Micro markets for smaller account sizes
The flood of micro contracts helps small sized accounts achieve more diversification
I’ve had a lot of conversations with traders looking to diversify into futures. They usually want a way to “test the water”, but after looking at the size of the margin commitments end up thinking it too much of a financial strain to ever get started. Well, a trader friend of mine just sent me a very interesting and useful link to Barchart.com. It sends you to a list of the micro contracts that are now available to trade on the various exchanges. I have no knowledge of whether it is a complete list, but it sure does cover a wide range of contracts.
For example, if you trade a large contract like Crude Oil, you are controlling 1000 barrels of oil worth $100,000 at $100 per barrel. The required margin is about $12,000 to hold one contract of Crude Oil. That’s a lot of exposure for a smaller account. Maybe at that level you can only afford one contract and it’s either that or zero contracts. It’s all or nothing.
But, if you decide to trade MCL or the micro version of Crude Oil, you are controlling only 100 barrels of oil, which at the same price would be worth $10,000 or one-tenth of the size of the larger contract. There are far more portfolios out there that might have $10,000 of a single stock. The margin commitment is less than $1,200. Having an exposure to crude oil with this smaller sized position can make better sense.
As many of you know, I wrote a book on the exact position sizing methods we used at Trendstat back in the day complete with formulas on how to do it yourself. I’ve sold thousands of copies to traders around the world and it’s been translated a couple of times into languages beyond English.
It turns out the the more you can fine tune your positions using position sizing algorithms, the more positive effect you can have on your return to risk. If you can only buy one contract and your ongoing position sizing rules tell you to peel off some risk, you can only go to zero contracts and are out of that market.
However, if you can buy 10 contracts for roughly the same amount of margin, you can peel off one-tenth of your position and still hold 9 contracts. This allows position sizing concepts to more accurately control the risk and volatility in the portfolio. I use micro contracts in about one-third of my positions and find them very useful indeed. Try them out and your equity curve will thank you over the long run while you enjoy the ride.