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Read an Index Contract Specification and Size a Trade

Scenario: your broker lists a stock index contract with these fields: price about 18,000, contract size 10 units, tick size 0.1, tick value 1 dollar, leverage 1 to 20. You have a 10,000-dollar account and want to risk 1 percent with a stop 50 points away.

Decode the specification. A contract size of 10 means one lot controls 10 units of the index. One full point of movement is worth 10 dollars per lot. A tick of 0.1 is worth 1 dollar, consistent with that.

Compute the risk per lot: 50 points times 10 dollars is 500 dollars. The risk amount is 100 dollars, so the lot size is 100 divided by 500, which is 0.2 lots.

Compute the notional value: 18,000 times 10 is 180,000 dollars per lot. At 0.2 lots, the notional is 36,000 dollars, 3.6 times the account.

Compute margin at 1 to 20: 180,000 divided by 20 is 9,000 dollars per lot, so 1,800 dollars for 0.2 lots, 18 percent of the account.

Now compare with a forex habit. A trader who typed 1.0 lots because it felt standard would face a risk of 500 dollars on that stop, 5 percent, and margin of 9,000 dollars, 90 percent of the account.

Always read three fields before sizing a new instrument: contract size, tick value, and margin.

Your turn: write the same calculation for any index your broker offers.

The comparison with a forex habit is the most important warning. A trader used to forex, where 1.0 lots of EUR/USD is a standard size, might enter 1.0 lots on an index without thinking. On this contract, that's 180,000 dollars of notional, 500 dollars of risk on a 50 point stop, and 9,000 dollars of margin on a 10,000 dollar account. The margin alone would leave almost no room, and a normal move could trigger a margin call. Index contracts vary widely between brokers, so the specification must be read every time, even for a familiar index.

This is the kind of check I wish I had done before my first index trade. I switched from forex to a German index on a demo and typed 1.0 lots as I always did, then saw the margin figure jump and the equity swing by more than I expected on one small candle. The contract size at that broker was 25 units, which I had never read.

Now I keep a small table in my notes for every instrument I trade, with contract size, tick value, minimum lot, margin per lot, and what a typical 20 point stop costs per lot. I fill it in from the platform's specification window, not from memory, because the same index can be set up differently at another broker.

The reply above made a good point that a normal move can trigger a margin call. I also check that margin after sizing stays under about a fifth of the account, so a gap on the open does not leave me exposed.