The futures market—where global commodities such as coffee, corn, soybeans, oil and gold trade—is a very popular day trading and swing trading market. Learn the basics of how futures work, why futures are great for swing trading, and how much capital you need to do it.
Swing trading is when you take trades that last a couple days to a couple months. It is a popular form of trading among professionals as well as people who work another full-time job and can’t sit around watching their trades/computer all day (like a day trader).
Basic Introduction to Futures Trading
Futures are popular because a futures contract is inherently leveraged. That means returns can be very big compared to capital used.
With a futures contract, you don’t need to pay for all of the product you are buying/selling upfront. For example, if oil is trading at $50/barrel, to buy 1000 barrels of oil would cost you $50,000. As oil fluctuates, what you can sell your barrels for goes up or down, creating a profitable or losing position for you. If oil goes up to $55 you could sell your barrels of oil and make a 10% profit ($5,000) on your $50,000 trade.
A better option is to buy an oil futures contract (CL). It gives you exposure to 1000 barrels of oil, but you only need to put up a small fraction of the full cost of the 1000 barrels. For example, with NinjaTrader Futures Brokerage, you are only required to put up $2,805 to open an oil futures contract trade (this may vary by broker, and change over time). This is called “Initial Margin” and it is your good faith assurance that you can afford some of the fluctuations that will occur in the price. Assume you buy a contract when oil is at $50, and you sell when the contract (price of oil) rises to $55. You still make the $5,000 ($5/barrel x 1000 barrels), but that $5,000 is now a 178% gain on your $2,805 trade. This is a far more productive use of capital: 178% gain versus a 10% gain.
So what is the downside?
While returns can add up quickly, so can losses. Maintenance Margin is what the exchange and brokers use to make sure your losses don’t get out of hand. It is usually a bit below the Initial Margin amount. For example, NinjaTrader brokerage has Maintenance Margin on the crude oil contract set at $2,550. If at any time the capital in your account drops below $2,550 (if holding one CL contract), you will get a Margin call from the broker and you must deposit enough funds to bring your account up to the Initial Margin level.
As a recap, Initial Margin is how much you need in your account to open a futures contract trade. This amount varies based on the broker and the futures contract you want to trade. Maintenance Margin is how much you need in your account during a trade. If your account falls below the Maintenance Margin level, you must deposit enough capital to bring your balance up to the Initial Margin level, otherwise your trade will be closed by the broker. If you are well-funded and follow the swing trading capital guidelines discussed below, you will likely never have to worry about Maintenance Margin or getting a margin call.
Here is an example of the different Initial and Maintenance Margin levels for various futures contracts. Intraday margin is applicable if you open and close your position within the same day–day trading. Margin requirements change over time and sometimes by broker, therefore, before taking any futures trades check for the current margin requirements.
Capital Required For Swing Trading Futures
This section looks at how much capital you need based on where you place your stop loss, and how much capital from your account you are willing to risk on each trade. These two factors are key in assessing how much capital you need to swing trade with. This section will use the E-mini S&P 500 (ES) futures contract as an example, as it is a very popular product among traders. Other popular contracts, along with their specifications and the recommend swing trading capital required, are discussed further down.
Futures contracts move in increments called ticks and points. In different contracts, the ticks and points are worth different amounts.
Each tick in an E-Mini S&P 500 contract (going forward it will simply be referred to as “ES”) is worth $12.50, and there are four ticks to a point. One point of movements is worth $50 (4 x $12.50).
It is recommended that swing traders have both an entry and exit plan when they enter a trade. This means you will place your entry, and at the same time place a stop loss order and target order. A stop loss order gets you out of the trade once you lose a certain amount of money (if the trade goes against you) and your target order gets you out with a profit at a specified price (if the trade goes in your favor).
With a stop loss in place, you can control your risk in $12.50 increments if trading one contract. If trading multiple contracts, multiply $12.50 by the number of contracts and is how much is being risked each tick.
If you buy one ES contract at 1500.00 and place a stop loss at 1499.75, you are risking only $12.50, or one tick. Your full Initial Margin is not at risk, you just need that much in your account to open the trade. Having the Initial Margin in your account doesn’t mean you need to lose that much. You are in complete control of how much capital you lose/risk on a trade. One tick of movement is very little, and happens every second, so a one tick stop loss, or even a several tick stop loss, isn’t advised for a swing trader.
A swing trader will likely need to place their stop loss at least 2 points away from their entry point (on ES). That is 8 ticks, which equates to a risk of $100 (8x $12.50). That is the absolute minimum distance you should place a stop loss away from your entry point. It is more likely your stop loss will be 5 points away, or even more, from your entry when swing trading. With a 5 point stop loss, your risk is $250 on the trade (20 ticks x $12.50).
The next step is to determine how much of your account, in percentage terms, you are willing to risk on each trade. I recommend only risking 1% of your capital on a single trade. That way, even if you hit a string of losing trades, most of your capital will still be intact. If you risk 10% of your capital, or even 5%, and lose 5 trades in a row, then half or a quarter of your capital is gone. Losing trades happen to everyone, and losing a big chunk of money is hard to recover from. Keep your risk to 1% per trade and you don’t need to worry about losing a massive chunk of capital quickly.
If you opt to risk 1% of your capital, and you are taking trades with a 5 point stop loss ($250 risk), then you need to have at least $25,000 in starting capital (100 x $250, or 1% of $25,000 is $250).
If you opt to risk 1% of your capital, and you are taking trades with a 10 point stop loss ($500 risk), then you need to have at least $50,000 in starting capital (100 x $500, or 1% of $50,000 is $500).
While not recommended, you could risk 2% of your capital on each trade.
If you opt to risk 2% of your capital, and you are taking trades with a 5 point stop loss ($250 risk), then you need to have at least $12,500 (50 x $250, or 2% of $12,500 is $250).
If you opt to risk 2% of your capital, and you are taking trades with a 10 point stop loss ($500 risk), then you need to have at least $25,000 (50 x $500, or 2% of $25,000 is $500).
To figure out exactly how much capital you need, you will need to do some testing and strategizing to figure out what your typical stop loss is going to be (3.5 points, 7 points, 10 points?).
Capital Required to Swing Trade S&P 500 Emini (ES): If risking between 1% and 2% per trade, and each trade exposes you to 5 to 10 points of risk, you will need at least $12,500 to $50,000.
From the margins table above, we can also see that the Initial Margin on this contract is $6,160. Therefore, to even consider swing trading this market, that is the bare minimum a broker will require you have in your account to open a position anyway.
Depositing only $7,000 meets the Initial Margin requirement but limits you in your swing trading. Even if you only risk 5 points on a trade ($250 risk) that means you are risking almost 3.6% of your capital on that one trade. That is way too much! It is far better to deposit more and risk less, or trade another market if you don’t have the capital required to keep risk less than 2% (ideally 1%) on all your trades.
Recommend Capital For Swing Trading Other Futures (Gold, Silver, Oil, Natural Gas and Euro FX)
Read the section above to see how everything works, including tick values and how much of your capital (%) you are willing to risk on each trade. If you don’t want to trade ES, here is a basic rundown of how much you will need if you want to swing trade gold, silver, oil, natural gas or euro FX futures.
The basic specifications for these markets are provided below, along with a stop loss scenario, and thus the capital required if you risk 1% or 2% of your account on each trade. The stop losses are based on my own trading, using a 1-hour chart for finding entries. The stop loss you require for your strategy may differ. During volatile times your stop loss may need to be bigger, requiring more capital. During quieter times your stop loss could be smaller, meaning you need less capital than described above.
Gold Futures (GC) – Represent 100 ounces of gold. Tick size is $0.10, so each tick is worth $10 (100 ounces x $0.10). You will likely need a stop loss that is $4 to $6 away from your entry point, which is 40 to 60 ticks, or more. You are therefore looking at risking about $400 to $600 per trade (60 ticks x $10/tick). If risking 1% of your capital, you need at least $40,000 to $60,000 to trade one gold contract. If you risk 2% per trade, you need $20,000 to $30,000 (because 2% of $30,000 is $600).
Silver Futures (SI) – Represent 5,000 ounces of silver. Tick size is $0.005, so each tick is worth $25 (5000 ounces x $0.005). You will likely need a stop loss that is at least $0.10 (20 ticks) to $0.15 (30 ticks) away from your entry point. You are therefore looking at risking about $500 to $750 per trade (30 ticks x $25/tick). If risking 1% of your capital, you need at least $50,000 to $75,000 to trade one silver contract. If you risk 2% per trade, you need $25,00 to $37,500 (because 2% of $37,500 is $750).
Oil Futures (CL) – Represent 1,000 barrels of oil. Tick size is $0.01, so each tick is worth $10 (1000 barrels x $0.01). You will likely need a stop loss that is at least $0.25 (25 ticks) to $40 (40 ticks) away from the entry price, or possibly more. You are therefore looking at risking about $250 to $400 per trade (40 ticks x $10/tick). If risking 1% of your capital, you need at least $25,000 to $40,000 to trade one oil contract. If you risk 2% per trade, you need $12,500 to $20,000 (because 2% of $20,000 is $400).
Natural Gas Futures (NG) – Represent 10,000 mmBtu of natural gas. Tick size is $0.001, so each tick is worth $10 (10,000 x $0.001). You will likely need a stop loss that is at least $0.02 (20 ticks) to $0.03 away (30 ticks) away your entry, or possibly more. You are therefore looking at risking about $200 to $300 per trade (30 ticks x $10/tick). If risking 1% of your capital, you need at least $20,000 to $30,000 to trade one natural gas contract. If you risk 2% per trade, you need $10,000 to $15,000 (because 2% of $15,000 is $300).
Euro FX Futures (6E) – Represent 125,000 euros. Tick size is $0.00005, so each tick is worth $6.25 (125,000 x $0.0005). You will likely need a stop loss that is at least 0.0020 (40 ticks) to 0.0040 away (80 ticks away) from your entry price. You are therefore looking at risking about $250 to $500 per trade (80 ticks x $6.25/tick). If risking 1% of your capital, you need at least $25,000 to $50,000 to trade one euro FX contract. If you risk 2% per trade, you need $12,500 to $25,000 (because 2% of $25,000 is $500).
Compensating Yourself For Your Risk
To swing trade futures, you are still putting up a hefty amount of cash. Make sure that every trade you take has the potential to compensate you for that risk. If I am risking 1% of my account on every trade, the absolute minimum I expect to make is 2%. In other words, if I take an ES trade with a 5 point stop loss (which equates to 1% risk in the account), I better have good reason to expect it to move 10 points or more in my favor. A 2:1 risk reward is the minimum I expect from my futures swing trades, but typically I only take trades with much higher reward-to-risk ratios, such as risking 4 points to make 12 or 25 points. Put another way, I am willing to risk $200 on a natural gas trade if I reasonably expect that I can make at least $400 on the trade, and likely much more.
Final Word On How Much Capital You Need to Swing Trade Futures
The scenarios above make certain assumptions, such as how far your stop loss is from your entry point. This will vary by strategy. These estimates are based on how I swing trade. You may find that your stop losses need to be placed further from your entry point, in which case, the risk on each trade increases, and thus you will need more starting capital (to keep the loss on each trade to 1% or 2% of account capital). During volatile times your stop loss may need to be bigger, requiring more capital. During quieter times your stop loss may be smaller, meaning you need less capital than described above.
If you risk 1% or 2% on a trade, and have your stop loss placed a safe distance away from your entry point, then the capital you require to swing trade should be quite a bit more than the initial and maintenance margin levels. Therefore, you don’t typically need to worry about these, unless you start taking multiple positions (trades in different futures contracts at the same time).
Cory Mitchell, CMT @corymitc
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