How to Calculate the Size of a Futures Market Trade
Get Ideal Position Size Every Time
If you are a futures day trader, or want to be, determining the size of your positions is one of the most important decisions you make. Your futures position size is part of your risk management strategy, which is there to make sure you keep your losses on each trade small, as well as make sure your losing days are kept to a reasonable amount. Here are the steps for calculating the perfect position size for day trading futures, no matter what futures contract you are trading or what trading strategy you use.
Step 1. Know the Tick Size and Tick Value of the Futures Contract You are Trading
The tick size is the smallest possible price change, and the tick value is the dollar value of the smallest possible price change. The tick size and the tick value are provided by the contract specifications for each futures contract.
For example, S&P 500 E-mini futures contracts (ES) have a tick value is $12.50 for each 0.25 of movement (one tick). Gold futures (GC) have a tick value of $10 for each 0.10 movement (tick), and crude oil (CL) futures have a tick value of $10 for each 0.01 movement (tick). These are popular day trading futures contracts, but to find out the tick size and tick value of another futures contract, check out the contract specifications page for that contract on the exchange it trades on. For most US-based futures contracts, that will be the CME Group website.
The tick size and tick value are required information, as these figures are needed for the next steps in calculating the ideal size of a futures trade.
Step 2. Calculate Your Maximum Account Risk Per Trade
The maximum account risk is the amount of money in your trading account that you are willing to risk on an individual trade. Most professional traders risk 1%, or less, of their capital on each trade. You can select any percentage you like as your personal account risk limit per trade, but risking only 1% is advised.
That way, even if you have a series of losses (which happens) you only lose a few percent of your account, which is easily recouped by some winning trades.
For example, if you have a $10,000 account and risk 1% per trade, the most you can risk per trade is $100 (0.01 x $10,000). If you are willing to risk 2%, then you can risk $200 per trade (0.02 x $10,000). For a $30,000 account, and risking 1%, you can lose up to $300 per trade (0.01 x $30,000). If you lose more than that, you are violating your 1% maximum account risk rule.
Step 3. Establish Your Trade Risk Limit
Step 2 focused on account risk; this step focuses on the actual trade, and how many ticks you are willing to risk on it. Trade risk is determined by the difference between your entry point and your stop loss level. Your stop loss location should give enough room for the market to move in your favor, but should get you out of the trade if the price moves against you (doesn't do what you expected). For more on stop loss placement, see Where to Place a Stop Loss When Trading.
Your trade risk may vary by trade, or you may have a fixed trade risk. For example, you could choose to always use a four stick stop loss when day trading the S&P 500 E-mini futures contract.
Or always use a 10 tick stop loss when day trading crude oil futures (just examples, not necessarily recommendations). It may also vary, sometimes risking three ticks on an S&P 500 E-mini trade, and other times risking four or five ticks, depending on market conditions.
On each trade, you must know the size of your stop loss (distance from entry point, in ticks). This is the final piece of information you need before you can calculate your ideal futures trade size.
Step 4. Calculate Your Ideal Futures Trade Size
For futures markets, the trade size is the number of contracts that are traded (with the minimum being one contract). The trade size is calculated using the tick value, the maximum account risk and the trade risk (size of the stop loss in ticks).
Assume you have a $10,000 future account, and are risking 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 (four tick stop loss). Based on the information you have, how many contracts can you buy?
Use the formula:
Maximum Account Risk (in dollars) / (Trade Risk (in ticks) x Tick Value) = Position Size
For this example that means: $100 / (4 x $12.50) = 2 contracts
Since each contract will result in a risk of $50 (4 ticks x $12.50), you can buy two contracts which will bring your total risk for the trade up to $100. Your maximum allowed risk on the trade is $100, so if you buy three contracts, you will be risking too much, and if you only buy one contract you are only risking half of what you are allowed to. In this case, buying two contracts is the ideal position size for the circumstance.
Final Word on Futures Position Sizing
Use the formula to calculate your ideal day trading futures position size. The formula works no matter what futures contract you trade, no matter what your stop loss is and no matter how much you have in the account. Set your maximum account risk for each trade, and make sure you know the tick size and tick values for the futures contract you are trading. Have a stop loss location for every day trade you take, that way you can calculate your trade risk, and establish the ideal position for that particular trade.