April 27, 2017

Use Mini Commodity and Futures Contracts And Cut Your Losses!

Many futures traders, especially those starting out, aren’t aware of mini commodity contracts. They’re a great way to learn and hone your futures trading skills while radically reducing your exposure for trading loss…allowing you to stay in the commodities game while you learn sound, fundamental trading practices and gain experience.

In this article we’ll discuss mini commodity contracts, what they are and their trading benefits and advantages. We’ll also tell you which commodity futures have a mini futures contract counterpart and talk about the following topics:

– Mini Contracts Defined
– “Mini Futures” Advantages & benefits
– Online trading Mini Futures – same liquidity/less profit

Mini Commodity Contracts Defined

Quite simply, mini commodity contracts are smaller fractionally sized versions of full futures contracts. They may 1/3rd, 1/5th or even 1/10th the size of a regular sized commodity contract, depending on the commodity.

The cost to purchase mini commodity contracts and get into a trade is also proportionately smaller, as are the potential returns…but don’t let that dissuade you. There are a myriad of advantages you can realize by trading mini commodity contracts…not the least of which is risk capital retention, minimizing trade loss potential.

Mini Commodity Contracts – Advantages & Benefits

First, they’re inexpensive! A solid advantage of trading mini commodity contracts is that the cost to purchase mini futures…like their fractional size vs. full size futures contracts…is also proportionately smaller.

New or less experienced futures traders with a relatively small trading stake to risk or an aversion to larger risk, can get started futures trading in a far more economical fashion. Heck, with some of the lower priced commodities, you can get into a trade with one futures contract for around $100 vs. $400 or more for a corresponding full size commodity contract.

And on $10,000 of risk capital, instead of trading one or two contracts MAXIMUM…(you do exercise conservative money management, right?)…you can trade 4,6 or more mini commodity contracts if you so choose, on a reasonably sized, yet limited trading account.

Another key advantage of far smaller contract sizes and cash outlays to trade, is the ability to learn proper futures Position Sizing…a very important aspect to solid money management. That’s a topic for another page.

The other side of the coin here is that you can dramatically lower your risk of loss trading a futures mini contract. Instead of a one cent move in Corn moving against you costing $50, you’re down only $10 bucks. Much, MUCH easier to deal with, when you’re on the negative side of a price move or trade, as noted here.

A 3x, 5x or 10x reduction in trading loss potential – is nothing to sneeze at. And as we said before, conserving trading risk capital will help keep you in the game longer and give you a better chance to succeed.

Learn more, faster

Trading mini futures allows a new futures trader more flexibility to learn more and varied trading approaches, certainly with less stress as mentioned above.

Without the constraints of trying to trade full size futures contracts on a very limited risk capital trading account, trading ‘minis’ gives you the flexibility and opportunity to try more things learning proper position sizing and good risk/money management strategies, trading multiple contracts, scaling in and out of trades and other more advanced futures trading techniques that many traders often don’t have when operating with relatively small trading accounts.

This can help new and younger futures traders to progress faster in their learning curve and improve their odds of potential futures trading success. With far less risk to their trading accounts.

And as a result, hopefully improve their odds of trading both mini futures, more successfully, and do the same with full size contracts, when ready. Taking the slower, more gradual approach that futures mini contract trading affords, can be far less stressful and more enjoyable (not always of course).

Trading Mini Futures – Lower Profit Concerns

Mini futures have been around for a while, some longer than others, some relatively newer to the futures market. Unfortunately, many traders don’t know of their existence. But now, you do!

But a word of caution is in order. Now that you have an choice – trading either mini futures or trading full commodity futures contracts – don’t get caught up with the internal debate of “With mini futures I can only profit by a small amount…but trading full contracts I make a lot more”.

The Greed Monster is quite persuasive. Put him on hold and back in his cage.

Remember, what’s the rush to burn your trading account so fast?

Learn gradually, experiment, try different things, and give yourself a chance to get good – on the cheap – before stepping up to the big time. Don’t let smaller profit potential trading with futures mini contract cloud your mind.

Stay focused on the main objective – protecting your risk capital and staying in the game.

Liquidity Concerns

With Online trading mini futures, you should be aware that there may be some market liquidity issues depending on the futures mini contract(s)> you choose to trade.

I’m not sure, but I’d think the volume of full commodity contracts traded is larger, potentially quite a bit larger than their corresponding mini futures. That could lead to some Online trading mini futures being ‘thinly’ traded. Liquidity has to do with the number of traders buying and selling – and the Open Interest – in a specific commodity market.

Basically, too few buyers (if you’re trying to sell), or too few sellers (if you’re trying to buy) may mean you’ll be stuck in your trade, and possibly not able to exit your trade position when and at the price point you want.

Could be a few hours, a day or days, or longer. You want to avoid these ‘thinly’ traded markets, especially when trading full contracts. If you’re stuck in a trade and the market moves against your position, your profit can turn into a loss very quickly…sometimes much larger than you want.

Always check with your broker to assess market liquidity, and ask for help/suggestions regarding same, particularly when brand new or early in your futures trading career.

Always look for highly liquid markets. They can provide very fast ‘fills’ on your trades, which is what you want. And definitely, avoid low liquidity markets.

Carl Croft

Carl is an active trader of forex, stocks and commodities who mainly uses charting and candlestick strategies. An author on various trading websites and is admin here!.