Understanding Dow Futures – Part 11

Dow futuresĀ  & Dow Emini futures markets are growing in popularity. Traders having actively traded them for many years now, and witnessed their growth personally. It is doubtful if they would ever want to switch to trading anything else. The emini futures are the best markets for day traders ever created.

This is an article about why Dow Emini Futures & Dow Futures markets are the best markets for day traders, especially the new traders who may still be looking for the best trading instrument out there. There are several reasons for that. Let’s list them then but not until we mention what emini futures are. That’s for those so new to the subject that they might not even have heard about emini futures.

Emini futures are simply smaller sized contracts of more mature futures contracts, such as Dow Futures, S&P 500 futures or natural gas, or crude oil. The latter have been around for decades, while the former for merely a decade or so, the oldest one of them, S&P 500 e-mini futures, having been launched only in 1997. The “mini” part of their name refers thus to their smaller size, which effectively means smaller points.

To give you an example, one point in ES, the S&P 500 e-mini futures, means $50, while one point in the full S&P 500 futures contract is worth $250. What this means is that had your position with 5 emini futures contracts of ES moved 1 point in your favor, you would have made as much a trader trading the full contract under the same favorable circumstances. Or in other words, if you want to be as rich as the other guy, you need to use 5 times more of e-mini contracts of S&P 500.

It is probably not that hard to guess what the “e” in “e-mini” stands for. Yes, that’s right, it stands for “electronic.” These are contracts that can be traded electronically, meaning over the Internet, which is one of their great appeals for this means that everyone with a reliable access to the Net can embark on a day trading career from the comfort of their homes. But don’t quit your day job yet, and don’t stop reading this article yet. You will thank us later for this sound advice. You are welcome…

With this very basic introduction done, let us now tell you why we believe emini futures to be the best markets for those eager to try day trading. Day trading, by the way, does not mean trading every day. It only means opening and closing your position during the same daily session. You can close literally seconds after opening it, but you can also hold it open for hours. Details don’t matter. As long as you close it during the same daily session you opened it, you are technically a day trader. This does have some formal (or legal) consequences but those apply to stock day traders only and we will return to this later.

First of all, it’s the ease of access that makes their choice so compelling. This is reflected in more than one way. One of them we already mentioned: you can trade them from the comfort of your home or your home office and who would not like that, right? But there is also another reason why trading emini futures is practically for everyone. That’s because you can trade them with only $2,500 in your brokerage account. That’s how little one of the emini futures brokers in the US requires you to deposit with them to be able to day trade eminis. While there are many more stock brokers out there (some of which offer also emini trading, but usually with higher commissions) than emini brokers, the number of emini brokers have been growing and these days you do have quite a choice among them. Some of them offer day trading margins as low as $500, and their commissions keep declining almost every year, with some very competitive brokers offering round turn commissions of only $4.00 if not less, at least for some emini markets. Lower commissions means obviously easier access too, but it’s the fact that you can day trade emini futures as much as you wish with only $2,500-5,000 that makes all the difference compared to stocks.

Namely, as we already alluded to when talking about formal consequences of opening and closing your position during the same day trading session, you cannot do this more than three times during the same session when trading stocks unless you have at least 25 grand in your account. This rule that prevents smaller stock traders from frequent daytrading, often referred to as the day trading pattern rule, does not apply to e-mini traders who can easily take more than 3 trades during the same day and avoid being penalized in any way by their broker. Emini futures thus rule quite decisively compared to stocks for those with less money to spare.

But the ease with which you can get access to frequent day trading of eminis is not the only advantage they hold over stocks. Another major advantage is the leverage they offer. Let us explain what it means. Imagine that the popular stock index known as S&P 500 is at 1000.00. Let us recall that its one point is worth $50 in ES, the S&P 500 emini futures contract, so if ES were a stock, you would have to pony up $50*1000.00=$50,000 to trade this stock or a half of that if you were trading it in a margin account. But you can actually control 50 grand with only $500 (your margin for one emini contract with some brokers), giving you the leverage of 100:1, a tremendous leverage no doubt about it.

There is still one more a reason, rather obvious and quite compelling why you would want to choose day trading emini futures over day trading stocks. Simply because it’s easier to focus on just one emini futures market, say S&P 500 or Dow Jones, than on a whole bunch of stocks. Yes, it’s possible to day trade just one stock that has a respectable daily range swing (say AAPL or GOOG), but then you would also need have at least $25,000 in your account to be able to do it frequently enough to earn a living as many day traders do or aspire to do.

Next : Understanding Dow Futures – Part 12

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