Futures can be one of the most accessible markets for day traders if they have the experience and trading account value necessary to trade. You can typically start trading futures with less capital than you'd need for day trading stocks, but you will need more than you will to trade forex. Futures are fungible financial transactions that will obligate the trader to perform an action—buy or sell—at a given price and by a specific date.
Trading futures can provide above-average profits but at the cost of taking above-average risk. This type of transaction also requires intermediate to advanced skills in researching the trades before entering and in determining exit points.
- Trading futures requires more minimum capital than other instruments used in day-trading.
- Futures are very volatile, so you should have a risk-management strategy to mitigate losses.
- There is no legal minimum for day trading futures, but some brokers have required minimums that you must maintain.
Futures Brokers, Margin Accounts, and Leverage
Different futures brokers have varying minimum deposits for the accounts of individuals trading futures. Traders will use leverage when they transact these contracts. Leverage means the trader does not need the full value of the trade as an account balance. Instead, the broker will make the trader have a margin account.
Leverage is money borrowed from the broker. The trader hopes to be able to profit from his futures transaction before the sum must be returned to the broker. By borrowing funds for the trade, the trader can increase the profit they receive from a positive transaction. They also increase the risk or downside of the trade.
Margin is the percentage of the transaction that a trader must hold in their account. To begin this is called the initial margin, Federal regulations set the minimum margin value as 50% of the total transaction's cost but brokers and exchanges can set their levels higher if they wish. As time passes, the broker may ask the trader to top off their margin account if the futures price moves against the trade.
As an example, a trader can have $50,000 in their brokerage account, and they can borrow another $25,000 in leverage and enter a trade for the total of $75,000 less any amount the broker requires they hold in abeyance—reserve—as margin in the account.
Before even discussing the minimum starting capital for day trading futures, risk management needs to be addressed.
Day traders shouldn't risk more than 1% of their account on any single trade. If trading a $10,000 account, that means the maximum loss a trader should take is $100 on any given trade. That way, even a string of losses won't significantly draw down the account's capital.
The risk is determined by the difference between your entry price and your stop-loss order (in ticks), multiplied by the number of contracts taken and the value of each tick. The next section looks at some examples.
Minimum Capital Required
There is no legal minimum on what balance you must maintain to day trade futures, although you must have enough in the account to cover all day trading margins and fluctuations that result from your positions.
Day trading margins can vary by broker. E-mini futures, especially the E-mini S&P 500 futures (ES) typically have the lowest day trading margins, $500 with some brokers. That means the trader only needs $500 in the account (plus room for price fluctuations) to buy/sell one E-mini S&P 500 contract.
Since the E-mini S&P 500 contract is heavily traded, and a highly day tradable market it will be used in the examples below as it is a good entry point for day traders. If a trader seeks to trade other markets, they will need to check the required day trading margin for that contract and adjust their capital accordingly. While broker's day trading margins vary, NinjaTrader Brokerage provides a list of their current day trading margins. Margin requirements are subject to change.
Capital and Risk
To see how much capital is needed for day trading futures (in this case, the E-mini S&P 500) we need to understand the contract and the risk it exposes us to. Futures move in ticks, and each tick movement in the E-Mini S&P 500 is worth $12.50.
Assuming you'll need to use at least a four tick stop loss (stop loss is placed four ticks away from entry price), the minimum you can expect to risk on a trade for this market is $50, or 4 x $12.50. Based on the 1% rule, the minimum account balance should, therefore, be at least $5,000 and preferably more. If risking a larger amount on each trade, or taking more than one contract, then the account size must be larger to accommodate. To trade two contracts with this strategy, the recommended balance is $10,000.
If your strategy calls for a six tick stop-loss, the risk on the trade is $75 (6 x $12.50). In this case, the recommended minimum balance is $7,500 ($75 x 100). For two contracts it's recommended you have $15,000, or $22,500 for trading three contracts (based on the six tick stop-loss strategy). Just multiply the risk of trading one contract with your strategy by how many contracts you would like to trade.
While not recommended, the risk level can also be adjusted to allow a 2% risk on each trade. Doing so still keeps risk controlled and reduces the amount of capital required.
Assume the six-tick stop-loss, which puts $75 at risk per contract. If we allow this to be 2% of the account, your balance only needs to be $3,750 ($75 x 50). To trade two contracts the recommended amount is $7,500 and to trade three contracts the recommended balance is $11,250. By allowing risk to equal two percent of the account instead of one percent, the recommended day trading account minimum would be reduced by half. Risk four ticks per trade and 2% of the account, and you only need to maintain a balance of $2,500.
Some futures brokers require a $10,000 minimum deposit to start day trading futures. Check with potential brokers for such limits.
Decide whether you are going to risk 1% or 2% on each trade. Ideally, new traders should risk only 1% while traders with a successful track record can risk 2%. If risking 1% and only trading one contract, you'll need at least $5,000 to $7,500 to start day trading E-mini S&P 500 futures with a four to six tick stop-loss respectively. Are you willing to risk 2% on each trade? Then those figures can be cut in half.
The tick value and day trading margin for other futures contracts will also affect the amount of capital you need. If trading a different contract, see what the day trading margin is, and then determine what your stop loss will need to be to effectively day trade the contract. Then work through the steps above to determine the capital required to start day trading that futures contract.
Frequently Asked Questions (FAQs)
What time do futures open on Sunday?
The futures trading week starts at 6 p.m. EST on Sunday.
What is the difference between options and futures?
Options, like futures, are a derivative that lets you make advanced trades on underlying assets like stocks or ETFs. However, options trade more like stocks. Options only trade during standard stock market hours. To day trade options, you'll need pattern day trader permissions, just like with stocks. That means maintaining a minimum equity balance of $25,000.