[es] Emini (ES) - Why the Need for Huge Capital?

[danielk 10]

Hi,

 

Edit: Right, so i think ive answered my own question through research. The reason for the capital requirement is the "initial margin" requirements set by the exchange CME+broker. As far as i understand it they require around $4500 as a form of liquidity(insurance) per contract, pretty much to do risk management for you..? Still seems high to me given the actual movements a contract typically can do.

--

 

I'm a noob. And i keep reading about how E-minis require relatively huge capital to trade safely, but dont understand it. I've also noticed all the warnings of it being extremely risky for those who do not understand it, hence this post.

 

So the advice i keep seeing is to have a bankroll of $5000-$10.000 PER contract you trade.

 

A general observation of the ES is that it tends to move 15-30 points an average day. It is also very rare to see it move more than 10 points in 1 hour, usually averaging 2-4 points of movement an hour.

 

In contrast to forex, this seems a lot "safer" - making the likelyhood of huge sudden moves a lot lower.

 

Now, not that any strategy would allow this to happen, but lets take a worst case scenario. You've got $5000 on your account, and buy 1 ES contract when it opens. You for some reason ride the downtrend and the ES closes 30 points down. Netting you a loss of 30x$50 = $1500. You still have $3500 left.

 

Now, if you have a long term strategy that must allow for huge stop losses, then i can get behind the $5000 recommendation. However, if i were to guess, i would imagine most strategies(at least mine would) use a SL of.... 2-5 points? $100-250 potential loss.

 

Then my question is, why would you advise having a $5000-10.000 bankroll, when your worst case SL stops you out at a $100-250 loss?

 

Is this the "max 2% capital risk" rule in action?

 

Dont want to come off seeming reckless here, but somehow this just seems a bit overly cautious to me?

 

Appreciate any thoughts!

Edited October 24, 2013 by danielk

[Seeker 11]

2% probably seems conservative if you're in this as a get rich quick scheme or have gambling mentality. You mention a 30 point loss, which would be 1500.

 

Can you imagine a casino, which has an edge in all their games, risking 30% of their entire capital on one bet? That casino would soon go out of business. What about a hedge fund or a bank?

 

So you have to decide if you want to run your trading as a business, and slowly accumulate wealth, or if you want to gamble and have some ups and downs before you lose the lot.

 

$5000 is not HUGE capital. If you don't have the capital, you shouldn't trade. Work and build up your stake and learn on demo so that when you do have a stake you can earn with it.

[danielk 10]

Uhm, yeeeah... OK! thanks...

[Seeker 11]

Waste of time. I won't bother in future

[BlueHorseshoe 10]

Hi,

 

Edit: Right, so i think ive answered my own question through research. The reason for the capital requirement is the "initial margin" requirements set by the exchange CME+broker. As far as i understand it they require around $4500 as a form of liquidity(insurance) per contract, pretty much to do risk management for you..? Still seems high to me given the actual movements a contract typically can do.

--

 

I'm a noob. And i keep reading about how E-minis require relatively huge capital to trade safely, but dont understand it. I've also noticed all the warnings of it being extremely risky for those who do not understand it, hence this post.

 

So the advice i keep seeing is to have a bankroll of $5000-$10.000 PER contract you trade.

 

A general observation of the ES is that it tends to move 15-30 points an average day. It is also very rare to see it move more than 10 points in 1 hour, usually averaging 2-4 points of movement an hour.

 

In contrast to forex, this seems a lot "safer" - making the likelyhood of huge sudden moves a lot lower.

 

Now, not that any strategy would allow this to happen, but lets take a worst case scenario. You've got $5000 on your account, and buy 1 ES contract when it opens. You for some reason ride the downtrend and the ES closes 30 points down. Netting you a loss of 30x$50 = $1500. You still have $3500 left.

 

Now, if you have a long term strategy that must allow for huge stop losses, then i can get behind the $5000 recommendation. However, if i were to guess, i would imagine most strategies(at least mine would) use a SL of.... 2-5 points? $100-250 potential loss.

 

Then my question is, why would you advise having a $5000-10.000 bankroll, when your worst case SL stops you out at a $100-250 loss?

 

Is this the "max 2% capital risk" rule in action?

 

Dont want to come off seeming reckless here, but somehow this just seems a bit overly cautious to me?

 

Appreciate any thoughts!

 

Hi Daniel,

 

I think there are two elements to your thinking here, and you need to be careful not to confuse them.

 

1) The notion that a margin of $4500 is actually a rational requirement is probably nonsense, as you suggest. In as much as it is to provide liquidity insurance, the ES is incredibly liquid and it is hard to imagine (even in a flash-crash type scenario) that a broker would decide to liquidate a position you had and then find that the market had to move 90 points before they could do so. The ES probably goes lock limit before then (you can find the exact details on the CME website), however, and in that situation your broker becomes just as stuck as you, so . . .

 

2) None of this really has anything to do with the size of your account or how much you should or shouldn't risk on each trade. Margin - you've said it yourself - is liquidity insurance for a leveraged product, and that is not the same as the money management approach you take when trading.

 

I imagine another reason that the broker has the margin requirement is that they prefer to have that money in their account rather than yours.

 

Kind regards,

 

BlueHorseshoe

[danielk 10]

Hi BlueHorseshoe!

 

Thanks for the feedback!

 

From my research it seems that the requirement for the initial margin, is actually a mandatory requirement from the CME Exchange itself and fluctuates based on market conditions(volatility). Some good reads on the topic;

 

Understanding Margin Changes | OpenMarkets

 

http://www.cmegroup.com/clearing/files/cme-clearing-margins-quick-facts-2011.pdf

 

And CME's overview of current margins aka "Performance Bonds"

 

http://www.cmegroup.com/clearing/margins/#e=CME&a=EQUITY+INDEX&p=all

 

So currently CME demands $4510 initial margin for every contract traded. This is CME's approach to helping out with risk management and ensuring the right type of volatility. Not to be confused with a traders own risk/money management policies, naturally

 

If i understand it correctly, 1x ES contract is worth 50x the S&P 500 index, that puts a current contract value at 50x 1,752 dollars. So in effect one single contract is worth $87,600.

 

Knowing all that really puts things into perspective and makes the $4510 initial margin perfectly understandable!

 

And to Seeker, sorry for the impolite response. However, you either didnt really read what i posted, or otherwise misunderstood my question...

 

Cheers