Reasonable capital required for day trading futures?

Markets

Dec 14

A good rule of thumb is that a reasonable risk per day for a day trader is from 2% to 5%. A moderate level of risk is around 3% of your capital. The new CME e-micros makes it possible to get started with trivial amounts of risk (from $500 to $1000 or even less). However, the e-micros are only a small part of the futures landscape.

For day traders, the energy complex can provide good volatility– that would be products like CL (Crude Oil), HO (Heating Oil), and Natural Gas (NG). They can compliment the equity day trading e-minis like the ES (S&P 500), NQ (Nasdaq 100) and the RTY (Russel 2000).

Now, most traders know that the CME sets the margin requirements and many brokers offer very low day trading margins as low as $500 per contract. However, here I am concerned with calculating up the reasonable minimum account size for day trading to maximize the probability of success– not the absolute minimum.

I have found that for e-mini day trading that trying to trade with less then $600 risk per day can be restrictive and makes it more difficult. If we take $600 at 3% account risk then that yields $20,000 as your minimum reasonable starting capital. Of course, it can be difficult to utilize a given risk without exceeding it. As such, we might want a risk limit that is above what we anticipate and to provide for changing market conditions. Given that, a 1k daily loss limit at 3% yields $33,000 while a $1200 risk limit at 3% would yield an account size of $40,000.

What about a more quantitative method that can also look at the individual contracts? In the method below, I calculated the notional value for the most popular day trading contracts. Next, I took the required capital to trade each contract at no more then 4x leverage. A leverage of 3x to 4x is often considered sufficient to enable meaningful returns while still allowing for adversity. However, that method does not take into account the volatility differences among contracts. As such, I developed a volatility adjusted method which is computed by taking a smoothed moving average of the Average True Range (200 SMA of the 14 ATR) and converting that into a real dollar amount (multiply by tick value) and finally calculating the capital that would be required to keep that at no more then 5% of our account. The logic is basically if we want to capture large intraday moves then it is a given that there is some associated level of precision which also, due to the fixed multiplier in futures, defines the type of capital we should be trading with.

While calculated independently, the results from the 4x leverage rule-of-thumb and the 5% ATR are mostly in agreement and more or less support my original guesstimates.

Contract Notional Value  4x Leverage Capital  5% Smoothed ATR
ES $               158,600 $                         39,650 $                      34,000
NQ $               170,420 $                         42,605 $                      46,800
RTY $                 82,000 $                         20,500 $                      24,000
YM $               140,825 $                         35,206 $                      30,700
CL $                 59,610 $                         14,903 $                      32,200
NG $                 22,960 $                            5,740 $                      16,400
GC $                 74,050 $                         18,513 $                      17,600
Avg $               101,209 $                         25,302 $                      28,814

In summary, the often recommended 25k capital requirement for day traders seems reasonable. In lieu of strong evidence to the contrary, the day trader who wants to maximize their probability of success while risking the minimum should start with somewhere between 25k to 40k of risk capital.

About the Author

The author is passionate about markets. He has developed top ranked futures strategies. His core focus is (1) applying machine learning and developing systematic strategies, and (2) solving the toughest problems of discretionary trading by applying quantitative tools, machine learning, and performance discipline. You can contact the author at curtis@beyondbacktesting.com.

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