If I Could Only Trade One E-mini Strategy, This Would Be It

E-mini futures are a phenomenal financial instrument with which to day trade the stock market. E-minis are transparent, liquid, and cheap, which is why so many retail traders are trading them. In this article, I'll detail the characteristics of the more popular e-minis and show you how to use them with three simple daytrading approaches.

The Chicago Mercantile Exchange (CME) introduced mini-sized versions of the S&P 500 and NASDAQ-100 futures in the late '90s. These mini-sized contracts were not only smaller in size, tick values, and margin requirements, they were also traded electronically...and that's where the term 'e-mini' comes from. But nowadays, with gold, oil, and other small contracts trading on the screens, the term 'e-mini' is used in trading circles to describe a whole host of electronically traded contracts.

The S&P 500 (ES) and NASDAQ-100 (NQ) remain among the most popular e-minis. Also included are the Russell 2000 (ER) and Dow Jones Industrial Average (YM). The ER e-mini, like the ES and NQ, trades on the CME, while the YM trades on the Chicago Board of Trade (CBOT). These four e-mini contracts, based on the most closely-watched U.S. equity index averages, are among the most popular choices for day trading. Other mini futures contracts are catching on, however, such as the aforementioned gold and oil mini futures.

ES ($50 per point)

The popularity of the indices e-minis stems from the massive liquidity that is available. The ES routinely trades over 1 million contracts per day during regular trading hours, and a couple hundred thousand contracts during the overnight session. To put this into perspective, you can very easily buy or sell 500 ES contracts during the day, which amounts to about $30,000,000 worth of futures. Trades of 500, even 1000 contracts clear all day long, without adversely impacting the bid/ask spread.

Each point in the ES is worth $50, so if you buy one contract at 1280.00 and it goes to 1284.00, you've made $200 ($50 x 4 = $200). (The 500 lot trader would clear $100,000 on four points!) The minimum fluctuation of the ES is 0.25 points, which makes each tick worth $12.50.

The daily chart below of the ES includes the volume, 10-day average volume, and the 10-day Average True Range (ATR). I've included the ATR, which is a basic measure of volatility, to reveal the dollar potential of the contract. The ATR, although imperfect, will give us an idea of how much profit potential the ES is trading with. The way I look at it is like this: The ATR is at about 14, and each one of those 14 points is worth $50 per contract, so there's about $700 per contract in dollar movement going on in the ES.

Source: Quote.com

NQ ($20 Per Point)

The ES is the most popular of the e-minis based on trading volume. Coming in second is the NQ, which trades about one-quarter the volume of the ES each day. The NQ is different in other ways, too, such as its minimum tick value and daily volatility. Each point in the NQ is worth $20, and like the ES, the NQ trades in quarter point increments. Each tick in the NQ, therefore, is worth $5 per contract.

The daily fluctuations of the NQ are much larger than the ES. Perhaps that stems from the fact that there are 400 fewer stocks in the underlying index of the NQ, and that most of those underlying equities are volatile tech stocks. Whatever the reason, the NQ averages about 25 points per day based on the 10-day ATR. That gives the NQ about $500 (25 x $20) of movement per day, per contract.


Source: Quote.com

ER ($100 Per Point)

Coming in third place among the equity indices and based simply on daily volume totals, is the ER. About 150,000 contracts change hands every day. But of the the four indices, the ER offers the most dollar potential on an intraday basis. The big movement of the ER and its comparatively high tick value, are the reasons why I focus primarily on this contract in my own trading.

Each point in the ER is worth $100, and the contract trades in $0.10 increments, so each tick is worth $10 per contract. But here's where it gets interesting: The 10-day ATR is about 13; therefore, each day there's about $1300 of profit potential ($100 x 13). The profit potential in the ER dwarfs that available in the ES and NQ. But with that increased volatility comes greater risk. That's why the ER is probably not the best contract to start day trading with, especially for beginners new to the futures market. The slower moving contracts like the ES or NQ are better places to begin learning how to day trade with e-mini futures.


Source: Quote.com

YM ($5 Per Point)

The fourth and final equity index e-mini that we'll take a look at is the YM, based on Dow Jones Industrial Average. The YM trades about 100,000 contracts per day, making it the least popular of the four contracts. I don't know exactly why the YM hasn't caught on more with traders. After all, it's based on the Dow, which is much more visible and popular than the Russell 2000, for example. Perhaps the lower trading volume is a reflection of traders' preference for the CME's trading platform, Globex, over that of the CBOT's electronic equivalent.

Each point in the YM is worth $5, and the contract trades in one-point increments. If you bought one contract at 11225 and sold it at 11235, you would net ten points and make $50 ($5 x 10). The 10-day ATR for the YM is at 119, giving the contract about $600 of potential each day. As you can see, the dollar volatility of the YM is similar to the figures for the ES and NQ.

To learn more about the contract specifications for the YM, including margin requirements, you can visit the YM product overview on the CBOT's web site. If you explore the CBOT site, you will find an extensive listing of other futures contracts, including several different Dow Jones Industrial contracts that are worth $10 and $25 per point.

Source: Quote.com

The reason that I've gone through explaining the different characteristics of each equity index e-mini is to help you decide which contract best fits with your trading style, risk tolerance, and account equity. But you don't necessarily have to choose one contract and only trade it. The argument for trading all four equity index e-minis is that from day to day, one will be over- or under-performing the others.

I'm sure you've noticed that on some days small caps out perform large caps, which would make the ER a better buy than the YM on that particular day. This phenomenon is referred to as relative strength, and it plays out every day in the market. If the day has an overall upward bias, it would make sense to buy the e-mini that is trading the strongest. Conversely, if the overall trend of the day is downward, then it would make the most sense to short the contract that is trading the weakest.

If you are going to monitor and trade all four equity index e-minis, then you can follow a few simple steps each day when deciding on which contract to trade.

1. Define the day's trend. This can be done through casual observation such as assessing the day's change from yesterday's close, or defined with indicators or quantitative analysis. However you do it, define the trend of the day as up or down.

2. Buy the contract that is trading the strongest, i.e. biggest percentage gain for the day, if the market is in an upward trend.

3. Sell the contract that is trading the weakest, i.e. biggest percent loss for the day, if the market is in a downward trend.

4. Cut losses short with a technically-based stop loss in the event that the day's trend reverses.

5. Let profits run.

Monitoring all four contracts does require more attention and possibly additional technology resources such as multiple monitors. But daytrading the e-minis can be made simpler by following just one of the contracts. As I wrote earlier, I primarily trade the ER because, dollar for dollar, it has the biggest swings of the four futures. But that may not make the ER right for you, especially if you're just getting started with trading the e-minis. One of the slower moving contracts, in fact, might be a better choice for beginners. Further, I'm not trading with a multi-million dollar account, so I can afford to be a little more nimble with my entries and exits; I don't need the liquidity of the ES or NQ. I can move 20 contracts in the ER pretty easily, without adversely impacting the bid and ask. If I were trading 100 or 200 contracts at a time, however, then I would instead use the ES or NQ.

Day Trading The E-minis

It doesn't matter if you're trading one lot or 500 contracts at a time. It doesn't matter if you're focusing on the ER, or trading all four e-minis every day. Successful day trading can be reduced to one simple truth: following the day's trend. You can put yourself ahead of the competition and far along the learning curve by accepting the fact that market's trend, and within those trends is the potential for profit. It's cliché, I know, but too many day traders try to fight it. They try to go against the trend by looking for tops and bottoms, going against the tide for the day. The trend fighters will eventually find themselves on the top of a pile of traders who were forced into premature retirement because they lost it all. You can stay off that heap of busted traders by going with the flow of the day, and sticking with the trend.

Sure, the trend can change on an intraday basis. It does all of the time. And when you observe such a change, you can adapt, be flexible, and go with the new trend. But trying to time when the day's trend is going to end will eventually lead to financial ruin. The bottom line: trade with the intraday trend.

Of course, defining the trend is where we move away from the theory and into practical application. There are three ways that I like to define the trend of the day: using support and resistance; observing higher highs and lows or lower highs and lows; applying technical indicators. You can use one of these three approaches on a standalone basis, or you can combine all three into a comprehensive approach to day trading the e-minis.

Support And Resistance: Daily Pivot Points

My preferred way of applying support and resistance techniques to day trading the e-minis is through the use of daily pivot points. I apply common techniques around the pivot points, such as buying bounces off of support in an upward trend or buying breakouts above resistance. In downward trends, I look to short on breaks below support or upon rollovers from resistance. It's that simple.

I've pulled an example of a trend day to show how the pivot points can help to gauge the strength of the day's trend, and offer entry points into such a move. The example that I'm using is of a flat-out trend day, one during which fortunes can be made by simply going with the flow of the day. I've used the ER to demonstrate how simply buying breakouts above intraday resistance can put you in the position to profit.

Source: Quote.com

There were three false breakouts during this day that probably would have resulted in small losses. Two false starts near the start of the session, and one false start late in the day. But there were three other breakouts that would have put you in the position for about 13 points of profit, or $1300 per contract, from 697.00 to 610.00. All by simply following the trend.

Higher Highs/Lower Lows

Observing higher highs and lows is an easy way to define an upward trend, while looking for lower lows and highs is a simple way of defining a downward trend. The key is to keep your observations to one time frame, and not use multiple timeframe analysis. Scanning multiple timeframes, looking for higher highs or lower lows, will only confuse you. If you're going to use this method, just stick with one timeframe, which brings up an interesting question about what timeframe you should use.

I've seen day traders in the e-minis use hourly intervals all the way down to ticks. Generally the shorter the interval, the smaller the trend, and the greater the transaction costs. I think it's wise to find a happy medium when considering what timeframe you will trade. Usually somewhere between the 2- and 10-minute intervals will serve you well.

For illustrating this strategy, I've used a 10-minute chart of the YM. On this particular day, you will see an early downward trend, and then a change in trend, which led to more than 100 points from low to high.

Source: Quote.com

The YM changed its direction after observing the formation of HH1 and HL1. We only know this with the benefit of hindsight, after these lows formed. But after HL1 formed, and the YM surpassed HH1, you could have pulled the trigger on long position since the contract was on its way to a higher high. If you missed that move, then a new bullish entry anywhere remotely close to HL2, with a stop placed below HL1, would have most likely resulted in a good profit as the YM moved up another 60 points towards HH3.

Looking for higher highs and lows in the case of an upward trend takes patience. Truthfully, I usually wait out the first hour of trading before applying this method. The same holds true for a downward trend, when looking for lower lows and highs. But this can be a great way to define the day's trend, or determine when the trend has changed. Further, you can use previous highs and lows as stop levels.

Systematic Trading With Indicators

The third way that I define the trend of the day is through the use of technical indicators. These tools could be applied on a standalone basis, such as buying and selling crossovers in the MACD, or trading reversal zones in the RSI, or using the slop of moving averages to define the trend of the day. But I like to combine a few simple technical indicators to come up with a systematic approach to trading the e-minis.

Here's a combination of two of my favorite indicators, stochastics and moving averages, and the rules that make up a daytrading system:

1. The system can be applied to a 1-minute chart up to a 10-minute chart.

2. The trend is defined by the relationship of two moving averages: 5- and 25-period simple moving averages (SMA). The trend is up if the 5 is above the 25, and the trend is down if the 5 is below the 25. (You can experiment with any combination of moving averages.)

3. The stochastic gives buy and sell signals when %K crosses %D. A buy signal is generated when %K crosses up through %D, and a sell signal is generated when %K crosses down below %D.

4. Take buy signals from stochastics only in an upward trend, as defined by the moving averages. Take sell signals only in a downward trend, as defined by the moving averages.

5. Exit a long when the 5 crosses below the 25. Exit a short when the 5 crosses above the 25.

That's it, a very simple system that you can use the day trade the e-minis. Here's an example of the system applied to the ES at a 5-minute interval.

Source: Quote.com