Tenth-size futures as a small-account ruin filter

The 5000 dollar account that was wiped out

A futures account opened with 5000 dollars and limited to one or two positions in lower-margin livestock and grain markets still saw routine daily equity moves of 10 percent or more. Those moves were more often downward at first. The account was later wiped out.

Limiting the book to cheaper livestock and grain markets, and to one or two positions, did not keep those daily equity moves small. The survival problem was the mix of account equity, daily swing, and exposure, not the fact that the contracts were the lower-margin ones on the board.

Risk of ruin as a pre-trade filter

Risk of ruin is the chance that a given mix of account equity, volatility, stop distance and exposure will deplete the account before a procedure can recover.

Futures contract selection is the choice of a denomination whose notional and margin fit the account so a planned loss stays inside a survival bound. Account sizing is the matching of capital, stop distance and exposure so a single loss or a cluster of losses cannot force the account out of the market.

Those two checks sit before entry and stay in force throughout the position. They exist to keep a loss or an exposure decision bounded before a trade is placed.

What paper trading cannot do

Paper trading is a simulated run of entry, exit and abstention rules without committing capital. It is used to make one procedure testable before live risk is taken.

Paper trading and simulators are described as unable to reproduce the emotional effect of trading with real money. A rule set can look complete on a simulator and still be untested as a live procedure.

A tenth-size index contract

In May 2019 a stock-index futures contract one-tenth the size of the existing mini contract became available. That listing lowered the notional required to hold an index futures position.

Live use of those tenth-size contracts is presented as more informative than a simulator because the dollars at risk are real even when the notional is small.

A live small-notional test is a live trade in a reduced-size contract used to check whether a backtested or paper-traded rule set still holds when real money is at risk. Reduced-size contracts can also be used to run a new rule set live as a check on prior backtest results, at a fraction of the dollar risk of the larger mini contracts.

When a smaller listing still fails

Tenth-size contracts can still be misused if an undercapitalized trader simply takes high risk in a smaller account. Account sizing remains necessary.

Editorial reading: shrinking the contract does not repair an account that is already too small for the stop distance and exposure in the plan. The listing is a denomination choice, not a substitute for waiting until more risk capital is available.