Topics of Trade Explained » ES Futures Advantages
There are compelling advantages to trading futures when compared to stocks or other trade vehicles.
Let's start with "what is a futures contract?" - A futures contract is basically an agreement to buy an underlying security or commodity at a fixed price to be exercised by a given "future" date.
The contracts that we tend to focus on, Index futures, include the symbols (YM) for the Dow-30, (ES) for the S&P-500, (NQ) for the NASDAQ-100 and (ER) for the Russell. These physically trade just like a stock. There is nothing complicated about them - but they may offer significant advantages over trading stocks to you.
These Index futures contracts are made up of a group of stocks traded under one symbol, much like a mutual fund or ETF. The S&P-500 E-Mini contract (symbol ES) reflects the price action of all the S&P-500 stocks. This investment approach allows risk to be spread across all the stocks listed in the index, without actually buying the individual securities which make up the index. Clearly, this offers protection against holding one stock that may make a drastic sudden move on you.
Our approach to trading the futures is to buy and sell on an intra-day basis. In general, we do not hold overnight positions. This allows for use of margin during the trading session and you never need to concern yourself with the expiration date. Expirations occur each quarter. In simple terms, you trade these just like you would any normal stock, with the exception that "four times per year a new contract is traded".
We tend to focus strongly on the (ES) S&P-500 contracts at TradeSeven.com. If you have any questions regarding trading the E-minis, please feel free to contact us.
Advantageous reasons to consider trading the E-mini contracts.
Commissions are still a bargain to trade the S&P-500 ES E-mini, usually a good bit less than $5 for a complete turn in and out.
ACCOUNT UNDER $25,000?: If you have a modest account under $25,000, the "Pattern Day-trade Rule 2520" does not pertain to you in E-mini futures accounts. An account of less than $5,000 is needed to trade at most brokerages, and there is no current restriction on the number of trades allowed per day.
Market liquidity is exceptional during normal market hours. A Market Order is generally filled instantly at the current price. Rarely will you see a questionable order filled.
Price spreads (ticks) are rarely ever considered wide between Bid and Ask prices like they often are on stock orders.
Routing decisions are simple in the ES E-mini futures. You simply place the trade and it goes into the bid-ask ladder. Stock traders have to be concerned about which Book will give them the best fill.
REDUCED RISK: I'll never forget one particular day of trading on August 24, 2000. Our Live Trading Room was watching the price of QLogic Corporation (QLGC), one of our favorit trading stocks at the time when a false news-wire report was released against a sector related company, Emulex Corporation (ELX), formerly (EMLX). During the next 16-minutes over 2.3 million shares of EMLX stock was traded and price dropped nearly $61.00 (60%) per share - from $103.94 to $43.00. This amounted to $2.2 billion in market capitalization!
Following a trading halt by NASDAQ, Emulex resumed trade later that day and the price rebounded to Close at $105.75! The EMLX hoax was latter settled and the 22-year old actor, Jason S. Jakob was sentenced to 44 months in prison.
Although usually not on such a large scale as this, sector related stocks make moves together like this almost on a daily basis. The lesson learned here is that trading ES E-mini futures greatly spreads any risk of this ever occurring to futures traders.
SIMPLE TO MONITOR: With respect to the EMLX and QLGC story above, there are "sympathy" (companies related by business or sector) moves in stocks during nearly every trading session. Thankfully, very few are like the EMLX hoax. Moves in price are generally related to earnings, breaking news, top tier management death, top tier management hiring or firing, significant contracts signed, lost contracts, world politics, etcetera. Point being, ELX today has 9 competing companies, and significant news from any one of them could effect it's price during the day. ES E-mini futures traders really need only to watch this one contract!
LESS HARDWARE INVESTMENT: An ES E-mini trader generally does not need a multi-screen set up to trade, where a stock trader may run as many as 6-8 screens, a futures trader really only needs 2. A single computer can usually handle all of your needs as well.
LESS SOFTWARE INVESTMENT: Where a stock trader will need multiple services to scan and monitor all the news and charts of their many stocks, an ES E-mini trader really only needs a solid charting service to plot the ES on, and a monthly subscription to TradeSeven.com!
INCOME and PROFITS: A trader who can successfully average 3-4 points per day trading with a single contract can make a living. Considering that a single contract costs less than $5,000 to buy, and 4 points would bring around $200 in profits per day, it is a pretty darn good return on your money. If you add another contract for every $5,000 you should quickly see how this would add up. All this with much less craziness when compared to juggling a handful of stocks all day.
TAXES: Specific tax advantages may apply to your E-mini trading account that are not available to stock trading accounts. Advantages that could save you 30% or more compared to standard filing methods.
TAX SIMPLICITY: Tax preparation for an E-mini account is much less complicated than having to document every stock transaction for the year on your tax return!
FOCUS, FOCUS, FOCUS: How many stocks can you really monitor, chart and trade effectively at one time? You have to be concerned with the issue's sector, breaking news, earnings, and sympathy stocks that can effect your stock's price at any moment. Each individual stock has it's own personality from day to day, making it rather difficult for most traders to follow more than a handful efficiently and profitably. ES E-mini traders work on becoming the master of one thing - the E-mini!
LESS STRESS: Concentrating on one highly liquid market each day allows you to improve your focus - and your trading. Let's face it, monitoring and trading just 3 - 5 stocks can be very stressful by the end of the day. Many traders watch hundreds to find just a few profitable plays each day - not to mention tracking the indices too.
NO UP-TICK RULE: Short plays are instantly available with Market Orders. There is no "up-tick rule" as the Powers-to-be keep changing with regard to stock rules.
NO "Market Makers": There are none in ES E-mini trading to play tactical games with price as there are in stocks. What you see is what you get!
MARKET GAPS: We have all turned our computers on to see significant gaps in stock prices during overnight trading. The problem is, even if we were sitting by our computers there is no way to participate in the moves, or worse yet, to get out of a losing stock during a gapping situation. Why do you think there is a volume spike nearly every morning at the 9:30 Open? Traders holding stocks are either panicking to sell their winners or to dump their losers. The ES E-mini futures trade nearly 24-hours per day, closing only on the weekends. During this time you can always enter a trade, or exit from one.
VALUE of YOUR TIME: Preparation each evening to scan for stock trading opportunities can be very time consuming. In fact, the average successful independent trader can easily spend upward of 10-15 hours each week doing so. ES E-mini futures traders generally need only to check the general condition of the Dow-30 and S&P-500 to get a feel for the bias in what is happening. This allows for tremendous flexibility and respect for your time.