|
Feature
E-Mini Futures Watching
by
D.R. Barton
I
believe that e-mini index trading is the most potent way that a
trader can use their trading capital today, especially when using
the right tools, strategies and mental approach.
I
was explaining this to a friend who was asking about all the
monitors on my desk the other day.
And about 30 seconds into my description, I realized that I
was describing things that most folks might not be familiar with.
It
was like the conversation I had with my 16 year-old daughter, Meg,
this week. She was
reading a book, and I asked if it contained short stories.
She informed me that they were essays.
Being a few years removed from high school, I asked her to
remind me of the difference. She
said that essays are like – um, essays and short stories are
really, well, short stories.
Meg
is such a literary wizard (e.g., perfect score on the reading section
of the national PSAT test), that the difference between an essay and
a short story is second nature to her.
But she quickly gathered her thoughts and explained that
essays are just a discussion of a topic and that short stories have
a plot. Okay – now I
get it.
So
before delving too far into the topic of e-mini index trading, I
thought it might be good if we covered the basics.
Then we’ll look at some great things that are happening in
those markets now.
The E-Mini Index Basics
In
the futures trading world, e-mini index futures have grown into
quite a phenomenon. They
have experienced growth unlike any other instrument, and for good
reason. But let’s
start with a very basic overview.
E-mini contracts were started by the Chicago Mercantile
Exchange (CME) in 1998 with the S&P 500 e-mini.
It currently is worth 1/5 of the larger, pit traded S&P
futures contract.
However,
for the reasons we’ll discuss next, the S&P e-mini has far
eclipsed its older and higher-valued sibling.
As of the first quarter of 2007, the S&P e-mini was
trading 4.5 times the dollar volume of the large S&P 500
contract. Today, the e-mini trades more than 10 times the volume of
the pit traded contract! There
are many reasons for its popularity.
Here are just a few:
·
The e-mini contract is traded electronically on a platform
called Globex.
·
Trades are executed instantaneously and are basically
error-free, especially relative to the pit traded contracts that may
require several levels of human interaction before orders are
executed.
·
The smaller size and therefore reduced margin requirements of
the e-mini contracts allow a high degree of retail participation.
The
immense popularity of the S&P e-mini has led to a number of other
equity indexes trading electronically in the e-mini size.
The most popular among traders are the Nasdaq Composites,
Dow Industrial, the up and coming Midcap 400 and the Russell
2000. E-mini trading has
also spread to commodities (gold, oil), bonds and currencies.
Let’s
look at why traders love these instruments so much.
After we review these attributes, we’ll talk about what’s
happening now in the world of e-mini trading.
·
Leverage. One
of the biggest advantages for e-mini trading is the high amount of
leverage they offer. And
for day traders, this leverage is increased still further.
Let’s 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 1240 = $62,000. The
margin to control $62k worth of stock is around $4,500 giving you
leverage of about 14:1 on your money.
However, the day trading margins are dropped significantly
with $1,000 margins common and some reputable firms offering $500
margins. At these rates,
you can increase your intraday margin to greater than 100:1!
But
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.
In Part II of this series, we’ll cover tools that allow
us to use this leverage in a big way, while protecting our downside.
·
Liquidity. Liquidity
is usually thought of in terms of volume, and it is the
characteristic that gives us the ability to get in and out of trades both
quickly and at a preferable price.
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.
·
Scalability. There
are certain types of trading that 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 gives
another advantage – the effect of overnight gaps are greatly
reduced. You can keep a
stop in the market if you’re doing a swing trade and have your
protection kick in at a time when your IBM stock is still sleeping.
The
last item to talk about is great volatility that has been in the
broader market in general and the S&P e-minis in particular.
The Average True Range (a measure of daily range that takes
gaps into account) for the S&P e-minis has been above 20 points
per day for the last 12 months – with only one period last fall
where volatility contracted. This
has provided good opportunities and a great trading environment,
especially for day traders.
In
Part II of this article we’ll look at some specific tools and strategies that top
e-mini traders are using today to take profits in these markets.
Please
note that I’ll be teaching a new, cutting edge workshop on e-mini
index trading in Raleigh on September 13–15.
Next time I’ll tell you about my good friend and awesome market
maven who will be joining us for the workshop – it’s one you
don’t want to miss!
See
more about D.R. below following his trading tip.
|
