Micros: Smaller Contracts Offering Big Potential
More Opportunities for a Developing Trader
As a developing trader you should always be looking for low-risk opportunities to learn what works for you and what doesn’t. If you never try out a new product – you reduce your opportunities for experience and exposure. When traders think about futures, they often think about the E-minis or full-size products. However, utilizing the larger products can obliterate a small account. Now there are a variety of Micro Futures that help developing traders gain access to these markets at 1/10th of the risk.
One massive benefit of Micros is that now a trader, with a much smaller account, can take advantage of news events or macro-based moves – in markets that otherwise would be reserved for traders/institutions with large accounts. For example, assume a trader has a $10,000 account – it would be unreasonable to trade something like the DOE inventory numbers using CL – because this could easily put 5% (or more) of their account at risk in a single trade. However, in utilizing MCL a trader with a smaller account can still get exposure while managing risk during these highly volatile moments, if they believe they have an edge (this is not a recommendation that you trade DOE inventories).
1 Setup in Many Markets vs Many Setups in 1 Market
Let’s discuss a few strategies you can employ to be more consistent in the markets. You can specialize in one market – develop a really strong sense for the characteristics of that market and how it moves – then tailor a series of setups to engage that one market. Alternatively, you may specialize in one setup, and then scan a variety of markets that this particular setup may be applicable to at any given time.
Both styles have merit and are good approaches. The key is finding what works best for you. The Micros give traders an excellent opportunity to explore both a new primary market, as well a testing pool for your best pre-existing setups.
Is it Tradeable?
Ok, so you’re ready to take the leap into executing trading in a new market. What do you need to know?
Well, first of all there are daily volume and liquidity concerns. If a Micros contract has a daily volume of less than 5,000 or so contracts – it may currently be too illiquid to trade. Depending on your own trading style and strategy, you may want to impose some sort of self-defined minimum liquidity threshold. Some traders work well with thin markets, others have more Edge in high volume high liquidity markets.
If you are hoping to trade news & macro events in the Micros – you must consider that the market makers in that particular product are likely to pull their liquidity during anticipated news events. This can result in significant stop-loss and market order slippage as a result of a very thin order book. If you are going to trade and participate in these events, this is something you must factor into your risk allocations. At a certain level, an orderbook is just too thin where a trader is unable to define (or estimate) their risk at all. We do not recommend participating in any market where the risk is indefinable.
How To Get Started Trading New Products?
Before trading any new symbol/market there is some important homework that you need to do. Our free webinar How to Build Edge in a New Product walks traders through the information they must consider before engaging with a new market. We recommend utilizing that resource as a checklist for getting started in your exploration of new products.