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Tharp's Thoughts Weekly Newsletter

October 17, 2007 ó Issue #343
  
Workshops Early Enrollment Discounts Expire TODAY
Article

E-Mini Futures, Why They Have Grown So Fast? by D.R. Barton, Jr. 

Trading Tip

Self-Sabotage Revealed by Van K. Tharp Ph.D.

New 20% OFF NEW Edition, How to Develop a Winning Trading System Home Study
Melita's Corner

Update on Melita

Workshops

Early Enrollment Discounts expire TODAY 
on Systems and Peak Performance Workshops


How to Develop a Winning Trading System That Fits You

with D.R. Barton and Chuck LeBeau
Nov 3-4-5

Peak Performance 101

with Van Tharp
Nov 7-8-9

Professional E-Mini Futures Trading Tactics

with D.R. Barton and Christopher Castroviejo
Nov 10-11-12

 

Feature

E-Mini Futures: 
Why They Have Grown So Fast?

by D.R. Barton, Jr.

I often get asked the question, ďIf you could only trade one thing, what would it be?Ē

Without hesitation, I would say the S&P 500 e-mini futures contract.

Today, Iíll tell you why.  But just for a bit of clarity, I enjoy trading and working with traders who trade futures, stocks, options and forex.  And there are people who excel in all of these areas.

But with all of these choices, here is my belief:  Given the right tools, strategies and mental approach, I believe that e-mini trading is the single most powerful way to deploy trading capital today.

And itís where Iím spending the majority of my trading time.

Before we jump in and look at the power of e-minis, letís cover the basics of e-mini futures contracts.

E-mini index futures have become THE instrument of choice for many traders. On a ďdollar value traded per dayĒ basis, the S&P 500 e-mini is one of the biggest (if not the biggest) exchange traded instruments in the world.  Currently the S&P e-mini averages $144 billion traded per day.  Thatís 6.8 times bigger than the pit traded S&P 500 contract.  (When I wrote about e-minis at the beginning of the year, the e-minis were out-trading their older brother by 4.5 times Ė so it has increased its lead by 50%!)  They have experienced growth unlike any other instrument, and for good reason. 

For comparison, Microsoft trades about $1.5 billion worth of shares per day.

So, if I could only pick one thing to trade, why the S&P 500?  It has the best combination of attributes that traders need.

       Leverage.  A major advantage for e-mini trading is the high amount of leverage they offer.  And for day traders, this leverage is increased even further.  Letís look at the actual leverage available:  the S&P e-mini trade unit is $50 times the S&P 500 Stock Index.  Currently, that calculation looks like this:  $50 x 1550 = $77,500.  The margin to control $77.5k worth of value is around $3,500 giving you leverage of about 22:1 on your money.  However, day trading margins drop significantly with $1,000 margins common and some reputable firms offer $500 margins.  At these rates, you can increase your intraday margin to greater than 100:1!

But remember that leverage is a double- edged sword that definitely cuts both ways.  While such leverage allows for large returns on very little money, it can also mean that you can lose large amounts as well.

       Liquidity.  Liquidity is usually thought of in terms of trading volume. It is the characteristic that gives us the ability to get in out of trade both quickly and at a preferable price (or with little to no slippage).  E-mini index trading gives us exceptional liquidity and great fills with little slippage.  And these attributes are very necessary to allow us to take advantage of the available leverage.

      Exchange Traded.  I know lots of folks out there are trading forex.  And while around the world, forex has a very high amount of spot contracts trading hands, that liquidity isnít necessarily available to retail traders who almost always end up trading against their brokers instead of with other traders through an exchange.  Trading a highly liquid e-mini contract through an electronic exchange really levels the playing field for retail traders.

        Scalability.  Certain types of trading can only be used on a small scale and cannot be translated to larger volumes as success occurs and larger position sizes are required.  But e-mini index trading in general and S&P e-mini trading in particular are highly scaleable.  Getting virtually no-slippage fills on 200 S&P e-mini contracts is an extreme advantage.

        Round-the-clock liquidity.  The S&P e-mini has liquidity 23.5 hours a day, which is another advantage; the effect of overnight gaps are greatly reduced.  You can keep a stop in the market if youíre doing a swing trade and then have your protection kick in at a time when your IBM stock is still sleeping.

Next week weíll have a special treat for you as my good friend and market maven Christopher Castroviejo gives us an interview on his thoughts about the markets and the tools and strategies that are working today.

Also note that Christopher and I will be teaching our new, cutting edge workshop on e-mini index trading in Raleigh on November 10 Ė 12.  Our course this past March had a full room and great reviews Ė we hope to see you there!

About D. R. Barton: D.R. will be presenting his upcoming Professional E-Mini Futures Tactics workshop, November 10-12.

A passion for the systematic approach to the markets and lifelong love of teaching and learning have propelled D.R. Barton, Jr. to the top of the investment and trading arena where he is one of the most widely read and followed traders and analysts in the world.

He is a regularly featured guest analyst on both Report on Business TV,  and WTOP News Radio in Washington, D. C., and has been a guest analyst on Bloomberg Radio.  His articles have appeared on SmartMoney.com and Financial Advisor magazine. You may contact D.R. at drbarton@iitm.com.

 

 

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Trading Tip

Self-Sabotage Revealed

by Van K. Tharp, Ph.D.

In my peak performance training with traders, I give a strong psychological slant to the concept of self-sabotage.  Self-sabotage typically occurs when one lacks the discipline to act in oneís own best interest.  For example, when you have dessert, knowing itís taboo because you are trying get healthy, you might call that self-sabotage.  Or perhaps you know you need to exercise and you really feel good when you do so, but somehow you just feel lazy and want to skip the exercise period.  Self-sabotage occurs in trading in many instances:

1)     When you know you should follow the ten tasks of trading, but you donít.

2)     When you know you need to determine if your system will really work, but you just trade it anyway.

3)     When you know you should develop a business plan for your trading, but somehow that just seems like too much work.

4)     When you know you need to put a stop loss order in on a trade, but you donít.

These and numerous other examples characterize self-sabotage.  And these examples of self-sabotage typically occur when you have internal conflict between various parts of yourself and when emotions pop up that result in behavior that is not in your best interest and when you just avoid doing whatís important for success.

Many traders, however, avoid thinking about self-sabotage in this manner because they donít like to go inside of themselves to see what is going on.  They prefer to think technically about systems rather than notice what their beliefs are and whether or not they are useful.  As a result of this tendency, Iíve developed another definition of self-sabotage that everyone can relate to:  repeating the same mistake multiple times.

My definition of a mistake is when you donít follow your rules.  And if you donít have rules, then everything you do is a mistake.  And self-sabotage occurs when you keep repeating the same mistakes over and over and over again.

For example, you donít raise your stop when the market makes a new high.  When you skip it once, and your rules say you must do it, then itís a mistake.  When you do it three times in the same week, then it is self-sabotage.  When you develop this attitude, can start keeping track of your mistakes and see how much they cost you.

For example, suppose you are about to be stopped out for a 1R loss.  (The definition of a 1R loss and R-multiples in general is explained in my book Trade Your Way to Financial Freedom and there is a brief description in my Tharp Concepts section of the website.)  You donít want to be stopped out, however, so you cancel the stop Ė which is your mistake.  The position keeps going down and eventually you get out with a 3R loss.  That mistake cost you 2R (i.e., instead of a 1R loss you got a 3R loss). 

Now suppose you have a system that makes you 100% per year.  However, you make a 2R mistake each week.  At the end of the year, instead of being up 100%, you have lost money just because of your mistakes.  Now can you begin to understand how trading reflects your behavior and that one of the critical things that you must do as a trader is to eliminate mistakes.

Next week weíll take a look at some of the common mistakes that most traders make repeatedly.

About Van Tharp: Trading coach, and author Dr. Van K. Tharp, is widely recognized for his best-selling book Trade Your Way to Financial Fre-edom and his outstanding Peak Performance Home Study program - a highly regarded classic that is suitable for all levels of traders and investors. You can learn more about Van Tharp at www.iitm.com.

Melita's Inspirational Corner

An Update On Melita

Melita is still recovering from surgery and has not re-commenced her column as yet. However, she has put some entries on her blog so please feel free to follow her progress at, www.myleftlung.com. She hopes to be back in the swing of things and writing articles again by next week.

 

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