Futures Trading
All About Futures & E-Mini Futures~ What You Need to Know

By Larry Gaines, Founder PowerCycleTrading.com, 30 Year Trading Professional

 

I.       Characteristics of Futures
II.      Overview of the main futures traded
III.     What are Equity Index Futures
IV.     The Markets
V.       Favorites to trade ~ E-Mini S&P & E-Mini   NASDAX 100~ Advantages
VI.      Future Market Advantages
VII.    Futures Margin Rates
X.      Contract Specifications
XI.     OCO ~ Futures Trading Execution

 

I. Characteristics of Futures

All About Futures ~ what you need to know…

A futures contract is a type of derivative instrument, or financial contract, in which two parties agree to transact a set of financial instruments or physical commodities for future delivery at a particular price. If you buy a futures contract, you are basically agreeing to buy something that a seller has not yet produced for a set price.  But participating in the futures market does not necessarily mean that you will be responsible for receiving or delivering large inventories of physical commodities – remember, buyers and sellers in the futures market primarily enter into futures contracts to hedge risk or speculate rather than to exchange physical goods (which is the primary activity of the cash/spot market).  That is why futures are used as financial instruments  by not only producers and consumers but also speculators. 

The consensus in the investment world is that the futures market is a major financial hub, providing an outlet for intense competition among buyers and sellers and, more importantly, providing a center to manage price risks.  The futures market is extremely liquid, risky and complex by nature, but it can be understood if we break down how it functions. 

In the futures market, margin has a definition distinct from its definition in the stock market, where margin is the use of borrowed money to purchase securities.  In the futures market, margin refers to the initial deposit of “good faith” made into an account in order to enter into a futures contract.  This margin is referred to as good faith because it is this money tat is used to debit any day-to-day losses.
When you open a futures contract, the futures exchange will state a minimum amount of money that you must deposit into your account.  This original deposit of money is called the initial margin.  When your contract is liquidated, you will be refunded the initial margin plus or minus any gains or losses that occur over the span of the futures contract.  In other words, the amount in your margin account changes daily as the market fluctuates in relation to your futures contract.  The minimum-level margin is determined by the futures exchange and is usually 5% to 10% of the futures contract.  These predetermined initial margin amounts are continuously under review:  at times of high market volatility, initial margin requirements can be raised.  

The initial margin is the minimum amount required to enter into a new futures contract, but the maintenance margin is the lowest amount an account can reach before needing to be replenished.  For example, if your margin account drops to a certain level because of a series of daily losses, brokers are required to make a margin call and request that you make an additional deposit into your account to bring the margin back up to the initial amount.

 

II.   Overview of the main futures traded

There are many quality futures markets around the world. Below are some  but not  all of  the  Futures  markets  that  can  be traded using the PCFDTM. I would recommend the main U.S. Equity Index markets to start with.

For active traders, the favorite and most popular futures markets, however, are the Equity index futures.  While they all move in the same direction there are differences in them that allow traders to match these markets to their personalities.  

III.  What are the Equity Index Futures?

Equity index futures are designed to trade in relation to a specific equity index which is comprised of a basket of securities.  These products allow traders to speculate and hedge risk associated with these markets.  Why Equity Index Futures?

The following is a unique combination of features that offers retail and institutional traders fantastic opportunity:

 

– Significant Tax Benefit
– Advantages of Stocks & Mutual funds combined
– Lower Margin Costs
– Low Commissions
– Highly Liquid Investments
– Huge Volume
– Transparency
– Near 24-Hour Training (except for a 15 minute period for settlement)
– Hedging
– Portfolio Diversification
– Lower risk than stocks (reduced overnight gap risk)

IV. The Markets

S&P Mini

– Very popular
– Highest volume/Most Liquid
– $50.00 per point per contract (Example: If you buy 1 S&P E-mini Futures contract at 1365.00 and sell it at 1370, you made $250.00)
– Represents a basket of stocks (S&P 500)
– Very orderly market because of its high volume
– Ideal for the more conservative trader


NASDAQ Mini

– Solid Volume
– $20 per point per contract Represents
– a basket of NASDAQ stocks
– Orderly market but larger swings partly because of lower volume than the S&P

DOW Mini 

– Low volume which means large swings in price, very volatile
– $5.00 per point in contract but don’t let that fool you, it is volatile
– Represents a basket of DOW Stocks
– Because of low volume, you may consider doing your analysis for this market on the S&P chart

 

Russell

– Low volume
– Popular because of its price point, this is not a market for conservative personalities
– $100.00 per point per contract
– Represents a basket of Russell stocks
-The combination of low volume and the high price point means a big money, fast moving market (not for  the beginner)

DAX

– Similar to the Russell
– Lower volume
– Traded on the Eurex Exchange
– 25.00 Euros per full point, per contract
– This is a big money market that can really move so beginners beware

FESX
– Saving one of the best for last…
– Super high volume on a 100% electronic exchange
(Eurex)
– 10.00 Euros per point, per contract
– For those in Europe, this is a great market to trade

For more information on these and other futures markets, see the following websites:
www.cmegroup.com 
www.eurexchange.com

In the world of equities, there are MANY different ways to take advantage of a move in the market. Knowing the details of the different markets helps you make the best decision based on your individual goals and requirements.

V.  Favorites to trade ~ E-Mini S&P & E-Mini

NASDAX100~ Advantages

1. Relatively Small Trade Size. The E-mini S&P (ES) Contract is 1/5th the size of the regular S&P Contract so a 1 point move in the market is equal to $50 per E Mini S&P contract instead of $250 per contract for the full sized contract.
2. The E-mini NASDAQ 100 (NQ) ~ a 1 point move in the market is equal to $20 per E Mini NASDAQ 100. Each tick equals $5 per contract.
3. A Completely Electronic Market. There is no open outcry trading for the E Mini S&P (ES) or NQ contract, so all trades are made electronically, which many traders feel puts everyone on a more level playing field.
4. Highly  Liquid  Market.  These  contracts  trade  millions  of contracts a day, meaning almost 24 hour liquidity and very low transaction costs.

VI.  Future Market Advantages

1. No Day-trading Restrictions. Unlike the stock market where you must have at least $25,000 in your account to day-trade, there are no such restrictions in the futures market.

2. Much Lower Margin Requirements. Day-trading margins for the E Mini S&P go as low as $500 per contract giving traders much more access to buying power than in the stock market. It is important to remember here however that leverage is a sword that cuts both ways, meaning that just as you can increase profit potential through the use of leverage this also increases your loss potential, something which we will cover in future lessons.

3. No Interest Paid on Margin. Unlike the stock market where you pay interest on margin used, you do not pay any interest on used margin in the futures market.

4. Tax Advantages. Futures Trades are generally taxed via the 60/40 rule meaning that 60% of gains are treated as long term capital gains and 40% are treated as short term capital gains. For most short term traders this tax treatment is a large advantage over the stock market, where 100% of short term gains are taxed at the higher rate.

Now that I have covered the advantages of the futures market, and the E Mini S&P 500 contract specifically, here are the general details about the contract which traders will want to know:

Trading Symbol: ES – The trading symbol for the E Mini S&P

500 contract is ES followed by the symbol for the month and year. For example the June 2012 contract is ESM12.

Contract Size: $50 X the Index. For example, say the E Mini

S&P 500 was 1365, which would make the contract size 1365 X

$50 = $68,250.

Minimum  Price  Fluctuation:  .25  Points  or  $12.50  equals  1 tick which is what the minimum price movement in a futures contract is referred to.

Trading  Hours:  Market  is  open  from  Sunday  Night  at  5pm Central  Standard  Time,  until  Friday  at  3:15  Central  Standard time except for between 3:15-3:30 PM CST and 4:30 PM-5PM when the market is closed for maintenance.

Contract Months: H = March, M = June, U = September, Z = December

Last Day of Trading: 8:30 AM on the third Friday of the contract month.

 

VII.  Futures Margin Rates

Stock Index

 

X.  Contract Specifications

 

 XI.  OCO ~ Futures Trading Execution Orders

‘One-Cancels-the-Other Order – OCO’

A pair of orders stipulating that if one order is executed, then the other order is automatically canceled. A one-cancels-the- other order (OCO) combines a stop order with a limit order on an automated trading platform. When either the stop or limit level is reached and the order executed, the other order will be automatically canceled. Seasoned traders use OCO orders to mitigate risk.  
TradeStation ® uses the MATRIX and Ninja Trader ®uses the DOME.

For example, assume you just bought 10 contracts of NQ (E- mini NASDAQ) futures for a momentum break out trade at $2555 per contract. You expect it to break out to the up-side quickly and your profit target is 6 ticks or $30 per contract but for risk mitigation, you would like to lose no more than 6 ticks or $30 per contract. To do this use an OCO order, which would consist of a stop-loss order to sell 10 contract at $2525 (6tick stop-loss) and a simultaneous limit order to sell 10 contracts at $2585 (6 tick profit take), whichever occurs first. These orders could either be day orders or good-till-canceled orders.

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Hi Larry, I have been on the $7 trial membership for the trading room beginning April 23rd and Larry’s site, Power Cycle Trading, has much to offer.  In fact, since that time I have made $590 in purchases of Larry’s courses, TOS indicators, and scanner, all are proving to be good investments.  And I am finding great value in the daily after market videos of his Power Cycle Trading Club along with his occasional daily email alerts. – Paul 

 

 

 

 

 

 

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I am in the last couple of years before retirement and I have been a part of several other services in the past, trying to find the one that would suit me best.  I have literally lost 1000s of dollars on other systems but settled on Larry’s.  His technical knowledge is unsurpassed, IMO, and his knowledge of using strategies with low risk and high reward is the best I have found since I started trading in 2003.  He always starts out with great risk management; always looking ahead in case he needs to hedge… – Pamela

 

 

 

 

 

 

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Results Vary.  There Are No Guarantees of Similar Results with the Same Strategy.

Larry Gaines

About Larry Gaines

Larry Gaines has become one of the leading coaches for successful traders and investors. He continues to develop and host, every month, new trading educational programs to help traders and investors generate greater income from their investment capital with less risk exposure. 

He founded PowerCycleTrading.com and the Power Cycle Virtual Trading Room following over 30 years of professional trading experience in the commodity and equity markets. 

During his tenure as head of an international trading company that often traded a billion dollars’ worth of commodities in a single day, he learned first-hand the necessary elements of a successful trading system and the use of options.

Using this in-depth knowledge and experience, Larry developed the Power Cycle Trading™ Model to allow for greater profits with a more disciplined, systematic degree of trading success.

Disclaimer

The following is purely for educational purposes. Any stocks mentioned DO NOT constitute advice and should NOT be construed as recommendations.

U.S. Government Required Disclaimer – Commodity Futures Trading Commission. Futures and options trading have large potential rewards, but also large potential risk. You must be aware of the risks and be willing to accept them in order to invest in the futures and options markets. Don’t trade with money you can’t afford to lose. No representation is being made that any account will or is likely to achieve profits or losses similar to those discussed on this website. The past performance of any trading system or methodology is not necessarily indicative of future results.

CFTC RULE 4.41 – HYPOTHETICAL OR SIMULATED PERFORMANCE RESULTS HAVE CERTAIN LIMITATIONS. UNLIKE AN ACTUAL PERFORMANCE RECORD, SIMULATED RESULTS DO NOT REPRESENT ACTUAL TRADING. ALSO, SINCE THE TRADES HAVE NOT BEEN EXECUTED, THE RESULTS MAY HAVE UNDER-OR-OVER COMPENSATED FOR THE IMPACT, IF ANY, OF CERTAIN MARKET FACTORS, SUCH AS LACK OF LIQUIDITY. SIMULATED TRADING PROGRAMS IN GENERAL ARE ALSO SUBJECT TO THE FACT THAT THEY ARE DESIGNED WITH THE BENEFIT OF HINDSIGHT. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFIT OR LOSSES SIMILAR TO THOSE SHOWN.

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