Micro Futures Trading: A Beginner’s Guide to Smaller Contracts

May 2, 2024

Written by:
John McDowell

Micro futures have evolved out of the bigger landscape of futures trading as an instrument that allows traders of all experience levels to participate in futures markets. In essence, it has made commodities, currencies, and equities futures trading more accessible and manageable than the traditional futures contracts most are familiar with.

In this guide to micro futures trading, we’ll introduce you to these instruments, discuss their many benefits, and compare them to traditional futures contracts. Hopefully you’ll have a better understanding of micro futures and how to get started trading them!

What Are Micro Futures?

Micro futures are like tiny, bite-sized futures contracts that track the price movements of their underlying assets, like cryptocurrencies, equity indices, commodities, or interest rates. These contracts are similar to fractional shares in that they are just a smaller size of the original futures contract. 

Micro futures allow a broader audience to participate in the market because of the lowered financial commitment. There is still considerable risks involved, however, as micro futures fluctuate with the same volatility and liquidity as other futures derivatives.

In addition, many brokerages allow for extreme leverage when trading micro futures, which can also increase your risks.

Importance of Understanding Micro Futures for Beginners

If you’re new to the world of trading, and especially to micro futures, you’ll want to understand how these trading instruments work before jumping into them. At a lower price point, they offer you the ability to enter the futures market with less upfront capital, and to some degree less risk.

As with any trading instrument, be it futures, stocks, bonds, or crypto, there is inherent risks involved. Here at TradingSim, we never advocate for trading anything with real money until you’ve actually studied, practiced, and proven you can be successful in a simulated environment. 

There’s no better way to learn than through futures trading simulation. And that is why we exist, to help you learn the ropes of futures trading through futures paper trading.

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Benefits of Trading Micro Futures

While we’ve touched on the benefits of trading micro futures for beginners, experienced traders also enjoy trading them. They are an attractive option for both novices and beginners. Let’s look at the several reasons why they are attractive to traders:

  1. Lower Financial Commitment: Traders can enter the realm of micro futures trading with a much smaller initial investment compared to traditional futures contracts. The minimal capital requirements allow you to build on your trading skills and confidence without the worry of a huge investment.

  2. Reduced Risk Exposure: Since micro futures have smaller a contract size, it is possible to reduce your risk, or manage it more effectively. This doesn’t mean that risk disappears. If you find yourself with a broker that allows high leverage, your risk exponentially increases. However, with lower margin requirements, you might find that you manage risk more effectively. 

  3. Flexibility with Trading Strategies: Smaller contracts allows you to experience real-world trading with less psychological pressure. For that reason, they can be a wonderful tool for beginner traders who are looking to go beyond the simulator and try their strategies with real money. As you learn and tweak your strategies, the smaller contracts may be more forgiving on your trading account.

  4. Diversification and Hedging: Micro futures can provide an opportunity for traders to diversify their other positions in the market or to hedge against potential losses in their portfolio. For example, you could spread a mix of micro futures contracts into your portfolio to reduce volatility, or you could take contrarian positions in the indices if you want to protect your long equity positions.

No matter how you look at it, there are a lot of ways to benefit from trading micro futures, so long as you understand your strategies and manage risk. These instruments can help you gain valuable experience in the market, while limiting your exposure.

Comparison with Traditional Futures Contracts

Let’s take one of the more popular micro futures as an example. In 2019, the CME Group introduced Micro E-mini futures to the market. Designed as a smaller-sized contract, it allowed more accessibility to a wider range of traders. These Micro E-mini contracts are available for the major U.S. indices, as well as other assets like Bitcoin, metals, etc.

Here’s how the Micro E-mini futures work compared to tradition futures:

  • Margin Requirements: Because they are a smaller contract size, Micro E-mini futures require less upfront capital with most brokerages. For example, you can get involved with Micro E-minis often for less than $2000 upfront capital requirements. This lowers the barrier to entry for trading futures markets compared to a much larger financial commitment to trade traditional futures.

  • Contract Size: Micro E-mini futures are 1/10th the contract size of a standard E-mini futures contract and 1/50th the size of a traditional futures contract. For example the NQ, or Nasdaq E-mini futures contract, has as contract size $50 times the index value, whereas the Micro E-mini Nasdaq futures (MNQ) is only $5 times the index value. In other words, your initial investment on a contract could be something like $50 instead of $500. 

  • Trading Hours: Trading hours actually remain the same for both traditional and micro futures. Both trade almost 24 hours per day, 5 days per week on the CME Globex electronic trading platform.

  • Liquidity Pools: Liquidity isn’t much of an issue during peak trading hours for micro futures, mainly because they have increased substantially in popularity since their beginning in 2019. As we’ve mentioned before, there are advantages to trading during optimal futures trading hours. Be sure to check that information out.

Understanding Micro Futures Margin

Futures margin is the amount of money you must deposit with a broker in order to buy or sell a contract. This amount is set by the broker as a percentage of the value of the futures contracts. For this reason, a cheaper futures contract will require less capital — hence, the lower barrier to entry for micro futures at 1/10th the cost of regular contracts.

The percentage requirement can vary, but is usually set between 3% and 12% of a contract’s value. Again, this depends on the type of contract and the exchange where you are trading.

Maintenance Margin

Maintenance margin is a financial minimum you must maintain in your account in order to keep a futures position open. If your trades go against you and your account falls below the maintenance margin requirement, you may receive a “margin call.” This is the brokers way of protecting their own butt by requiring you to deposit more funds or close your position.

Let’s look at an example:

Say you want to buy a micro futures contract valued at $10,000. You may only need to deposit $1000 for margin, assuming a 10% initial margin requirement.

However, if your position goes against you and falls too much, you might need to increase your deposit to meet the maintenance requirements. A lot of this will depend upon how much leverage your broker offers, and how much of that you use.

How Does Leverage Affect Micro Futures?

Leverage is a term for “borrowed funds.” Borrowing from your broker to buy more shares than your deposit can help you grow your account faster — IF it is executed properly. If not, you stand to lose your initial investment or receive a margin call.

Some brokers allow leverage up to 100x’s the initial investment. This is massive exposure for a small account size. The average is closer to 10:1 leverage. We recommend taking a safe approach to using margin so that you don’t lose it all in one big leveraged position.

As always, it’s crucial to understand risk management in trading, especially with futures or micro futures. Always measure your stop-loss according to the amount of margin you use (position sizing), and by all means, respect your stop-outs!

Key Considerations for Trading Micro Futures

What Assets Are Available to Trade with Micro Futures

Micro futures are available for several different assets, mainly on the CME Global exchange. These include stock market indices, commodities, and currencies. As of writing, this is the current list of micro futures offered by CME:

  • Micro E-mini Nasdaq-100 futures
  • Micro E-mini S&P 500 futures
  • Micro E-mini Dow futures
  • Micro E-mini Russell 2000 futures
  • Micro E-mini futures for commodities: gold, silver, copper, natural gas, crude oil, etc.
  • Micro Treasury futures for interest rates
  • Micro Forex 
  • Micro Bitcoin

While this list is subject to change, you can see that micro futures offer a good variety of choices to expose your portfolio to different industries and asset classes. You can take advantage of Bitcoin without actually buying it, the same with gold and silver, or with stock indices. The sky is the limit with these choices.

Here at TradingSim, we offer all the major futures contracts you could want to trade and practice in a simulator -- making it simple to choose a replay to trade and study anytime of day from anywhere:

How Do Micro Futures Settle?

Because futures contracts represent the underlying asset, it can be difficult to take tangible ownership of the underlying if it is intangible. Oil futures, for example, allow you to take ownership of the oil barrels at the contract expiration. Let’s say you bought 7 contracts of oil at $75 per barrel. At the expiration of the contract, you would need to take ownership of these barrels.

This would be nonsensical for a lay investor to take ownership of a barrel of oil, unless you are a refinery company. Thus, most contracts carry a cash settlement option.

Indices, currencies, and other assets usually settle in cash at the expiration for the difference in the contract price you purchased at, and the price at the end of expiration. These assets represent items that would be difficult to own, like the S&P 500. These transactions are all done virtually through your broker.

Choosing a Reliable Trading Platform and Broker

There are many brokers that offer futures trading on their platforms. These brokers will usually offer a dynamic charting platform, the ability to place complex trades, access to real-time pricing and liquidity data, and proper cash settlement.

From Interactive Brokers to E*Trade, and many, many more, you’ll want to give these brokers a try to see which one you like best. They all have a various differences, looks, and feel. When choosing a platform, pay close attention to the following criteria:

  1. How much access to do they provide to the various futures assets like commodities, currency pairs, or indices? The more options they provide, the more opportunities you have to trade.

  2. Do they provide real-time data and quotes so that you can make informed decisions quickly and with reliable information on current market conditions?

  3. Are the charts and trading tools they provide advanced advanced enough, and user-friendly enough, for your style of trading? This is important for analyzing market trends and identifying potential trading opportunities.

  4. Can you place multiple order types with advanced order execution options? This should include stop-loss orders, contingent orders, trailing stops, and other advanced order types.

  5. How low are their intraday margin rates? This will allow you to put more capital to work with smaller upfront investment.

  6. Is it important for you to trade on the go with comprehensive mobile apps in addition to a desktop or web application?

  7. Do they provide customer support (especially after hours), educational resources and other materials to help you learn, setup your account, use their platform, etc.?

  8. What are their commissions like? Do they offer competitive pricing with low commissions and fees for futures trades? What options do they provide for IRA futures accounts?

These are just handful of potential questions you should be thinking about when choosing a micro futures trading platform and broker. Keep in mind that all these options will vary to some degree from broker to broker. Do your due diligence when choosing a provider for your futures trading experience.

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Tips for Successful Micro Futures Trading

Start with a Demo Account

Practicing micro futures trading in a demo account, or paper trading account, is the absolute best way to get involved in futures trading. Here at TradingSim, we are huge proponents of this approach because it works. 

Think of it this way, how many professional performers, either in the arena, the stage, or any other venue, step into a performance without practicing behind the scenes first? You know the answer to this. None! W

Why would you do anything different?

The first thing you need to ask yourself is, “How serious am I about learning this?” If you want to go gamble, why not go to Vegas and blow a bunch of money and have fun? Trading in the markets is risky business, and if you don’t know the game, you‘ll eventually get eaten by the sharks who know the game. Plain and simple.

To that end, take the necessary time of trading in futures simulator, like the one here at TradingSim, until you’ve had enough market cycles to learn the ropes and show a positive equity curve with virtual money. Once you can prove to yourself that you can trade with real money, then start applying what you’ve learned to micro futures with small contracts until you build up your confidence for bigger positions.

Set Realistic Goals and Expectations

The time it takes for a trader to reach a place where he/she can consistently make money in the markets is usually around 5+ years. Before that, it’s a matter of losing as little as you can to save your capital until you reach consistency. 

Many of the greatest traders, like the ones mentioned in the Market Wizards books, took years before they were ever successful at this. It doesn’t happen overnight. In fact, most traders blow up multiple times in their early careers (and some late in their careers). 

Keep all this in mind as you set goals. Your goals should be less about monetary gains and more about educational and consistency “milestones” in your trading. Focus on the process and the outcome will take care of itself.

Learn from Your Mistakes

As part of the process to reaching successful micro futures trading, you’ll want to document your progress along the way. At TradingSim, we offer a trade tracking tool that allows you to see your progress in the simulator. Being able to see your wins and losses, what worked and what didn’t, can go a long way in understanding what is holding you back from success.

When learning from your mistakes, be sure to look for consistent patterns of both successes and failures. Often times, we find that simply cutting out what doesn’t work is enough to boost profitability. But, how will you know what to cut out if you don’t document and study your past history?

Stay Disciplined and Consistent

Eventually, once you find a strategy that works for you, the process because more psychological. How disciplined can you become at sticking to what works, and avoiding impulsive, gambling behaviors? That’s the key to consistency.

The more you learn and observe in the market, the less you should be doing outside your wheelhouse. In the beginning, it’s all about experimentation. As you grow, it’s more about consistency. 

Some of the greatest traders will tell you that good trading is boring. It’s boring because you’ve taken the mystery out of it, and you no longer chase uncertainty.

Key Takeaways

We hope you can now see how accessible micro futures can be for traders looking to gain exposure to the futures markets with lower capital requirements. With the myriad of assets available to trade, reduced contract size, around the clock trading, and lower margin rates, micro futures can be a great place to get your feet wet in trading — especially as a beginner trader.

Remember to familiarize yourself with a solid understanding of market dynamics, technical analysis, and simulation trading. We can’t emphasize the importance of paper trading in micro futures. 

To that end, we’d like to offer you a 7-day free trial of our futures trading simulator. Risk free! Click below to give it a try.


Tags: Day Trading, Futures


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