Previous Entry: What Are Emini S&P 500 Futures?
The Many Advantages of Day Trading Eminis
There's a huge number of markets out there, so why is Emini day trading so compelling to so many traders? These traders have usually been involved in equities, bonds, forex, and any number of other markets over their trading careers but many call the futures market home when it comes to their day trading. In this article, we'll provide a number of reasons why trading Eminis can be a huge advantage for the novice and veteran trader alike. These advantages are a big part of why we prefer to focus on trading Emini S&P 500 futures here at Samurai Trading Academy.
Emini Trading Advantage 1: A High Liquidity, Efficient, and Volatile Market
The Emini S&P 500 (ES) is the world's most actively traded stock index futures contract with millions of contracts traded every day. When you consider that each contract is worth $50 times the current value of the S&P 500 index, you can see just how huge a market it is at well over $100 billion per day.
This size and continual activity makes for a high degree of liquidity. During the normal trading hours the Emini S&P 500 (ES) futures contract maintains a very tight bid-ask spread of just a single tick (or $12.50 per contract). Since the spread is considered a cost to enter the market, the very low spread of ES is a huge advantage for the active trader. In the Emini S&P 500 futures market traders can be filled on orders of hundreds of contracts without slippage problems and even at that size large orders can be filled quickly and efficiently.
The ES market is also quite volatile throughout the trading day. This volatility provides the opportunity for Emini day trading and allows us to find trading setups even in a limited amount of time. An ES trader can trade as little as an hour or two every morning and still be consistently profitable most days due to the number of high quality trading opportunities. Here at Samurai Trading Academy we aim for 10-15 points a week from trading the ES morning session alone.
Emini Trading Advantage 2: The CME Group Is A Regulated Central Exchange
Any trading in Emini S&P 500 (ES) futures is done through the Chicago Mercantile Exchange Group where all trades are recorded in an official time and sales report. These trades are public and are placed on a first come, first served basis and all trades must follow CME Clearing rules as well as the CFTC and NFA rules. The ES is a fully electronic market without a trading pit which means no market makers, locals, or floor brokers. This means that all traders have access to the same Level II market and bid-ask spread. This provides an equal playing field and allows for extremely quick online order execution.
Compare this to Forex, where various firms control the market and the bid-ask spread. Even though many Forex brokers advertise a fixed spread, they often reserve the right to widen it at any time. Even worse, because Forex does not have a central exchange and many trades are done "over the counter" without a central time and sales report there is the risk that a broker may not get your trade filled with the best execution possible. Some Forex brokers have been known to bet against a trader, front-run their orders, and other nefarious tactics.
Emini Trading Advantage 3: Emini S&P 500 Futures Is A Very Technical Market
Due to the nature of the participants in the Emini S&P 500 futures market and the quantity of the trading being done, the ES is an excellent market for technical analysis. There are very few parabolic moves, the depth of the market makes it virtually impossible to manipulate, and trends tend to be smooth and predictable with regular pullbacks. The same can't be said for most stocks, commodities, and many Forex pairs.
The advantage of the technical nature of ES is that it allows us to focus on the price movement itself rather than indicators, expensive news feeds, or market rumors. When viewing the price action we can easily identify trends and common patterns in the market and reliably act upon them.
Emini Trading Advantage 4: A Single Chart and Minimal Prep Time Necessary
The highly technical nature of Emini S&P 500 futures also provides advantages in terms of the amount of market information we need to focus on each day. With only a single chart on one screen we can trade ES effectively as day traders. Compare this to the information overload that many stock traders have where they follow 20 or more different charts on multiple screens each day. Being bombarded by a huge information flow is rarely an advantage - sometimes simple is better! This setup also gives the ES trader a great deal of flexibility. All an ES trader needs is a laptop's single screen and they can trade from anywhere in the world as long as they have a reliable internet connection.
The technically-focused Emini S&P 500 day trader doesn't have to do a great deal of research on individual companies or study the fundamentals in exhaustive detail to be ready for the trading day. Their preparation time outside the trading day can be kept to a minimum which frees the day trader up to focus on the price action and patterns as their guide. With some practice an ES day trader can generally do their pre-market analysis in only 5-10 minutes and will be fully prepared for the trading day ahead.
Emini Trading Advantage 5: Freely Trade Short or Long
There are no restrictions or rules against going short in the Emini S&P 500 futures market. A trader can sell short an ES contract at any time in hopes of simply buying it back later at a lower price with a profit. You can do this from day one with your futures broker without any special requirements needed.
To go short in stocks you will require a special account with increased requirements. Some stocks cannot be shorted or have limited shares available to short which greatly limits your options in some market conditions.
Emini Trading Advantage 6: Excellent Leverage and Margin Requirements
A trader needs to be careful with using leverage as higher leverage means higher potential risk, but in the in the hands of a trader with proper risk controls it's an excellent tool. By putting up as little as $500 of intraday margin with a broker an Emini S&P 500 futures day trader is able to buy or sell short a single ES contract (currently valued around $75,000). The leverage in this scenario is 150:1 which allows fantastic flexibility to the ES trader that other markets don't provide. We don't advocate this kind of extreme leverage scenario at Samurai Trading Academy but with good risk controls it does allow those who are new to futures trading to enter the market with a much lower financial barrier.
Most traders don't get to enjoy the leverage benefits of Emini S&P 500 futures and have to put up significantly more capital on margin to enter their positions. Some stocks cannot be traded on margin and those that can require at least 50% margin to take a position. In the US, Forex trading firms are only allowed to offer a maximum leverage of 50:1 on major currency pairs and 20:1 on minor pairs. With these requirements it's no surprise that many traders prefer Emini futures.
Emini Trading Advantage 7: No Pattern Day Trader Rule
A futures day trader can open an account with as little as $2,500. They can then trade as often or as rarely as they want without further restrictions. On the other hand, a stock trader who executes 4 or more day trades in 5 business days (provided the number of day trades is more than 6% of the customer's total trading activity over that same period) is considered by the SEC to be a Pattern Day Trader.
What this means is that you are now required to have a minimum or $25,000 of capital in your account at all times and may not fall below this amount. The Pattern Day Trader Rule of trading stocks creates a very high barrier to entry so being able to get started day trading futures with only 1/10th that amount is a huge advantage for many.
Emini Trading Advantage 8: Low Commissions and The Reduced Cost of Doing Business
A new Emini S&P 500 futures trader can get round-trip commissions and fees as low as $4 per contract to start if trading a single contract. Compared to stocks and Forex this is exceptionally low and unlike a Forex firm which might suddenly increase your spread, the commissions in futures can only get lower. Once you are trading more contracts on a monthly basis the broker commissions become only a fraction of their initial level and very large traders can even get a seat on the exchange to reduce their fees even more. The lower commission structure of futures allows a trader to enter and exit the market more often which means that a trader can day trade and scalp with very large size if they choose to. In most markets this isn't an option for retail traders.
The cost of doing business in futures is also very low due to the leverage and small minimum account balance needed to get started. For the well prepared novice trader these lower barriers to entry are a huge advantage as they don't have to worry about tying up a large quantity of funds in their new venture. An experienced trader also finds the high leverage a very useful tool as they are able to manage their trading account risk and free up funds for other uses.
Conclusion - 8 Advantages of Trading Emini S&P 500 Futures
There are a number of other advantages out there to trading Emini futures like tax breaks, diversification benefits, and much more but many of the major ones have been covered here. You should now have an improved understanding of the benefits that trading Emini S&P 500 futures can give you, especially if you intend to do so as a day trader. If you are currently an active trader in stocks, Forex, or commodities I hope this article gave you good reasons to more seriously consider entering the arena of futures trading.
In our upcoming articles in the Emini Day Trading Series from Samurai Trading Academy we will look at how money is actually made as an Emini day trader and we will also look at some of the considerations you need to build a successful trading plan that will allow you to reach your trading goals.
Emini Day Trading Series
Part 1: What Are Emini S&P 500 Futures?