If a day trader has the skills and capital required to trade, futures might be one of the most accessible marketplaces. The usual starting capital for futures trading is less than that required for day trading equities, but it is higher than that required for trading FX. Futures are fungible financial transactions that bind the trader to take a certain action, such as buying or selling, at a specific price and by a specific date.
Futures trading can offer above-average returns, but at the expense of taking on above-average risk. Identifying exit locations and conducting pre-trade research are additional intermediate to advanced abilities needed for this kind of transaction.
Futures Brokers, Leverage, and Margin Accounts
Individuals who trade futures must make a minimum deposit into their accounts with various futures brokers. Leverage will be used by traders to transact these contracts. By using leverage, a trader can make a profit without keeping their entire trade’s value in their account. The broker will need the trader to have a margin account instead.
Money borrowed from the broker is leverage.
Before the money must be paid back to the broker, the trader wants to make money off of his futures purchase. The trader might increase the profit they obtain from a successful deal by borrowing money for the trade. They also raise the trade’s risk or downside.
The amount of the transaction that a trader must have in their account is known as the margin. Federal laws establish the minimum margin value at 50% of the cost of the entire transaction, but brokers and exchanges are free to set their levels higher if they so choose. This is known as the initial margin. If the futures price moves against the trade over time, the broker might require the trader to top off their margin account.
A trader, for instance, might have $50,000 in their brokerage account and use leverage to borrow an additional $25,000 to make a deal for a total of $75,000, less any margin the broker might need them to maintain in reserve.
Management of Risk
Risk management must be addressed before even addressing the minimum beginning capital for day trading futures.
Day traders shouldn’t put more than 1% of their account at risk in a single transaction. With a $10,000 account, the maximum loss a trader should sustain on any particular deal is $100. In this method, even a run of losses won’t cause the account’s capital to drop noticeably.
The risk is calculated as the difference (in ticks) between the entry price and the stop-loss order, multiplied by the number of contracts chosen and the tick value. The part after that looks at several instances.
Minimum Required Capital
Although you must have enough money in your account to cover all day trading margins and variations that arise from your positions, there is no legal minimum balance requirement to keep in order to day trade futures.
Broker-specific day trading margins may exist. The day trading margins for E-mini futures, particularly the E-mini S&P 500 futures (ES), are often the lowest, at $500 with some brokers. To buy or sell one E-mini S&P 500 contract, the trader simply requires $500 in the account (plus room for price swings).
The E-mini S&P 500 contract will be utilized in the examples below since it is widely traded and on a market that is highly conducive to day trading. If a trader wants to trade on other markets, they must first determine the day trading margin needed for that contract and then adjust their capital. The current day trading margins of brokers are listed by NinjaTrader Brokerage, despite the fact that these margins can fluctuate between brokers. Margin specifications are flexible.
Money and Risk
We must comprehend the contract and the risk it exposes us to in order to determine the amount of capital required for day trading futures (in this example, the E-mini S&P 500). Each tick movement in a future is worth $12.50 for the E-Mini S&P 500.
The minimum you should expect to risk on a transaction for this market is $50, or 4 x $12.50, as you’ll likely need to utilize at least a four tick stop loss (stop loss is put four ticks away from entry price). The minimum account balance should therefore be at least $5,000 and preferably greater based on the 1 percent guideline. The account size must be larger to allow for more risk per trade or the taking of many contracts. The suggested balance for this method is $10,000 to trade two contracts.
The trade’s risk is $75 if your method calls for a six-tick stop-loss (6 x $12.50). The suggested minimum balance in this scenario is $7,500 ($75 multiplied by 100). It is advised that you have $15,000 for two contracts and $22,500 for three contracts (based on the six tick stop-loss strategy). Simply multiply the risk of using your technique to trade one contract by the number of contracts you want to trade.
The risk threshold can also be changed to allow a 2 percent risk on each trade, though this is not advised. By doing this, risk is still kept under control, and less cash is needed.
Consider the six-tick stop-loss, which exposes each contract to a risk of $75. Your balance would only need to be $3,750 ($75 x 50) if you allowed that to be 2% of the account. The suggested amount to trade two futures is $7,500, and to trade three contracts is $11,250. The suggested day trading account minimum would be cut in half if risk were allowed to equal 2% of the account rather than 1%. You only need to keep your account balance at $2,500 while taking a risk of four ticks every trade and 2% of the total account value.
For day trading futures, some futures brokers demand a $10,000 minimum deposit.
For such constraints, ask potential brokers.