Benefits Of Trading Emini Futures
January 29, 2013 at 10:03 PM (RIMM)(QQQ)(SPY)(DIA)(SODA)
Benefits Of Trading Emini Futures Compared To Stocks
We all have unique financial situations including account size and varying levels of experience in whatever markets we have traded in the past. In this article we will cover a few of the reasons why Emini Futures have become one of the most popular trading vehicles worldwide.
If you have a reason that I've not listed, please share it with our readers using the comment box below.
- Liquidity - Most all Emini's offer decent volume, but the S&P500 is the liquidity kingpin. Average daily volume for the ES is 1-2 million contracts. Even in the dead of night, somebody.. somewhere.. is trading the S&P. Rarely, if ever, will you see more than 1 tick between the bid and ask price. To give you an idea, it's 1:30AM EST as I type. There are 121 contracts on the Bid and 103 on the Ask, separated by 1 tick. As you can see from the DOM (Depth of Market) below, even in the wee hours you can find someone to take the other side of your trade.
Total liquidity showing at the moment - 6,531 contracts on the Bid and 3,728 on the Ask. With almost twice as much showing on the bid side, which way do you think the market will move short term? The obvious answer is UP, right? You might make note of the time on the DOM (Mountain Standard Time) which is 2 hours behind Wall Street. Check your own Time & Sales when you read this and you might be surprised at what happened. We have some thoughts that are a bit contrarian regarding "reading the tape". Drop by the Live Trading Room and we'll be happy to discuss it with you.
(ES) S&P500 Emini Order Entry DOM
- Pattern Day Trading - In the world of stocks, if you make 3 round turn transactions in 5 days, you will be labeled a Pattern Day Trader. While that's not a bad thing, the financial ramifications are certainly different with futures than with equities. Pattern Day Traders must maintain a minimum $25,000 account balance. If you violate this rule, your account can be frozen for up to 90 days. Most likely you'll get a warning the first time, but the good news is - there are no such rules when trading the Emini. You can open an account with as little as $3,000.00 and you are free to buy and sell as often as you like without penalty, or name calling.
- Day Trading Margins - Not only are you able to trade with less than $25,000 in your account, you can day trade the Emini for just $500 per contract with Daniels Trading. Keep in mind that leverage is a double edged sword. You are controlling $75,000 worth of stock, for $500. The formula is - Current value of the S&P ($1500) X $50 = $75,000.00. If the S&P were trading at $1000 the formula would look like this - $1000 x $50 = $50,000. Keep in mind, $500 is what you are required to put up to place the trade, this does not mean you are risking $500 on the trade. You can risk as much or as little as you like and control the risk to the tick through the use of brackets and stop loss orders. We'll cover this in Part 2.
- Emini Market is 100% Electronic. Without a market maker in sight, you are guaranteed FIFO (First In First Out) whether you're a retail trader or Goldman Sachs. This is a level playing field and all players are treated equal.
- Taxes - Emini Futures receive preferential tax treatment via the 60/40 split. 60% of your profits are considered Long Term even if the trade only lasts 5 minutes. The other 40% is considered Short Term and taxed accordingly. Be sure to discuss this with a tax professional. Some tax professionals might not be aware of this important point, but they will be able to research, verify and guide you accordingly. For those who day trade stocks, every transaction must be individually recorded. This can be time consuming and nerve racking. As an Emini Trader, you will receive a 1099 with one figure on it. It will show your net profit or loss for the year. You may place thousands of trades over the year, but at tax time your tax professional only has to enter one number, on one line. This particular benefit is nothing short of miraculous.
We will continue this article tomorrow...
As opportunities unfold we'll keep you posted.
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