An introduction to daytrading the S&P e-mini futures (/ES)

2. Stocks vs. Options vs. Futures
Stocks Options Futures
Minimum $25,000 $25,000 As low as $3,000
acct. balance (depends on broker)
to day trade
Leverage Between 0x Around 15x for Between 8x and 87x
and 2x ATM option
Equivalents 500 shares 10 ATM calls 1 future contract
Capital 100% short 100% short 1256 contracts = 40%
gains: term term short term 60% long
daytrading term
Non-1256 contracts =
100% short term

3. Advantages of Trading the ES
(S&P e-mini)
 No pattern day trading rule
 Efficient use of capital
 1256 contract means 60% gains/losses
taxed at long term rate
 VOLATILE!

4. Futures Basics
 Futures trade on margin
 Initial margin amount is set by the exchange
and is subject to change
 Example: ES is set by CME at $5,625 per contract
 Each future has a different tick amount, dollar
value per tick, and trading hours, expiration
dates
 Know these before considering trading a specific
future

6. Futures Basics
 Futures are speculations about future prices,
NOT what the future will actually bring
 Always a buyer and seller
 No difference between buying and selling
 Contracts have expiration dates similar to
options
 But no greeks (other than delta)
 At expiration, held contracts must be
performed
 Goods exchanged, cash settled, etc
 Never hold over expiration!

7. Futures Naming Format
 /XXY#
 XX = Symbol name
○ S&P 500 e-mini = ES
 Y = month code
○ June = M
 # = last digit of the year
○ 2009 = 9
 Example:
 June 2009 S&P e-mini = /ESM9

8. Types of Futures
 Commodity Futures
 Gold, Corn, Wheat, Oil, Natural Gas, etc.
 Index Futures
 S&P 500, Dow, NASDAQ, Russell 2000, FTSE,
Nikkei, etc.
 Forex Futures
 Euro, Pound, Yen, Aussie, etc.
 Interest Rates
 30 year Treasury bond, 10 year, etc.
 Weather
 Cooling, Heating, Hurricanes, Snowfall, etc.

9. How Futures Margin Works
 Trader puts up a performance bond (margin) to
guarantee against losses
 ES - $5,625 initial margin controls $43,300
 Gains and losses are settled immediately
 Margin call if account less than 80% of initial
margin
 Intraday margins are set by the broker (like
TOS) and not by the exchange
 These vary from as low as $500 to as high as the
initial $5,625
 TOS is 25% of the initial margin = $1,406.25 (30x
leverage)

10. Why Trade the ES (S&P
500 e-mini)
 Most liquid of all futures products
 Widely followed and discussed
 Best representative of the market as a
whole
 Best way to introduce yourself into the
futures market
 Some people make their entire living off
of this one product

12. ES Basics
 Tick size = 0.25 point
 Tick dollar increment = $12.50
 4 ticks per point
 1 point = $50
 Average daily range – currently around 25 points
 $50 * 25 = $1,250
 Trading Hours: 24/5
 Intraday hours: 9:30am to 4:15pm EST
 Closed from 4:15pm to 4:30pm EST daily
 Weekly: Open Sunday 6pm to Friday 4:15pm EST
 For more information check out www.CME.com

16. Importance of Volume
 Volume and liquidity are very important for
short term futures trading
 Bid / Ask should be 1 tick wide
 Daytraders need to get in and out quickly
 Each future has different time frames when
volume is heaviest
 Examples:
○ S&P (ES) – best during US market hours
○ Euro currency (6E) best during European market
hours

19. Importance of Commissions
 If you trade with any volume,
commissions are vital
 Scenario 1: 10 round-trip trades per day,
5 contracts, $3.50 commissions ($7 RT)
 10 * 5 * $7 = $350 per day
 $350 * 5 = $1,750 per week
 $1,750 * 4 = $7,000 per month
 $7,000 * 12 = $84,000 per year

20. Importance of Commissions
 Scenario 2: 10 round-trip trades per
day, 5 contracts, $2.20 commissions
($4.40 RT)
 10 * 5 * $4.40 = $220 per day
 $220 * 5 = $1,100 per week
 $1,100 * 4 = $4,400 per month
 $4,400 * 12 = $52,800 per year

21. Importance of Commissions
$3.50 comm. $2.20 comm. Savings
Daily $350 $220 $130
Weekly $1,750 $1,100 $650
Monthly $7,000 $4,400 $2,600
Yearly $84,000 $52,800 $31,200
$31,200 = Annual salary working
full time at $15 per hour

22. Profit Potential:
Conservative
 Using scenario 2 from before:
 10 trades per day, 5 contracts, $2.20
commissions
 Assume conservative average of 2 points per
day
 2 points * 5 contracts * $50 per point = $500
 $500 - $220 commissions = $280 per day
 $280 * 5 = $1,400 per week
 $1,400 * 4 = $5,600 per month
 $5,600 * 12 = $67,200 per year

23. Profit Potential: Aggressive
 Same scenario:
 10 trades per day, 5 contracts, $2.20
commissions
 Now assume aggressive average of 6 points
per day
 6 points * 5 contracts * $50 per point = $1,500
 $1,500 - $220 commissions = $1,280 per day
 $1,280 * 5 = $6,400 per week
 $6,400 * 4 = $25,600 per month
 $25,600 * 12 = $307,200 per year

24. Choosing a Broker
1. Software / Tools
2. Commissions
3. Data Feed
4. Intraday Margin
 $500 to $5,625
5. Customer Service

25. Recommended Brokers
 www.mirusfutures.com
 www.thinkorswim.com
 www.interactivebrokers.com
 www.infinityfutures.com
 www.alaron.com
 www.mfglobalfutures.com
 www.pfgbest.com

26. Tools of the Trade: Charts
 Futures can be fast movers
 Many futures day traders prefer to use
tick or constant volume bar charts
 Warning: Prophet charts are terrible for
intraday futures trading
 Recommend TOS charts or NinjaTrader
charts with a good data feed

29. Tools of the Trade: DOM
Ladder
 Allows you to set multiple price targets
and stops
 Easy visual representation of the market
 Shows depth of market (DOM)

32. Tools of the Trade:
Technicals
 Moving Averages
 Oscillators
 Trendlines
 Price Patterns
 Pivot Points
 Fibonacci Retracements
 Value Areas
 **too deep to go into all these today**

33. LEVERAGE WARNING!!!
 The majority of futures traders blow out
their account very quickly
 Respect the leverage!
 Start in Simulation / Papermoney
 Do not hold overnight yet
 ALWAYS have a stop loss in place
 Progress to 1 live contract after
consecutive long term successes
 Continue progression slowly