If you are a futures day trader, or want to be one, determining the size of your positions is one of the most important decisions you make. Your futures position size is a key part of your risk-management strategy—the way you minimize your losses while allowing for gains.
Position sizing is important, no matter what you trade with futures contracts. Here are the steps for calculating the perfect position size for your risk tolerance, account size, and preferred market.
- Calculating the size of a futures market trade manages risk, but it’s not something you can find at a glance. It involves several factors.
- Futures contracts have various tick sizes that are set by the exchange, and these are pertinent. A tick is the smallest possible price change.
- You must define your maximum risk. How much of your trading account capital are you willing or able to lose?
- Convert the amount of your maximum risk into ticks to arrive at your stop-loss. That prevents your trade from losing more than you can tolerate.
Tick Size and Value Vary by Futures Contract
The tick size is the smallest possible price change that a futures contract can experience, and the tick value is the dollar value of that price change. It is set by the exchange, and it varies according to the futures contract you're trading.
For example, the S&P 500 E-mini futures contracts (ES) have a tick size of 0.25 and a tick value of $12.50. Gold futures (GC) have a tick value of $10 for each 0.10 movement (tick). Crude oil (CL) futures have a tick size of 0.01 and a tick value of $10.
It's important to find out the tick size and tick value of futures contracts before trading that market. Otherwise, you will have no way to calculate your position sizes, stop levels, and price targets. For most U.S.-based futures contracts, the CME Group website will have the information you need.
Calculate Your Maximum Risk
The maximum account risk is the amount of money in your trading account that you are willing to risk on an individual trade. Many traders risk, at most, 1% of their capital on each trade.
You can select any percentage you like as your personal account risk limit per trade, but beginners are especially better off risking small amounts on each trade. That way, even if you have a series of losses (which happens to all traders), you only lose a few percentage points of your account value. Controlling your losses makes it easier to recoup them with winning trades.
For example, if you have a $10,000 account and risk 1% per trade, that comes out to a $100 risk per trade (0.01 x $10,000). Once your loss on a trade hits $100, you need to exit the trade to avoid violating your own maximum-risk rule.
Establish Your Limit
Once you know the dollar amount you are willing to risk on each trade, you need to convert that dollar figure into ticks for your futures market of choice. In other words, you need to think about your trade risk in terms of the difference between your entry point and your stop-loss level.
The perfect stop-loss location allows for normal price fluctuations, gets you out of the trade once the price is definitively "moving against you" (i.e., not doing what you expected), and prevents your trade from losing more than your allowable maximum dollar risk.
Your trade risk may vary by trade, or you may have a fixed trade risk. For example, you may always use a four-tick stop loss with S&P 500 E-mini futures contracts and a 10-tick stop loss when trading crude oil futures.
Your stop-loss levels may also vary by factors like market conditions. Under some circumstances, you may set your stop-loss on an S&P 500 E-mini trade three ticks away from your entry point, while other circumstances may call for a stop-loss four or five ticks away from your entry point.
Calculate Your Ideal Futures Trade Size
Once you know your maximum acceptable dollar risk and your stop-loss level, you can calculate your ideal futures trade size.
For futures markets, the trade size is the number of contracts that are traded—similar to the way a stock trader measures their position sizes in terms of stock shares. The minimum trade size is one contract.
The formula described here works for calculating ideal futures position sizes, no matter what futures contract you trade, what your stop-loss is, or how much you have in your account.
An Example of Calculating Trade Size
Suppose you have a $10,000 account for futures trading, and you are willing to risk 1% per trade. That means you can risk up to $100 per trade. You are trading the S&P 500 E-mini contract, which has a tick size of 0.25 and a tick value of $12.50. You want to buy at 1250, and place a stop-loss at 1249 (a four-tick stop-loss).
Based on the information you have, how many contracts should you buy to build your position? Use the formula:
- Maximum risk in dollars ÷ (trade risk in ticks x tick value) = position size
- $100 / (4 x $12.50) = 2 contracts
Each contract with that stop-loss level will result in a risk of $50 (4 ticks x $12.50), so buying two contracts will bring your total risk for the trade up to $100. If you buy three contracts, you will be violating your maximum-risk rule. If you only buy one contract, you are only risking half of your maximum allowable loss, which means you are also limiting your profit potential.