Rrrracer 

To put it another way... if you're just starting out and learning, you WILL LOSE MONEY, period. Why put up any more of your hard earned cash than necessary to get through that process we all have to go through? Other than psychologically speaking, trading the micros is more difficult simply because of commissions vs tick value and slippage. If you can trade well in the micros, you should kill it in the full size contracts.

Yeah, but most starters will NOT do well ... and will loose for a while. They'd loose 10 times more in the mini, so starting with Micros does make sense ...

mkjonhston 

Do anyone know how commissions will look like for these micros?

Total cost on the currency micros for retail is high relative to their big brothers... through Amp, I pay $2.06/RT (which includes commissions, fees, etc...) I suspect these will be similar. Not a huge amount, but enough to where you will have to cover a few ticks (instrument dependent) before you can break even.

mkjonhston 

Yeah, but most starters will NOT do well ... and will loose for a while. They'd loose 10 times more in the mini, so starting with Micros does make sense ...

My point exactly. They are a great way to cut your teeth trading real, live money without necessitating a huge account. A $5K account is very comfortable for trading these.

I will add that I am very interested to see how the liquidity is with these new instruments. I can tell you first hand that I hardly ever get any slippage in M6E EUR/USD, but the same cannot be said for the other pairs.

I've been trading B6E GBP/USD for a short amount of time now and there can be significant slippage/spreads (2-10+ ticks) even during the busy hours of the Euro and New York sessions. I almost always enter with limit orders.

TWDsje 

People are way too focused on the commissions. Who's trading ES for a tick? That's just not a viable strategy on an instrument that can sweep 4-8 ticks.

I'm the one doing a lot of the commission analysis, and I agree if your using this purely as an education tool, don't worry about it. But for anybody trying to actively trade with a small account size, these are not your answer!

TWDsje 

I'm sure I'll make a mistake in the math, but let's just say for the sake of argument that you do 2x risk/reward. So like risk 8 ticks to make 16. If your round turn was $1.50 then you'd need to hit about a 38% winrate to break even. If you were doing 1.5x so more like risk 8 to make 12 then your winrate needs to be 46%. Now of course when you catch a runner you'll probably catch much more than that. It's quite possible in ES to get your average win vs average loss to 3:1 and then you'd only need a 28.75% winrate to break even. Sure it the end it's going to be a larger % of your profits taken in commissions. However, it's not going to be the commissions that prevents you from being successful. And once you've learned and built up your account you move up to the regular ES contract.

I agree with your calculation, but think your $1.50 round turn assumption is way to low and your math only applies to the larger ES micro. The numbers for the other contracts are far worse.

So everybody else can see the calculation let's do some Algebra.
Define

R = Risk Amount
P = Winning Percentage
C = Round Turn Commission
K = Risk/Reward.

Theoretical Expected Payout is

(P * K * R) - ((1-P) * R) - C

which is positive when

R(PK - 1 + P) > C

With Tradestation commissions C is 6.88 ticks for the 50c tick contracts. So with risk/reward of 2, and a risk of 8 ticks we get

8(2P - 1 + P) > 6.88
3P - 1 > 0.86
3P > 1.86
P > 0.62

So with Tradestation commissions, the small 50c tick contracts, 8 tick risk, R/R 2:1 you need a 62% Win Rate.
Similarly with R/R 1.5:1 you need a 74.4% Win Rate.

snax 

I have been doing some research into how the past futures traders went about their business and it sounds like there was a higher rate of success, because you were working directly for a mentor and you didn't trade at first, you were working your a#$ off making sure the company or person you worked for could trade smoothly as I understand it, whatever that took. When you finally did get to trade you had a competent understanding of the market for the product(s) you were going to trade. I'm sure this isn't true for everyone but it sounds like it was more common on the floor.

Floor traders also had an informational advantage you will never be able to match. For many learning to trade was more learning how to use that advantage and not to trade. That's why the majority of floor traders could not make the transition to screen based trading.

Commission can be huge for a day trader. The fact that you're trying to capture 3,4,5,6,7+ ticks on trades isn't relevant as what your average profit per contract per trade is which is usually going to be less than 2 ticks for scalpers.

Yes, I agree it less relevant for big day/swing trades. But, one of the primary benefits of the E-mini futures is that they can be used to day trade for non PDT accounts. If the micro's don't have that same quality, I think they will be less useful.

Although, I have given some ideas already here for small accounts. I have few other ideas. I am personally curious how they will compare with the NADEX binaries too because that's another option for small traders. I have always felt binaries are very interesting properties. I do not have my analysis handy but I believe you have to take around a 52.5%-55% win ratio to for 1/1 strike break even on those. Most technical based methods will not yield over 52.5%-55% win ratio.

One other possibility for micro accounts is to consider the feasibility to scalp the weekly or nearest ES CME call and put options. The delta for the nearest option is I believe going to be around $12-$20 per point. This is something I want to evaluate when I get time. If anyone is trading this already, send me a PM. You could also try a non-margin options account and scalp/day trade ETF/stock options, though you can't recycle buying power. I think it would be interesting to do a comprehensive cost analysis for the CME micro, mini, NADEX, and CME options on futures products to see how they compare in terms of spreads and commish.

Another route for small accounts, is to figure out the amount a risk amount that makes you slightly uncomfortable, and then wait to find a high confidence trade worth risking that amount. The catch to make this work is you have to make sure you don't skew your win ratio negative when doing this over your baseline (changing the way you take losses), and your confidence in your trades has to really match the reality.

I've already put in my view that the likely main benefit of the new stock index micro contracts is simply to let new traders trade some real money, in relatively small amounts, instead of staying in the riskless world of sim trading.

I think that some of the comments are oriented toward the idea of trading these things as a serious trading vehicle instead of a learning tool. There's nothing wrong with this, actually, since it lets you establish a baseline to evaluate the contract on a theoretical basis. I pretty much agree with @SMCJB's analysis on that score: you're going to need a very good win rate to overcome your transaction costs.

Can you get that rate? Leaving aside everyone's more or less unconscious assumption that they are really master traders just having a brief rough stretch ( ), if you take a look at a chart of some of the currency micros and compare them to the full contracts, those guys (micros) jump all over the place. They sort of redefine "slippage." Common advice is to use the full contract for your charting, because it may give you a better picture, and execute on a micro contract chart. (Not everyone does it this way, but the point is that the micro action is inherently harder to trade.)

For instance:

Rrrracer 

I will add that I am very interested to see how the liquidity is with these new instruments. I can tell you first hand that I hardly ever get any slippage in M6E EUR/USD, but the same cannot be said for the other pairs. I've been trading B6E GBP/USD for a short amount of time now and there can be significant slippage/spreads (2-10+ ticks) even during the busy hours of the Euro and New York sessions. I almost always enter with limit orders.

The reason, of course, is liquidity. Now, probably an S&P-based micro will have more and bigger players, and algos too (yeah, I think algos add liquidity, simply because they add volume. Don't hate on me in comments for this . I'll decline to enter that argument, since it never gets resolved anyway.) We don't yet know the liquidity/volume characteristics of the stock index micros, but we can expect them to be less than the ES, for instance.

All this is still a bit academic and theoretical now. I can imagine a future scenario where the index micros have a ton of participation, contrary to my current assumptions. Might they be a handy way to hedge index options (not only futures options, but SPY for instance)? Who the hell knows? Who knows how the various players will respond to them?

So we're spinning out truly imaginary scenarios without the actual relevant knowledge and experience. But going just on the existing micros -- and realizing it's definitely apples to oranges -- I'm still thinking of these things as more a tool for traders to get their feet wet, not as major trading vehicles.

I could certainly be completely wrong. It wouldn't be the first time.

Bob.

snax 

Slightly off-topic and this may be a silly question but I don't want to make assumptions that I haven't verified. "Last look", the way I understand it, is isolated to spot forex, and not an issue in futures markets because of the exchange over-sight, is this actually true?

SMCJB 

Correct, although ICE did just implement something in their Gold and Silver daily futures that allows market makers to avoid sweeps.

Most CFD brokers, with the exception of LMAX have last look too.

bobwest 

I have never traded any of the existing micros, in currencies, but my impression after following several traders who have is that the major point is not to make money (yes, that does seem strange), because (a) transaction costs are high, which has gotten a lot of discussion here, and (b) liquidity is fairly low, so slippage can be a problem. Of course, you can trade profitably, but you will be giving up a lot due to these factors, and it's not really a good way to make much. Well, why would anyone trade something if not to make money??? I think the general feeling is that you're trading with something real, not a simulation, and you do have the real-life pressures of money on the line, so it's a better way to learn than pure, riskless sim -- but with a smaller money commitment you can trade with, so you can keep the losses down. In other words, don't trade this if you expect to clean up. You don't have much chance of that, plus, if you're already a profitable trader, you're probably going to stay with the full contracts anyway. If you think of it as a way to get into real cash trading with less financial risk, it might work out for you. Naturally, anyone trading these will want to be profitable, but the experience of real money trading may be the greatest benefit for many. Note that it will also be a good way to lose money fast, if you're just attracted to the idea of small margin requirements. But that's something to learn about, too. Perhaps someone who does or has traded the currency micros can add something about this. Bob.

As I said, the lower efficiency of CFDs and soon to be Micros have advantages.

If a trader can generate a reasonable track record with smaller but less efficient contracts, then stepping up to the plate with full E-minis should be less stressful. When the monkey comes scratching due to the larger size, the trader can take comfort in the fact that they've already made money in a venue that is harder to trade.

Longer term trades with wider stops become possible too.

Looking at the other responses, I think we are all pretty much on the same page.

I'm guessing liquidity will not be much of an issue. I could be wrong, [as is the perennial case in this business] but M6E has enough. M6B, etc. don't but I think there will be enough interest in these new instruments that market makers will step in. And if there's enough competition commissions shouldn't be too bad either. We'll see!

-Other Bob

bob7123 

... -Other Bob

I see you've run into the multi-Bob thing too. At least neither one of us is embarrassing the other (I hope! )

Bob.

bob7123 

I'm guessing liquidity will not be much of an issue. I could be wrong, [as is the perennial case in this business] but M6E has enough. M6B, etc. don't but I think there will be enough interest in these new instruments that market makers will step in. And if there's enough competition commissions shouldn't be too bad either. We'll see!

I just pulled up M6A, M6B, M6E, MCD and MJY to take a look and compared them to the fullsize 6A 6B 6E 6C and 6J. The Micro's are tick for tick with the fill size with the only differences being where the ticks sizes are different.