Contract Specifications and Tick Value

The short answer

A contract specification is the conversion rate between a distance on your chart and money leaving your account. Contract size and minimum price increment together produce tick value, and tick value is what turns a stop of "twelve ticks" into a number in your currency.

Most sizing errors on a futures account are not errors of judgement. They are arithmetic errors, made once, at the point where a price distance was converted into money using the wrong multiplier.

The five fields that decide your risk

Every specification document contains a great deal you can skim. These five you cannot.

• Contract size — how much underlying one contract represents. One contract is never "one unit". It is a fixed multiple, and that multiple is the single field most often assumed rather than read.
• Minimum price increment (tick size) — the smallest amount the price is allowed to move. Not the same thing as the number of decimal places on your screen, and in some contracts not decimal at all.
• Tick value — what one minimum increment is worth in money. Usually stated in the specification, always derivable from the two fields above.
• Settlement type — cash-settled, or physically delivered.
• Expiry and final settlement details — the last trading day, and the procedure that follows it.

Margin requirements matter too, but margin tells you what you must post to open the position. These five tell you what the position does to you once it is open, which is a different and more important question.

Tick value is derived, not guessed

tick value        = minimum price increment × contract size
ticks in stop     = stop distance in price ÷ minimum price increment
risk per contract = ticks in stop × tick value
contracts         = amount at risk ÷ risk per contract, rounded DOWN
notional          = contract size × price × contracts

Five lines. The first is the one people skip, because the specification usually states tick value directly and it is easy to carry a remembered figure across from a different contract. Derive it anyway. It takes ten seconds and it is the check that catches the expensive mistake.

Two notes on the second line. If the contract is not quoted decimally — some are quoted in fractions of a point — then "stop distance in price" has to be expressed in the same units as the increment before the division means anything. And the minimum increment can differ between the outright contract and related spread markets, so read the row that applies to what you are actually trading.

From stop distance to money at risk

The numbers below are invented for teaching. They describe no real instrument and are not a trade idea.

• Account equity: $25,000
• Risk per trade: 1% → $250
• Contract size: 100 units of the underlying
• Minimum price increment: 0.05
• Entry: 1,842.40
• Stop: 1,839.90

Work it through:

tick value        = 0.05 × 100                  = $5.00
stop distance     = 1,842.40 − 1,839.90         = 2.50
ticks in stop     = 2.50 ÷ 0.05                 = 50 ticks
risk per contract = 50 × $5.00                  = $250.00
contracts         = $250 ÷ $250                 = 1
notional          = 100 × 1,842.40 × 1          = $184,240

Look at the last two lines together. Your maximum planned loss is $250, which is 1% of the account, exactly as intended. The notional you control is $184,240 against $25,000 of equity — roughly 7.4 times your capital, from a single contract.

That is the point worth sitting with. Sized correctly, one contract still carries leverage most people would not choose deliberately. The risk limit is being respected; the exposure is not small. Both statements are true at once, and only the first one is visible if you look at the stop alone. The position size calculator shows the notional-to-equity ratio next to the size for this reason.

Where this goes wrong

Take the same setup and change one assumption. The trader believes one tick is worth $1.00 rather than $5.00 — because that was the tick value of the last contract they traded, and the two products have similar names.

assumed risk per contract = 50 × $1.00 = $50
contracts                 = $250 ÷ $50 = 5

Five contracts are opened. The real risk per contract is $250, so the real risk on the position is $1,250 — five percent of the account, on a trade the plan recorded as a one percent trade.

Nothing about this is detectable from the chart. The entry may be reasonable, the stop may be in a sensible place, the trade may even work. The risk limit was breached before the order was sent, and it will be breached identically on every subsequent trade in that contract until someone re-reads the specification.

This is the failure mode the lesson exists for. It is not a judgement error, it is a units error, and it survives indefinitely because it produces no symptom until the day a normal loss turns out to be five times the size it should have been. The round-trip cost lesson covers the other direction the same arithmetic can bite: commissions and exchange fees are charged per contract per side, so a contract count you inflated by five inflates the costs by five as well.

One contract is a floor

Contracts are indivisible. You cannot trade 0.6 of one.

That produces a constraint the spot-market version of this arithmetic does not have: the minimum position size sets a minimum risk. If your risk limit is $250 and one contract risks $400 at your intended stop, there is no size that expresses the idea within your limit.

There are exactly three honest responses. Trade a smaller-sized version of the contract if one exists. Widen nothing and simply skip the trade. Or reduce the stop distance — which is only legitimate if a closer level genuinely invalidates the idea, and is otherwise just the risk limit being negotiated with.

The dishonest response is to round the contract count up, or to move the stop to wherever makes one contract fit. Both convert a risk limit into a suggestion. See position sizing explained for why the sequence runs size-last and never size-first.

Settlement type is not a footnote

A cash-settled contract resolves at expiry into a cash difference against a reference price. Nothing is delivered and nothing needs handling.

A physically settled contract does not. Held into its delivery window, it creates an obligation to make or take delivery of the actual underlying — an obligation individual traders are almost never equipped to meet, and one that is expensive to resolve under time pressure.

Most positions are closed well before this becomes relevant, which is precisely why people stop checking. Check anyway, and know the last trading day before you enter, not after.

Before your first order in any new contract

Open the venue's current specification for that exact product and write down five numbers: contract size, minimum price increment, tick value, settlement type, last trading day.

Then derive tick value yourself from the first two and confirm it matches the third. If it does not, you are reading the wrong document or the wrong product, and you have just found that out for free rather than for $1,000.

Do this once per contract, not once per trade. It takes a few minutes and it is the difference between a risk limit that exists and a risk limit that is written down.