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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
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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 that 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.
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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 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.
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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 trader’s
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
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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 of 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
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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.eurexchange.com
www.cmegroup.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.
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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 on 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
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VII. Futures Margin Rates
Stock Index
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X. Contract Specifications
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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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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.
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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 fo
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.
There is a very high degree of risk involved in trading. Past
results are not indicative of future
returns. Powercycletrading.com and all individuals affiliated
with this site assume no
responsibilities for your trading and investment results. The
indicators, strategies, columns, articles
and all other features are for educational purposes only and
should not be construed as investment
advice. Information for any trading observations are obtained
from sources believed to be reliable,
but we do not warrant its completeness or accuracy, or warrant
any results from the use of the
information. Your use of the trading observations is entirely at
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usefulness of the information. By
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in the securities described herein
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