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

by D.R. Barton, Jr.

I often get asked the question, “If you could only trade one thing, what would it be?”

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

Today, I’ll 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 it’s where I’m spending the majority of my trading time.

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

E-mini index futures have become THE instrument of choice for many traders. On a “dollar value traded per day” 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.  That’s 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 – 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.  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 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 isn’t 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 you’re doing a swing trade and then have your protection kick in at a time when your IBM stock is still sleeping.

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E-Mini Futures – Trading Like the Pros – Not the “Joes”

 by  D. R. Barton, Jr.

There’s an interesting television program out now called “Pros vs. Joes”.  It’s a reality TV series with an interesting premise – it pits backyard “wannabees” against actual professional athletes. To be honest, the “Joes” almost never stand a chance.

Every once in a while one of the average “Joes” will make a lucky play and beat the professional – but rarely will they win one of the staged events.  The skill and experience of the pro athletes is just too great to overcome.

The same thing happens in the financial markets.  Every day, a different version of “Pros vs. Joes” occurs in trading.  New and inexperienced traders take on the pros.  And the results are the same as in the reality sports show – the Joes have an occasional lucky win, but in general, the pros are consistently walking away with the money.

I want to introduce you to one of the real pros in the market, but first, let’s look at a few of the things that set professional traders apart from the less experienced players in the market:

• First and foremost, professionals have an understanding of what works in the market.  They turn that market knowledge into a plan, and then stick to the plan in an unwavering manner.

• Pro traders have a game plan and prepare for the market each day.  This preparation allows them to make money under many different market conditions

• Pro traders take what the market gives instead of forcing their will (or their strategy) on the market.  They have multiple tools in their toolkit that allow them to participate in different market conditions.

• And of course, pro traders follow Van’s Ten Task of Trading.  More on this below…

In honor of St.Valentine's Day, I’d like to offer an unabashed view of the electronic e-mini index futures markets.  Like many people’s relationships, there are certain things about e-minis that I love – and other things that I just have to put up with.  So let’s look at both sides of the coin, and see what conclusions we can draw about these ultra-popular trading tools.

Things to Love About Index E-Minis:

Liquidity.  This is what allows us to enter and exit trades with a minimum of slippage.  The S&P 500 is among the most liquid exchange traded instruments in the world. Other index e-minis are also very liquid and enjoy significant day trader participation.  These include the Dow, the Nasdaq and the Russell 2000.  More on each of these below.

Level Playing Field.  With e-minis, all trades are computer matched.  This means that a the trader at a terminal in Topeka, Kansas is not at a disadvantage to anyone trading e-minis around the world.  The high level of liquidity also helps make a level playing field, because it's almost impossible for the spreads to get bigger than one tick in the four e-minis mentioned above. (The spread is the difference between the bid and offer prices).

Leverage.  Overnight leverage on e-minis is high, at roughly 20:1 for the S&P 500 e-mini.  Day-trading leverage is screaming at most brokerages, with some brokerages allowing greater that 100:1 leverage.  It’s tougher to get a bigger bang for your trading buck than in e-minis.

Predictable Movement.  One of the reasons that so many professional traders trade the index e-minis is because they have predictable price movement intraday.  This means that when prices approach certain points, there is a pattern of reaction that can be exploited.  This tradeable edge is a critical – and much loved – aspect of e-mini trading.

An Index Personality for Everyone.  The four major indexes that are traded (S&P, Dow, Nasdaq and Russell) each have different personalities, while sharing the overall characteristics and trading styles of indexes.  The S&P is a bit slow and ponderous, with great fills and minimum slippage.  The Russell is the other end of the spectrum – moving quickly at the drop of a hat.  Both the Dow and Nasdaq fall somewhere in between.

Things About E-Minis that We Just Have to Put-Up With

The quirks and idiosyncrasies of the e-minis are there also.  Yes, they do have their downsides.  And just like our significant others, these are things about e-minis that we’d love to change but can’t – so we just learn to live with them.

Leverage – the Other Side of the Sword.  Great leverage can bring great reward.  But it also brings great risk.  If you have a $10,000 account that allows you to trade on $1000 margin, you can trade 10 Russell contracts.  A 10 point move in your favor will double your account; a 10 point move against you will wipe you out.  With leverage this high, proper risk management is absolutely critical.

The Cumbersome S&P.  There are periods of time when the S&P seems to act like a huge oil tanker.  Never moving outside of a narrowly defined range.

Trend Days vs. Range Days.  Traders in all instruments have the problem of deciding if you’re in a trend or a range.  But for many, this is a particularly beguiling problem in the indexes.  Fortunately, there are some tools that can help us here.  But without those tools, many a trader has been caught on the wrong side of the market all day, only to look back in calmer times and see the error of their way!

Differences in the indexes.  While the different personalities of the indexes give us different reasons to trade them based on conditions, set-ups, etc., they also mean that we have to learn about each instrument in order to trade them.  As with most worthwhile endeavors, there is no one size fits all.

The bottom line: Trading e-mini futures indexes is a bit like driving a fine sports car – they’re fast, they corner great, and they have a few idiosyncrasies.  But at the end of the day, they are still the best way to get the most bang for your buck.

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