,045 | $950 |
| Russell 2000 Index | Micro E-Mini M2k | $638 | $580 |
Along with market volatility, margin rates can fluctuate at any time. The exchange stipulates the margin amounts, but your broker may have additional requirements.
How Much Money Do You Need?
At a bare minimum, you’ll need to have an account balance big enough to meet the margin requirements. This can vary from broker to broker.
A good rule of thumb that I’d suggest is $2k-$3k. This is an ideal minimum to start day trading micro futures.
What Brokers Allow Micro Futures Trading?
Here are some of the popular brokerages that offer micro futures trading:
- AMP Global
- TD Ameritrade
- Interactive Brokers
- Tastyworks
- Charles Schwab
AMP Global offers some of the lowest fees but can be intimidating to set up for a beginner.
Interactive Brokers also have low fees depending on how often you trade and the account type you choose. However, they are a bit conservative with margin.
Tastyworks is an excellent middle ground between fees, margin, and ease of use.
Benefits
One of the most significant benefits of micro futures is accessibility. Retail traders with smaller accounts are given a better shot at succeeding in the futures market. Or at least given a better chance to try it out.
You also get better tax benefits as a futures trader. 60% of your gains will be taxed at the long-term capital gains rate. This is far superior compared to the tax treatment for day trading stocks.
Futures contracts allow for an easy way to hedge or diversify an investment portfolio.
The leverage used in the futures market makes it possible for big returns with a low amount of capital.
You’ll also gain access to nearly around the clock trading hours. Pajama traders are futures traders.
But best of all, you don’t have to worry about the pattern day trading rule!
Risks
Unlike stocks, you can potentially lose more than your original investment. This is due to the use of leverage. And futures contracts are considered to be highly-leveraged products.
So, as a beginner, you should start small. Learn as much as you can, and develop a trading plan. Understand what you are getting into before risking your capital.
Micro Futures Day Trading Strategies
Risk/Reward Ratio & Setting a Stop
The same day trading strategies used for stocks can be used with micro futures. The biggest difference is understanding ticks and how to calculate the risk/reward ratio.
A stop loss is a necessary tool used to lower your risk. Setting one while day trading micro futures will involve calculating ticks.
For example, let’s say you bought an MES contract for 3460 and have a profit target of 3485. You decide to set a stop loss at 3455. The 5 points equal 20 ticks, so if your loss gets trigged, you will lose $25 (20 x 1.25).
Now, if your trade works out and it hits your profit target, the 25 point move is equal to 100 ticks. This gives you a profit of $125 before fees.
This example has a risk/reward ratio of 0.2, meaning the potential gain outweighs the risk. A risk/reward ratio above 1 means that the risk outweighs the reward.
Support & Resistance Strategy
Support & resistance areas allow for a simple and effective day trading strategy. Using moving averages and trendlines, you can identify areas of support and resistance.
Enter the trade when the price action is testing support. Then put a stop-loss somewhat below the area of support. Then look to take profit near areas of resistance. (Make sure you backtest and calculate the risk/reward before entering.)
You’ll want a wider or shorter stop depending on the current market volatility. A strong understanding of technical analysis is recommended.
Final Thoughts
Several day trading strategies can be used to trade micro futures. If you are a beginner, I suggest you keep it as simple as possible. Start small and use methods you understand before moving on to more advanced tactics.
Micro futures are a great alternative to options trading. And the benefits have attracted many retail traders.
The popularity of futures trading is going to skyrocket, especially with products like the micro e-minis.
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