Futures Trading All About Futures & E-Mini Futures~ What ...

Futures Trading

All About Futures & E-Mini Futures~ What You

Need to Know

By Larry Gaines, Founder PowerCycleTrading.com, 30 Year

Trading Professional

I. Characteristics of Futures

II. Overview of the main futures traded

III. What are Equity Index Futures

IV. The Markets

V. Favorites to trade ~ E-Mini S&P & E-Mini NASDAX 100~

Advantages

VI. Future Market Advantages

VII. Futures Margin Rates

X. Contract Specifications

XI. OCO ~ Futures Trading Execution

Power Cycle Trading© – Click Here for Weekly Unique Trade Ideas, Live Q&A with Larry, Trading Room+

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I. Characteristics of Futures

All About Futures ~ what you need to know…

A futures contract is a type of derivative instrument, or financial contract, in which two

parties agree to transact a set of financial instruments or physical commodities for future

delivery at a particular price. If you buy a futures contract, you are basically agreeing to

buy something that a seller has not yet produced for a set price. But participating in the

futures market does not necessarily mean that you will be responsible for receiving or

delivering large inventories of physical commodities – remember, buyers and sellers in the

futures market primarily enter into futures contracts to hedge risk or speculate rather than

to exchange physical goods (which is the primary activity of the cash/spot market). That is

why futures are used as financial instruments by not only producers and consumers but

also speculators.

The consensus in the investment world is that the futures market is a major financial hub,

providing an outlet for intense competition among buyers and sellers and, more

importantly, providing a center to manage price risks. The futures market is extremely

liquid, risky and complex by nature, but it can be understood if we break down how it

functions.

In the futures market, margin has a definition distinct from its definition in the stock

market, where margin is the use of borrowed money to purchase securities. In the futures

market, margin refers to the initial deposit of “good faith” made into an account in order

to enter into a futures contract. This margin is referred to as good faith because it is this

money that is used to debit any day-to-day losses.

When you open a futures contract, the futures exchange will state a minimum amount of

money that you must deposit into your account. This original deposit of money is called

the initial margin. When your contract is liquidated, you will be refunded the initial

margin plus or minus any gains or losses that occur over the span of the futures contract.

In other words, the amount in your margin account changes daily as the market fluctuates

in relation to your futures contract. The minimum-level margin is determined by the

futures exchange and is usually 5% to 10% of the futures contract. These predetermined

initial margin amounts are continuously under review: at times of high market volatility,

initial margin requirements can be raised.




The initial margin is the minimum amount required to enter into a new futures contract, but

the maintenance margin is the lowest amount an account can reach before needing to be

replenished. For example, if your margin account drops to a certain level because of a

series of daily losses, brokers are required to make a margin call and request that you make

an additional deposit into your account to bring the margin back up to the initial amount.

II. Overview of the Main Futures Traded

There are many quality futures markets around the world. Below are some but not all of

the futures markets that can be traded using PCFDTM. I would recommend the main U.S.

Equity Index markets to start with.

For active traders, the favorite and most popular futures markets, however, are the Equity

index futures. While they all move in the same direction there are differences in them that

allow traders to match these markets to their personalities.




III. What are the Equity Index Futures?

Equity index futures are designed to trade in relation to a specific equity index which is

comprised of a basket of securities. These products allow traders to speculate and hedge

risk associated with these markets. Why Equity Index Futures?

The following is a unique combination of features that offers retail and institutional trader’s

fantastic opportunity:

– Significant Tax Benefit

– Advantages of Stocks & Mutual funds combined

– Lower Margin Costs

– Low Commissions

– Highly Liquid Investments

– Huge Volume

– Transparency

– Near 24-Hour Training (except for a 15 minute period for settlement)

– Hedging

– Portfolio Diversification

– Lower risk than stocks (reduced overnight gap risk)

IV. The Markets

S&P Mini

– Very popular

– Highest volume/Most Liquid

– $50.00 per point per contract (Example: If you buy 1 S&P E-mini Futures contract

at 1365.00 and sell it at 1370, you made $250.00)

– Represents a basket of stocks (S&P 500)

– Very orderly market because of its high volume

– Ideal for the more conservative trader




NASDAQ Mini

– Solid Volume

– $20 per point per contract Represents

– a basket of NASDAQ stocks

– Orderly market but larger swings partly because of lower volume of the S&P

DOW Mini

– Low volume which means large swings in price, very volatile

– $5.00 per point in contract but don’t let that fool you, it is volatile

– Represents a basket of DOW Stocks

– Because of low volume, you may consider doing your analysis for this market on the

S&P chart

Russell

– Low volume

– Popular because of its price point, this is not a market for conservative personalities

– $100.00 per point per contract

– Represents a basket of Russell stocks

– The combination of low volume and the high price point means a big money, fast

moving market (not for the beginner)

DAX

– Similar to the Russell

– Lower volume

– Traded on the Eurex Exchange

– 25.00 Euros per full point, per contract

– This is a big money market that can really move so beginners beware




FESX

– Saving one of the best for last…

– Super high volume on a 100% electronic exchange (Eurex)

– 10.00 Euros per point, per contract

– For those in Europe, this is a great market to trade

For more information on these and other futures markets, see the following websites:

www.eurexchange.com

www.cmegroup.com

In the world of equities, there are MANY different ways to take advantage of a move in the

market. Knowing the details of the different markets helps you make the best decision

based on your individual goals and requirements.

V. Favorites to trade ~ E-Mini S&P & E-Mini

NASDAX100~ Advantages

1. Relatively Small Trade Size. The E-mini S&P (ES) Contract is 1/5th the size of the

regular S&P Contract so a 1 point move in the market is equal to $50 per E Mini S&P

contract instead of $250 per contract for the full sized contract.

2. The E-mini NASDAQ 100 (NQ) ~ a 1 point move in the market is equal to

$20 per E Mini NASDAQ 100. Each tick equals $5 per contract.

3. A Completely Electronic Market. There is no open outcry trading for the E Mini S&P

(ES) or NQ contract, so all trades are made electronically, which many traders feel puts

everyone on a more level playing field.

4. Highly Liquid Market. These contracts trade millions of contracts a day, meaning

almost 24 hour liquidity and very low transaction costs.



http://www.eurexchange.com/

http://www.cmegroup.com/


VI. Future Market Advantages

1. No Day-trading Restrictions. Unlike the stock market where you must have at least

$25,000 in your account to day-trade, there are no such restrictions in the futures market.

2. Much Lower Margin Requirements. Day-trading margins for the E Mini S&P go as

low as $500 per contract giving traders much more access to buying power than in the

stock market. It is important to remember here however that leverage is a sword that cuts

both ways, meaning that just as you can increase profit potential through the use of

leverage this also increases your loss potential, something which we will cover in future

lessons.

3. No Interest Paid on Margin. Unlike the stock market where you pay interest on margin

used, you do not pay on interest on used margin in the futures market.

4. Tax Advantages. Futures Trades are generally taxed via the 60/40 rule meaning that

60% of gains are treated as long term capital gains and 40% are treated as short term

capital gains. For most short term traders this tax treatment is a large advantage over the

stock market, where 100% of short term gains are taxed at the higher rate.

Now that I have covered the advantages of the futures market, and the E Mini S&P 500

contract specifically, here are the general details about the contract which traders will

want to know:

Trading Symbol: ES – The trading symbol for the E Mini S&P

500 contract is ES followed by the symbol for the month and year. For example, the

June 2012 contract is ESM12.

Contract Size: $50 X the Index. For example, say the E Mini S&P 500 was 1365, which

would make the contract size 1365 X $50 = $68,250.

Minimum Price Fluctuation: .25 Points or $12.50 equals 1 tick which is what the

minimum price movement in a futures contract is referred to.

Trading Hours: Market is open from Sunday Night at 5pm Central

Standard Time, until Friday at 3:15 Central Standard time except for between

3:15-3:30 PM CST and 4:30 PM-5PM when the market is closed for maintenance.

Contract Months: H = March, M = June, U = September, Z = December

Last Day of Trading: 8:30 AM on the third Friday of the contract month




VII. Futures Margin Rates

Stock Index



X. Contract Specifications





XI. OCO ~ Futures Trading Execution Orders ‘One-Cancels-the-

Other Order – OCO’

A pair of orders stipulating that if one order is executed, then the other order is

automatically canceled. A one-cancels-the- other order (OCO) combines a stop order with

a limit order on an automated trading platform. When either the stop or limit level is

reached and the order executed, the other order will be automatically canceled. Seasoned

traders use OCO orders to mitigate risk.

TradeStation ® uses the MATRIX and Ninja Trader ®uses the DOME.

For example, assume you just bought 10 contracts of NQ (E- mini NASDAQ) futures

for a momentum break out trade at $2555 per contract. You expect it to break out to the

up- side quickly and your profit target is 6 ticks or $30 per contract but for risk

mitigation, you would like to lose no more than 6 ticks or $30 per contract. To do

this use an OCO order, which would consist of a stop-loss order to sell 10 contract at $2525

(6tick stop-loss) and a simultaneous limit order to sell 10 contracts at $2585 (6 tick profit

take), whichever occurs first. These orders could either be day orders or good-till-canceled

orders.






https://powercycletrading.com/trading-room-for-options-web/


Larry Gaines has become one of the leading coaches for successful traders and investors. He

continues to develop and host, every month, new trading educational programs to help traders and

investors generate greater income from their investment capital with less risk exposure.

He founded PowerCycleTrading.com and the Power Cycle Virtual Trading Room following over 30

years of professional trading experience in the commodity and equity markets.

During his tenure as head of an international trading company that often traded a billion dollars’

worth of commodities in a single day, he learned first-hand the necessary elements of a successful

trading system and the use of options.

Using this in-depth knowledge and experience, Larry developed the Power Cycle Trading™ Model to

allow for greater profits with a more disciplined, systematic degree of trading success.



http://powercycletrading.com/


Disclaimer

The following is purely for educational purposes. Any stocks mentioned DO NOT constitute advice

and should NOT be construed as recommendations.

U.S. Government Required Disclaimer – Commodity Futures Trading Commission. Futures and

Options Trading have large potential rewards, but also large potential risk. You must be aware fo

the risks and be willing to accept them in order to invest in the futures and options markets. Don’t

trade with money you can’t afford to lose. No representation is being made that any account will or

is likely to achieve profits or losses similar to those discussed on this website. The past

performance of any trading system or methodology is not necessarily indicative of future results.

CFTC RULE 4.41 – HYPOTHETICAL OR SIMULATED PERFORMANCE RESULTS HAVE CERTAIN

LIMITATIONS. UNLIKE AN ACTUAL PERFORMANCE RECORD, SIMULATED RESULTS DO NOT

REPRESENT ACTUAL TRADING. ALSO, SINCE THE TRADES HAVE NOT BEEN EXECUTED, THE

RESULTS MAY HAVE UNDER-OR-OVER COMPENSATED FOR THE IMPACT, IF ANY, OF CERTAIN

MARKET FACTORS, SUCH AS LACK OF

LIQUIDITY. SIMULATED TRADING PROGRAMS IN GENERAL ARE ALSO SUBJECT TO THE FACT

THAT THEY ARE DESIGNED WITH THE BENEFIT OF HINDSIGHT. NO REPRESENTATION IS BEING

MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFIT OR LOSSES SIMILAR TO

THOSE SHOWN.

There is a very high degree of risk involved in trading. Past results are not indicative of future

returns. Powercycletrading.com and all individuals affiliated with this site assume no

responsibilities for your trading and investment results. The indicators, strategies, columns, articles

and all other features are for educational purposes only and should not be construed as investment

advice. Information for any trading observations are obtained from sources believed to be reliable,

but we do not warrant its completeness or accuracy, or warrant any results from the use of the

information. Your use of the trading observations is entirely at your own risk and it is your sole

responsibility to evaluate the accuracy, completeness and usefulness of the information. By

downloading this book or any information from Powercycletrading.com your information may be

shared with our educational partners. You must assess the risk of any trade with your broker and

make your own independent decisions regarding any securities mentioned herein. Affiliates of

Powercycletrading.com may have a position or effect transactions in the securities described herein

(or options thereon) and/or otherwise employ trading strategies that may be consistent or

inconsistent with the provided strategies.



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