In the 80’s, the US T-Bond contract was the most liquid market. The bond pit at the CBOT was so crowded that you could not turn around. There was a bit of intrigue with commodities. It was deemed “not a prudent man’s investment vehicle” — it was for the aggressive investor. It was not a climate for “everyman” as the margins were often high and the moves could be severe. “Everyman” needed a liquid market with reduced margins that would allow participation in the stock market in a diverse manner. The E-mini indices allow a trader to participate in a stock weighted average of a portfolio.
The first futures trading platforms were very crude and unstable, but with the unification of the CUBS units on the floors of the exchange, the link became crucial to index traders. The CME exchange went through an elaborate changeover in the creation of Globex. The idea of a host computer to match the trades made the marketplace a fair and equitable trading floor for the average speculator. With the onset of the E-mini S&P 500 on September 9th 1997, the heads of many FCM’s traded hundred lots that first evening to kick off the contract and create the liquidity to make it stick. The exchanges have books of contracts that no longer exist as the volume would not sustain the contract.
Upon the success of the E-mini S&P 500, other E-mini contracts were introduced to provide diversity for the speculator. The Minis are offered at a fraction of the size of the larger counterparts. The margins are indicative of that fraction and further, day-trade margins may be $500.00 in some cases to make it even more appealing. The exchanges themselves do not require any margin unless a contract is held overnight, so each FCM may decide what they may be comfortable with for that “good faith deposit” as long as the client is out at the close (3:15 PM CST).
In constructing a plan to trade the E-mini contracts, there are many preparations to factor out potential errors and filter out the highest probability of successful trades.
- In today’s market, the platform means everything in terms of comfort, knowledge and ease of use. It is imperative to have a direct connection with the FCM to the Exchange. The stability of the platform and the internet connection must be reliable. The freedom to navigate from the depth of market to the order function to the charts is vital to trading. It is suggested to demo a variety of platforms to find the right match.
- The style of trading is important in developing a trading plan! There are scalpers, channel breakout traders, trend-traders and contrarians. The style of trading should be derived from the current market conditions and risk parameters.
- Risk is essential in that, psychologically, one must be comfortable losing money before they can make money. Fear of losing money can actually impede the ability to make money. If a plan is drawn up with a risk per day as part of the plan, it will contain any potential problems in overtrading or chasing a market. The E-mini S&P 500, for example, is $50.00 per full point, where some traders will earmark 6 points, or $300.00, as the risk tolerance for a day. Excess venture capital must be used!
- Mindset is a large part of trading. One must pursue a climate of clarity and focus when trading. Trading should occur when a place is set-up with a cell phone and a trade log. Should there be an interruption in online trading, a trade-log would enable a trader to record each trade so that even with an interruption in online trading, they may call the desk to exit a trade or adjust stops. A trade log would also allow the trader to review the trades of the day off the platform! Trading space should be conducive to trading without distractions.
- Basic charting is crucial to traders. One cannot trade off of the fundamentals alone successfully. The trading world is made up of many sophisticated technicians that will have an edge. For a trader to create that same savvy approach to the markets, charting and select indicators are necessary.
- Indicators range from momentum to moving averages. Most indicators are lagging, descriptive indicators and can occasionally be out of sync with the current market conditions. The correct predictive indicators can filter your trades so that you take only the higher probability trades. The ideal scenario would be to have a developer handy to decipher the trading environment and create the indicators necessary to keep up with the markets. Most traders do not have access to the latest indicators, so one must figure where the indicators may be obtained.
- The learning curve for trading is quite individual. It is important for the trader to know himself/herself to decide the best method to learn about trading. Some traders may be able to tinker with many indicators and charts to figure out what is in sync with the current markets. Some traders may do well with a mentor, course or trade room to learn. Many traders are social and desire the shared ideas of other traders. Why re-invent the wheel when other traders have been through the learning curve and are willing to share their findings? Shared experiences may in some cases prevent costly errors or inferior tools to decipher trade set-ups.
- Discipline is probably the most important part of trading. To be able to plan the trade and trade the plan without any emotional whims will keep the trader on target with their risk parameter for the day and perhaps occasional opportunities to profit.
- Taking a profit is part of the equation. Some traders will desire to trail stops to keep the profit side open while the risk limited. Other traders may wish to use preset brackets for their trading, allowing a part of their trading to be automatic. Bracket trades must have additional margin in many cases as the platform will not realize that 2 working orders may offset only 1 trade. In bracket trading, it is important to leave the bracket intact or, if offsetting manually, to be sure that all working orders on the bracket are canceled. A trade from the chart may not be acknowledged by the platform as an offset by the bracket. It is important to close out all open positions and cancel all working orders prior to leaving the platform.
- Trading platforms can be sensitive. Traders with pets or children may do well to close the platform before leaving it. The IP address of your computer can be traced so that all trades generated from it are yours.
- Winning can be just as damaging as losing! Traders can gain too much confidence and change the plan. The changed plan can lead to overtrading or even an error may occur as the emotional state may take over.
- Trading can be intense where concentration is vital. A trader cannot stay in the correct state of mind trading for an extended period. It is important to allocate a couple of hours a day when there are no distractions. The same time of day each day will allow the trader to note patterns and time changes in the market. It is also important to pick 1 to 3 markets initially to know closely. The price action of those markets can be viewed as imprints for your future trades.
Trading’s not easy, but with hard work, determination, and patience, it can get easier. In opening a business, a person may do elaborate feasibility studies and cost analysis before beginning. Why would trading be any different? Trading is a business like any other, but perhaps more fun. There is a learning curve that may be expensive so many traders will test their strategies through paper trading on their chosen platform. Paper trading may not be exactly the same as live trading, but it is the closest way to examine the trading plan and feasibility of it!
The CFRN.net Team
STOP ORDERS DO NOT NECESSARILY LIMIT YOUR LOSS TO THE STOP PRICE BECAUSE STOP ORDERS, IF THE PRICE IS HIT, BECOME MARKET ORDERS AND, DEPENDING ON MARKET CONDITIONS, THE ACTUAL FILL PRICE CAN BE DIFFERENT FROM THE STOP PRICE. IF A MARKET REACHED ITS DAILY PRICE FLUCTUATION LIMIT, A "LIMIT MOVE", IT MAY BE IMPOSSIBLE TO EXECUTE A STOP LOSS ORDER.
Learn to Trade the E-Mini S&P 500
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