One of the greatest misconceptions about active trading is that you must “trade big” to make money. This is simply not the case. The lineup of products available on the Small Exchange can help you pursue nearly any financial goal. No matter whether your specialty is stocks, commodities, bonds, or currencies, the Smalls offer countless ways of optimizing your capital efficiency.
In this article, we provide two tips that can help you maximize your potential in this exciting trading venue.
1. More Leverage Doesn’t Necessarily Mean More Money
Applying financial leverage is the act of borrowing money to acquire an asset. Stock, futures, and forex products all rely on leverage to facilitate the trade of positions far in excess of a trader’s available capital.
To illustrate how leverage works in the futures markets, assume that you’re interested in buying one contract of the March E-mini S&P 500. To accomplish this, you’ll need to make a good-faith deposit, known as a margin, with your broker. In the case of the E-mini S&P 500, a margin of at least $750 per contract must be maintained for intraday positions, with $11,000 needed to hold one lot through the daily electronic close.
In addition to the extensive margin requirements, the minimum tick value for the E-mini S&P 500 is $12.50. Although these dollar amounts are reasonable for many retail traders, they’re not ideal for traders with limited monetary resources.
Across the futures markets, the capital outlay for margins and tick values can be strategically constraining for a large portion of retail traders. Executing swing trades or simply weathering a period of intense volatility often prove to be nonstarters when trading full-sized issues. Fortunately, the contracts listed on the Small Exchange deliver fully customizable market exposure to traders. Here are the featured products:
|Small Contract||Asset Class||Tick Value||Margins|
|Small Technology 60 (STIX)||Equities, Tech||$1.00||$523.00/$475.00|
|Small Stocks 75 (SM75)||Equities||$1.00||$523.00/$475.00|
|Small US Dollar (SFX)||Currency||$1.00||$165.00/$150.00|
|Small Precious Metals (SPRE)||Metals||$1.00||$462.00/$462.00|
|Small 10YR US Treasury (S10Y)||Debt||$1.00||$180.00/$165.00|
|Small Global Oil Index (GOSME)||Energy||$1.00||Variable|
2. You Can Realize Steady Gains by Improving Your Capital Efficiency
As you can see, the Smalls offer exposure to an array of the world’s most popular asset classes. Let’s say that you want to go long the E-mini S&P 500 (ES), but market conditions are volatile, making the margin requirements and $12.50 tick value far too expensive. In this situation, the Small Stocks 75 (SM75) on the Small Exchange provide several key advantages over traditional E-mini S&P 500 futures:
- Granularity: Benefit from increased granularity by incrementally adding to position size. Although absorbing the ES $12.50 tick value isn’t feasible, buying three, four, five, or six contracts of SM75 may be the perfect amount of exposure.
- Freedom: The combination of reduced tick values and maintenance margins open the door to a wide array of strategies. For instance, the $475 maintenance margin of the SM75 makes it possible to maintain exposure to U.S. large-cap stocks through the daily or weekly market close. This is a critical advantage, effectively placing swing trading and longer-term investment strategies on the table.
- Flexibility: It’s difficult to overstate the value of being able to incrementally adjust the granularity of each and every trade. The ability to add or subtract contracts from an open position brings into play such advanced strategies as dollar cost averaging, scaling, or multi-bracket orders.
Although it’s true that trading larger sizes can lead to extraordinary returns, this approach has many pitfalls―margin calls, premature position closures, and catastrophic losses are three of the most common ones. However, optimizing your capital efficiency via the Small Exchange can mitigate these risks while promoting sound trading and long-run profitability.
Want to Learn More About the Small Exchange?
If you’re interested in learning how trading small can work for you, look no further than the market pros at Daniels Trading. Check out our Reduced Size Equals Big Opportunity e-book to discover how to use a small position to achieve consistent profitability.