An Introduction about E-Minis for Beginners

I found this book from NQ Trader. If you want more visit NQ Trader at http://nqtrader.us or email info@nqtrader.us or call 754-800-1810

 

An Introduction about E-Minis for Beginners

 

In the past book (“Futures Trading Guidlines”), an overview of futures contracts was explained. This time, we will explain a particular form of futures contract that is widely being traded in various platforms. This is specifically about E-Minis.

 

In this book, we will define e-minis, as well as its characteristics and specifications. A description of its players or traders will also be provided here in order for you to understand their tendencies and capabilities. Also, these shall guide beginners in this field to identify if e-minis trading is for them or not. Moreover, we will also share with you the three (3) things that you would need to decide upon on your way forward in e-minis trading.

 

 

Defining E-Minis

 

Generally, E-minis are futures contracts that are being traded electronically. There are two (2) components that explain why it is called as “e-minis,” which are the “e” and the “minis.”

 

On the one hand, the “e” in its name suggests how it is being traded, as stated above, which is electronically. On the other hand, “minis” refers to its size. This is because e-minis just represent a certain percentage of the regular or standard futures contracts. Hence, what this means is that e-minis are small futures contracts.

 

Characteristics of E-Minis: What makes it different?

 

Aside from differentiating e-minis from other financial instruments, there are also some characteristics that make them more attractive. These are particularly in terms of volume, liquidity, volatility, accessibility and affordability.

 

1.    Volume

 

This is the number of contracts that are being traded at a particular period of time. E-minis are among the most traded all over the world. Specifically, the e-mini S&P 500 is being traded worldwide through at least 2.2 million contracts a day, on the average.

 

2.    Liquidity

 

This characteristic is about the ability to efficiently and quickly implement any size of order without a significant change in its price. In other words, what this is simply about how a trader can enter and exit positions quickly. There are usually four (4) indicators in order to measure liquidity of an instrument. These are:

 

-       Width: tightness of the bid-ask spread;

-       Depth: volume of orders that rest beyond the best offer and bid;

-       Immediacy: rate of how fast that a large market order can be executed; and

-       Resiliency: turnaround time of the market to go back after filling a large order.

 

3.    Volatility

 

This characteristic refers to the rate of price movements, whether it is going up or down, of a particular instrument or market. When a market is volatile, investors and traders have the opportunity to profit from the changes in the price, depending on the movement.

 

For example, when a trader bought a contract for a low price and its market price suddenly increased significantly; he or she can sell it. His or her profit will then be the difference of the current price to how much the contract was originally bought.

 

4.    Accessibility

 

E-minis can be traded in all electronic platforms 24 hours a day. This is a very important factor for many investors and traders, not only in a particular country, but all over the world as well.

 

5.    Affordability

 

E-minis can offer very attractive margin rates. What this means is that you can enter position using small account, instead of a full-sized contract. This is especially important for traders who are just beginning in the field of financial investment.

 

There are two (2) general kinds of margins, which are initial and maintenance. On the one hand, initial margin is the amount that traders need to pay upon initiating or entering a position. Maintenance margin, on the other hand, refers to the level in order to maintain their positions over time.

 

The required margin varies from one contract to another. It may also depend on the broker. For example, there are some e-minis that you can trade for as low as $500.

 

 

E-minis Specifications You Need to Know

 

E-minis have contract specifications, which have components that you need to know in order to understand what they mean. The following is an example of contract specifications:

 

Contract	Symbol	Exchange	Contract Size	Tick Size	Contract Months
E-mini NASDAQ 100 F	NQ	Globex	$20 x Index	0.25 = $5.00	H, M, U, Z

 

Now, let us dissect those elements one by one.

 

1.    Ticker Symbol is consisted of letters, which represent a particular contract. Such symbol is the one being used in order to create price charts, as well as to execute orders or positions in the market. In the above example, the ticker symbol is NQ, which refers to E-mini NASDAQ 100 futures contracts.

2.    Exchange refers to the market place, where a contract is, and can be, traded. The purpose of this is to make sure that there is a fair and orderly environment for trading. This market place also provides an efficient venue in disseminating information on prices. The market place can either be a physical or virtual location.

3.    Contract Size refers to the value of the futures contract and an index multiplier. In the above example, $20 is the contract price while the multiplier is “Index.”

4.    Tick Size refers to the minimum price fluctuation allowed for the contract in a trading session. In the above example, 25 cents is the smallest price fluctuation for the contract while each tick is representing $20.00.

5.    Contract Month refers to the particular period when the contract will expire. There are some contracts that expire quarterly; hence, they have multiple contract months. One letter represents a month, as shown in the following table:

 

Code	Month
F	January
G	February
H	March
J	April
K	May
M	June
N	July
Q	August
U	September
V	October
X	November
Z	December

 

In the above example, the contract will expire by the end of each quarter, which are in the months of March (H), June (M), September (U) and December (Z).

 

 

Who are the players or E-Minis traders?

 

Anyone may engage into e-minis trading. However, there are four (4) different kinds of players that you might bump into when trading. They will either be any of the following:

 

1.    Institutional Traders

 

Traders like these place high-value positions. They usually represent institutional investors like owners mutual, pension or hedge funds and even insurance companies. They can do this because they have the capital to trade large positions, which makes e-minis even more attractive for them. Institutional traders also trade e-minis in order to hedge their investments against bigger futures contracts.

 

2.    Managed Funds Traders

 

Traders like these can be a single person or a group of traders, who manage investment funds. The composition of the group usually depends on the size of the fund. If it is big, then more people would need to manage it. Otherwise, for small funds, a single investor might be enough.

 

What makes e-minis attractive for managed funds traders is because of its technical nature. Specifically, this is since e-minis are based on various stocks, instead of just a single stock. Hence, what this means that its price, for instance, will not move just because of a single fundamental news about a company. Therefore, traders can use technical analysis.

 

3.    High Frequency Trading (HFT) Firms

 

Traders like these make money through short-term trades. Firms like these are big enough to invest on more advance systems that allow them to rapidly identify or even executive trades. Usually, they can liquidate their traders within the trading day, E-minis are also attractive for HFT firms because of their technical and behavioural structures.

 

4.    Retail Traders

 

As its names suggest, this type of participant refers to individual traders, who do not work for institutions, firms or manage funds. They can work from their own home. In order to earn, what retail traders is to trade on a daily basis. The trading style of retail traders depends on various factors such as:

 

-       Experience;

-       Risk tolerance;

-       Account or fund size;

-       Personality; and

-       Availability.

 

With the foregoing, retail traders can trade e-minis in various styles, whether position, swing, day or scalp trading.

 

-       Position Trading has long term time frame, which holding period may last from months to years;

-       Swing Trading has a short term time frame, which holding period may last from days to weeks;

-       Day Trading has a short term time frame, which holding period may last within the day only. What this means is that there is no position held overnight; and

-       Scalp trading has an extreme short term time frame, which holding period only lasts from seconds or even a few minutes. Like the previous one, there is also no trade being held overnight for this particular style.

 

Getting Started with E-Minis Trading

 

Now that you already know some of the basic information about e-minis, the next thing that you need to know is about how to get started. On your way forward, there are three (3) important things that you need to decide, which are about the platform, techniques and size.

 

1.    Platform

 

It can either be a standalone or web-based platform. The right one you need to choose depends on your preference. On the one hand, standalone platforms are usually more robust; while, on the other hand, web-based platforms can give you flexibility. This is because the latter option will allow you to trade through an internet connection, regardless of your location.

 

2.    Techniques

 

There are different techniques that you can follow in order to start your trading. These techniques are about placement methodology. Traders have the option to place their trades, either discretionary, semi-automated or automated. Of course, each of these techniques have their own sets of pros and cons.

 

3.    Size

 

As stated above, you can trade e-minis with just a low margin. Hence, you can choose to open a small trading account first. However, as you gain experience in this field, you might want to increase the size of your positions. This is because it will offer you greater profits. However, you also need to take note that it will entail greater risks as well.

 

Whatever your choice is training is the most important piece of the puzzle.