Capturing Meaningful Market Moves with the Micro Emini Futures

The problem with day trading is that you may often find yourself taking large and frequent risks on price action that amounts to nothing other than market noise. Market noise, though sometimes favorably volatile, is typically not driven by any meaningful factors of real supply and demand. Its the marginal waste product that the economic process excretes.

Trading noise is purely a speculator sport, a gamblers arena (to a certain extent), subject to the fickle laws of chance that play an intervening role in determining who might, at a given moment, find fortune or meet ruin. And after a while, after all the thrills, after all the wins that often cant make up for the losses, it can leave a trader enervated, wanting a lengthier and perhaps more substantial market movement.

Trading Market Noise for Larger Market-Driven Swings

The thing is that trading larger swings often entail setting deeper stop losses. For example, lets go back to January 2, 2019. You see what can potentially be the bottom of a correction on the E-mini Dow Jones (YM). Your technical assessment of the situation also matches your fundamental assessment, making such a trade opportunity actionable.

You want to buy the breakout at [1] in order to catch a potential move to the December 3, 2018 resistance level at [2]. You determine that if your technical assessment were correct, price would have to stay above support at [3], otherwise, your upward bias would no longer be valid (YMs downtrend would continue).

Heres the issue:

  • Your potential profit from 23,417 to 26,088 is a 2,671 point move--amounting to a gain of $13,335 for just one contract; but...

  • Your potential loss (with a stop loss at 22,505) is a 912 point loss--amounting to -$4,560.

You cant afford a $4,560 loss. So despite feeling that the probability of the trade is high, you decide not to take it.

A Tenth of the Market Exposure Might Make a Big Difference

If you were able to place the same trade but on a micro contract that was one tenth of the exposure, then your potential profit scenario would amount to $1,335.50 (before commissions and fees) while your potential loss (also before commissions and fees) would be -$456.

For some traders, not only might such a loss be more affordable, but the reduction of exposure might allow traders with smaller means to attempt larger trades with a more favorable risk-to-return scenario (a favorable risk/return implies that the distance between entry and profit target is larger than the distance between entry and stop loss).

Trading longer swing may also expose you to more fundamentally-driven movements than the seemingly random noise that you encounter on a much smaller intraday time frame.

And although the new CME micro emini products might not be a tenth of the required margin (since they are new instruments that might not initially have much volume behind them), once liquidity does set in, chances are that the margins may be less prohibitive to those who want to hold the contracts on a position basis.

Takeaway: trading micro emini contracts might be your opportunity to take more meaningful positions in the market, shifting your strategy from noisy short-term patterns to more fundamentally-driven events. It may be something worth considering.

The New CME Micro Eminis Are Scheduled to Launch on May 6, 2019

Micro contracts are being offered for the following indices (dollar per tick values in parentheses):

  • S&P 500 ($1.25 per tick)

  • Dow Jones Industrial Average ($0.50 per tick)

  • Nasdaq 100 ($0.50 per tick)

  • Russell 2000 ($0.50 per tick)

The risk of loss in the trading of stocks, options, futures, forex, foreign equities, and bonds can be substantial and is not suitable for all investors. Trading on margin or the use of leverage is not suitable for all investors and losses exceeding your initial deposit is possible. Supporting documentation is available upon request. Trading futures, options on futures, and FX involves substantial risk of loss and is not suitable for all investors. Carefully consider whether trading is suitable for you in light of your circumstances, knowledge, and financial resources and only risk capital should be used. Opinions, market data, and recommendations are subject to change at any time. The lower the margin used the higher the leverage and therefore increases your risk. Past performance is not necessarily indicative of future results.