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.
