Defining Wealth - A How To Guide For Emini Traders
December 26, 2012 at 4:55 PM (QQQ)(AMZN)(FB)(NFLX)(SPY)
Defining Wealth 2 Points At A Time -
A "How To" Guide For Emini Traders
Today's topic is 2 Points. Specifically, 2 Points in the S&P500 Emini Futures. Each market has its own equivalent so don't leave the room just yet. If you like trading Dow Futures, the corollary is 20 points. Prefer the Russell? Just 1 point will do it. Soybeans? This is where you put your 2 cents in. In other words, our discussion can be applied to any market that has sufficient daily range and liquidity.
Let's look at an average day in the S&P -
Average Day - S&P Emini Futures
Each vertical line on the chart above is exactly 2 points. This is a 24 hour Globex chart. One of the reasons this market is so popular is because of round the clock liquidity. As I type it's 8:31PM EST and Wall Street is officialy closed. However, the markets are not -
S&P Emini Dom
There are 1,683 contracts on the bid and 1,422 on the ask. In our last post we discussed trading 10 contracts for a daily net gain of 2 points. The chart above gives you an indication of how often, over the course of a day, the market actually makes 2 points available. The snapshot of my order entry platform shows that even after the suits go home, you can still get your dance card punched. The first slot on the bid side shows an offer to buy 61 contracts at 1414.75. One tick higher at 1415.00 there are 70 contracts for sale. If you're a buyer you can wait for the price to come down, or you can drive 'em home right now by upping your offer $12.50 per contract. If you're the seller, you can wait it out, or sell out, by reducing your price $12.50 per contract. Each tick is $12.50 and there are 4 ticks in each point. A point is when price goes from 1414.00 to 1415.00. The 2 points we're after, is 8 ticks. 8 X $12.50 = $100.
Now that we know the opportunity exists, how do we participate? Carefully...
From this viewpoint is looks ridiculously simple doesn't it. Just reach out and grab 'em right? If the market is climbing, buy some. If it's falling, sell some. Did I mention that part yet? If the market is dropping, you can be a seller even though you don't own any. It's called going short and yes you do pay for the privilege just as you do when buying the market. My point is simply this - 2 points are always available no matter which direction the market is traveling.
Frequently Asked Questions (F.A.Q.)
What is an Emini Contract?
- A stock index futures contract
What is that?
- A futures contract is an agreement between two parties to buy or sell a specified asset of standardized quantity and quality for a price agreed upon today with delivery and payment occurring at a specified future date.
What is the quantity and quality of an S&P 500 Emini contract?
- 1 contract represents a fractional value of all 500 "best of breed" companies in the S&P 500.
How is the value of 1 contract determined?
- Multiply the current value of the S&P500 Index times $50. If the S&P500 is trading at 1400, the equation would look like this > 1400 X $50 = $70,000
1 S&P500 Emini contract is currently worth $70,000?
- It represents $70,000 worth of stock in those 500 companies. (yes)
How much does it cost to buy 1 contract?
- Many brokers will allow you to borrow one for $500 during the day. If you want to keep it overnight or longer, it will cost you $5,000+. This is called margin.
How do I make money?
- By the rise and fall of the price of the underlying securities. (S&P = 500 companies)
How does the broker make money?
- He charges you a transaction fee or commission each time you buy or sell an Emini contract.
What happens to my security deposit (margin)?
- Once your transaction is complete, the broker will credit the full amount back to your account less the transaction fee and plus or minus any change in value of the underlying securities that took place while the Emini contract was in your possession.
My head hurts.
- This is not uncommon among Emini traders.
The Transfer Of Wealth
Everything I've told you is the absolute Emini truth. No fibbing! Just to make sure we're clear, let's hit the highlights one more time.
- The S&P 500 E-mini contract trades 23.5 hours a day from Sunday 5PM CST until 3:15PM CST on Friday.
- There is sufficient liquidity for a 10-30 contract trader around the clock.
- As a trader you control $70,000 of equity for as little as $500.
- 2 Points net, adds $100 of equity to your trading account for every contract traded. If it takes 1 trade or 100 trades, 2 Points net still adds exactly $100 of equity to your trading account for every contract traded.
- The current daily range of the S&P 500 is 16 points. Today's high was 1425.50. Today's low was 1410.75. Today's range was 14.75 points. Here's where it gets interesting - the market dropped from 1425.50 to 1410.75, it then rallied back up to 1419.50 (8.75 points) and dropped all the way down to 1411 (8.5 points). So on a day when the S&P Emini had a range of 14.75 points, it traveled a total of 14.75 + 8.75 + 8.5 = 32 points. This is not unusual. You would need to look at a chart of today's price movement to determine whether or not you could have extracted 2 points net. I will show you today's movement on an hourly chart followed by a 10,000 contract volume chart.
(ES) Emini Futures - Hourly Chart
(ES) Emini Futures - Volume Chart
So, if in fact, everything I've told you is the true Emini skinny (and it is), why is there poverty in the world today? Why are more American's on food stamps then ever before? Why are people around the world losing their homes, their jobs, their hope? Why will 15 children die of hunger related illness in the next 60 seconds?
Tune in tomorrow for the answer...
As opportunities unfold we'll keep you posted.
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