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5 Things You Need To Day Trade Emini S&P

By Lawrence  

imageIf you have experience buying stocks or trading other markets, forex included, the transition into day trading emini contracts is not as complex as it seems. Many people hearing the words Emini S&P would immediately associate that with complexity and mystic feelings because they do not have any idea what it is. The reality is much less sexy and more pragmatic. The main hurdles towards trading or day trading Emini S&P are simply basic knowledge of the contract itself and having the logistics setup properly. Here are the things you need to start day trading emini S&P.

You Need to Know What Emini S&P Is

Emini S&P is an index future contract based on the S&P500 stock market index. It is a structured financial product just like any others as far as a trader is concerned. You can trade it easily just like exchange listed stocks, commodity future contracts or forex. E-mini S&P has many closely related financial instruments because they are all designed to mimic the underlying S&P 500 Cash Index which is computed from the 500 component stocks of the index itself. As the components fluctuate, the price level of the index would follow, so do all the derivatives of the cash index as people speculate on the future price levels.

Some people prefer trading stocks because they think they know where the stock price is heading. Some people prefer trading stock market indices like the S&P 500 index through E-mini S&P or other means because they find that they have a better sense of the direction of the index than an individual stock. Some others like me prefer trading E-mini because of its better use of leverage (i.e. lower margin requirement as in stock market terms) and that it has more trading opportunities and better liquidity than many other markets.

Following are the main technical differences between trading Emini S&P and stocks:

  Emini S&P Stock
Per quoted price Each point in 1 contract represents $50 Each point in 1 share represents $1
Minimum movement 0.25 point 0.01 point
Expiration Yes, by the end of every quarter the current contract would expire. The exact date of expiration changes because it is based on calendar week schedule as oppose to a set day in the month No

A quick reference on E-mini S&P is available at Wikipedia on E-Mini S&P

You Need a Future Brokerage Account

You cannot trade Emini S&P from your stock brokerage account. If you are interested in trading Emini S&P or other future contracts. You need a future brokerage account. Notice that you may not need to find a completely unfamiliar future brokerage firm to open a new account there. Your current stock brokerage firm may offer future contract trading as well. It is wise to check out what they offer should they have future contract trading available.

Here is where things getting tricky. I have past and present relationships with many brokerages myself thus I cannot just throw a name out and say a certain one is the best one to go with. I have clients with various firms and some of my clients are brokerage firms. It is not appropriate for me to make a recommendation here. Instead, following is a guideline of what to look for and what to expect.

Classic Old-Style Firms Are Not Suitable For Emini Traders

Quite a number of classic old style brokerage firms (including those so called discount brokerages from the 1990s) do offer futures trading but they are often awfully expensive and inefficient. Even if they offer you the ability to trade Emini, you have to understand that many trading opportunities happen within a very tiny time window. If you still have to call someone to place your order, it is likely you are not going to get the price you think you are getting.

Some people actually told me they prefer to call someone to place their orders. I told them frankly they should forget about day trading Emini. Their need of human touch in their decision making process strongly implies that they cannot succeed in trading.

The technologies employed by these firms are also bureaucratically built hence useless in real trading. These software they have are made to please the management, not built for traders to make a living. As a trader, what you need may not be what you want. The first look at a trading platform can be very attractive to you, but completely useless in the eyes of real traders.

My advice is to avoid these old style firms when it comes to day trading Emini. There is no in-between experience or transitional attempt at trading Emini with these firms because you would learn nothing from the experience you have with them that will be useful with trading Emini elsewhere.

Low Margin Firms Are Good For Tech Savvy Seasoned Traders

The other extreme of the spectrum are the ultra low margin brokerages. These brokerages specialized in low margin for day trading and they offer very competitive commissions and fees with standardized software. Surprising to many people who immediately associate these brokerages with the word inferior, they are not. Many of these firms are reputable and they survive by economy of scale. Many of these firms focus mainly on professional traders who produce majority of the revenue while their retail business are just an extension.

The classic brokerages are inferior comparing to these firms in terms of trading execution speed and resolutions in resolving order problems and technical issues. If you are a technical savvy person and that you are an active trader in stocks or other financial instruments, these firms are your best bet to go with.

Retail Boutique Firms Strike A Good Balance For All

Somewhere in-between are the boutique brokerage firms that are famous among the retail traders because they put out the most effort in marketing. These firms are also often famous retail stock brokerages. Their strong reputations are built on their ability to deliver the best mix of services and technologies. Their fees in general are a tad higher than the low margin brokerages. These firms usually offer their own trading platforms which are not the standard ones you see available at the low margin firms. Some of these firms, however, offer you multiple platforms to choose from so that they can take on clients who prefer the standard platforms over their proprietary ones.

Account Safety First

One important thing to remember with brokerage firm selection is safety. Emini trading is regulated under the jurisdiction of Commodity Futures Trading Commission (CFTC) in the United States. The brokerages that offer you the service to trade Emini are regulated by CFTC. For the smaller firms, they have to use a Future Commission Merchant (FCM) to clear the transactions for them. It is similar to what happens in the regulated stock markets everywhere that have clearing firms responsible for the processing of the actual transactions behind the scene.

The most important thing you need to know about this mechanism is that your money is actually parked with the FCM when you open an account at a smaller brokerage. For the larger firms, they are FCM themselves. It is your responsibility to make sure your money is parked at a firm that you are comfortable with given their financial condition.

You can find out the latest financial data of all the FCMs at the CFTC website on the page Financial Data for FCMs.

You Need Enough Money to Fund the Brokerage Account

To fund your future brokerage account to trading the Emini, you need enough money to cover,

  • the minimum account balance requirement
  • the margin requirement
  • the potential fluctuation of the price while you are holding the contract
  • any extra requirement imposed by your brokerage firm

I did a lengthy discussion on the subject of how much money is necessary to trade the Emini, I am not going to repeat that here.

If You Can Afford It

In general, it is best to have enough money to cover the overnight margin, not just the day trading margin offered by your brokerage firm because you never know if your firm would revoke your privilege of using their special margin. It can be your bad behaviour like keep violating their margin rules. It can be the volatility of the market driving them to change the requirement. It does not matter what the reason is. What matters is that you do not want to wake up one day you cannot trade just because there is the sudden change in your margin arrangement with the brokerage firm.

Ideally, at least 3 times the overnight margin requirement would be sufficient for day trading 1 Emini contract while you learn to trade carefully. That translate to USD$4,600 x 3 = USD$13,800. More is better but not everyone has the luxury to access to that amount of money.

If You Are Pushing The Limit

If you choose to use a firm with day trading margin of only USD$500. I would still recommend having at least USD$7,500 in the account. The extra $7,000 is for covering the minimum account balance which for some reason stands at $1,500 to $2,000 across many firms, and your tuition fee / stake of $5,000 to bleed chips until you learn the basics.

Enough money is a very vague concept. Some people have to make more mistakes before they learn their lessons. Some people are unlucky and get caught in major market shocks before they get a chance to learn to protect themselves properly in trading. In general, the more capital you have at your disposal, the better the chance you have to eventually becoming proficient in trading.

You Need Software For Order Entry and Charting

As mentioned earlier, there exists quite a number of standard charting and order entry platforms for trading the Emini. The most famous ones among the institutional traders are X-Trader from Trading Technologies and CQG Trader from CQG. The most famous ones among the retail traders are J-Trader and NinjaTrader.

The proprietary platforms from individual brokerages offer their own favour of charting, order entry and other real-time trading tools. Among these proprietary platforms, the functionality varies and the design philosophy (if there is any) behind these platforms also various. Some focuses more on better order entry support while the others will give you a stronger charting tool.

Standard vs. Brokerage Proprietary Platforms

In general, if you prefer your platform experience and expertise developed on a platform to be transferrable from one brokerage to another, choose a standardized platform. That way you do not have to worry about spending time to learn a new trading environment all over again. In fact, the very reason why brokerages prefer not to offer a standardized platform is that they would like to lock in their clients with their trading platform so that the clients will not move their accounts to another brokerage easily.

Personally, I prefer X-Trader for order entry myself over the other ones because I can interface with their software to customize the way my orders are handled. Since I have built my tools around it for a long time, in a sense I am locked in to their technology. I have access to all the other standardized order entry platforms due to the nature of my work. My experience with CQG Trader and NinjaTrader as order entry platforms are about the same – both are decent order entry tools. J-Trader should be avoided because there are quite a number of problems reported about the platform over the years which makes it less suitable for engaging in very busy markets like Emini.

Real-Time Streaming Data Services

Up to this point I have not mentioned a unique service related to order entry and charting. It is real-time data streaming service. There are data vendors offering real-time streaming data and various kind of on-demand historical data. These services cost extra money, usually charged on monthly basis, on the data you choose to stream in real-time. The main difference in using such services is that your data source will be completely independent from the data provided by your brokerage. It means all your brokerage is doing for you is their service of order execution.

There are several advantages with this arrangement. If you trade multiple financial instruments through multiple brokerages, it is often desirable to get the data from a centralized source. Another issue with brokerage data is that the data streaming technology of the brokerage firms are often not as good as the data vendors with many years of data delivery experience. One good example is that during very chaotic market conditions like back in year 2009, data streaming from many brokerages at the time simply broke down during trading hours while the professional data streaming services all working fine.

Obviously, having a third party real-time data service is costly comparing to the free data you get from the brokerages. However, if you prefer clean data, better control of your trading environment and a backup data source for your trading, these data services have their value for the serious traders.

You Need to Spend Time to Understand Emini

Time is the last thing most people think about when it comes to day trading. After all, the reason many people give day trading Emini a try is that they think it is a good way to make money fast. I am telling you upfront that you need to spend a considerable amount of time first, in order to day trade Emini successfully. If you cannot afford to spend the time necessary, it is better that you do not trade Emini at all.

Importance of Screen Time

It is important, at least in the beginning, to monitor how Emini S&P trades during the first 30 minutes to an hour of the trading day and if possible the last hour of trading. The time spend on monitoring Emini (or any other markets) is called screen time. The goal is not to engage in trading just yet. The goal is to season yourself into understanding the speed of Emini relative to your prior experience with other markets so that you can make the adjustment necessary.

This screen time requirement is necessary even if you plan to trade mechanically. You need to be able to operate proficiently with basic order entries and know where to find the current price on your platform. The truth is that your automated trading systems will fail one day and if you do not even know what to do exactly to get yourself out of the mess created by your trading systems, you have no one else to blame but yourself.

Importance of Research and Self Study Time

You also need to spend a lot of time studying the charts of Emini from the past. Acquire as much data as you can for your platform so that you can get yourself familiar with the way Emini moves. Before trying out all the fancy things you see people doing on their charts, there is one simple thing many people have forgotten – the historical data itself. By spending enough time with the data without anything else, people often develop a nature feel of Emini just because they are willing to spend countless number of hours reading the historical charts.

A Realistic Schedule

Many beginner traders interested in day trading Emini have an unrealistic schedule in mind. For example, they may think that all it takes would be a month or two to figure it all out. In my not so scientific observations of new firm traders and retail traders, the time requirement is very different from what the beginners have in mind. On part-time basis, those who are willing to commit 20 hours a week on research and study, with 2 to 3 hours screen time a day, will become quite proficient in trading after 6 months if they focus on just one to two well defined trading setups. That means no fancy indicators, no discretionary opinions of their own and no trades outside of the trading setups they have spend all their time studying.

Screen Time Is Not The Same As Training

Those who just keep staring at the screen thinking that they are putting in hours on screen time are likely to fail because they have not developed a road map in their heads first. That comes from the 20 hours a week research and study. The studying effort enables you to develop a plan. Even a simple plan is way better than no plan because trading decisions made in a rush are more prone to mistakes and emotional influence. For beginners, this plan has to be very restrictive so that it would probably engage the market once every few days.

Correcting Bad Habits Also Takes Time

For those who have picked up bad habits in trading, wired their minds with fancy indicators affecting their decision making, it will take time to correct them. Similar to helping addicts to overcome their addictions, the resolution is quite simple – do what a beginner should have done and start from a simple trading plan with restrictive trading until discipline, patience and clarity of mind is developed. The time necessary to correct all kinds of trading issues varies from person to person.

It Sounds Easy Because It Is

This covers the requirements for anyone who is interested in day trading emini S&P. It is in fact as easy as opening an account to trade stocks or forex. Well, it is not complex to have an account opened to trade pretty much anything.

The complex part comes later when you have to learn the basics of order placement and how to use your trading software efficiently. Remember though, being proficient with the mechanics of trading does not imply you will make money day trading emini S&P.

The money making part will be subjected to your ability to develop your trading skills and master your emotions over time, which is something outside of the scope of this article.

Part of Definitive Guide to Emini S&P Day Trading Success

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Comments
  • MidKnight  September 3, 2014 at 21:09:50

    A Realistic Schedule:
    “That means no fancy indicators, no discretionary opinions of their own and no trades outside of the trading setups they have spend all their time studying.”

    The reality though, is that very few are able to focus this precisely. It takes time to figure out what works in what markets and to figure out what psychological issues one has. Myself, as a self-directed and self-taught trader, it took me 4 years of beyond full-time efforts. 6 months would have been a dream for me – I’m slow, what can I say :) Everyone is different.

  • Lawrence Chan  September 4, 2014 at 11:40:10

    Those kids hired by their firms have a shorten path because they get a better introduction into the game from pro traders. They get to see first hand what not to do which means at least 6 months to a year of self learning time saved. They are also forced to focus on the very few things taught to them as those who refused to follow the protocol are kicked out quickly.

    Retail traders are fed with b.s. right from the start because those b.s. are more appealing to them. You cannot blame the financial industry for that. =P

    In other words, retail traders spend their first years learning all the wrong things in trading. Then lots of time to correct them until they are back to square one. Those willing to start from square one again get the chance to beat the game.

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