When day trading futures, you enter and exit all positions in
the same day - never carrying a position overnight. Since the
overnight moves of the market are difficult to predict, many
traders avoid risk by day trading. Ironically, the public
believes that day trading is the riskiest way to trade.
THIS IS A MYTH !
Some traders day trading futures, make 1 to 3 trades per day,
trying to catch the major intraday moves. Others trade
in-and-out very frequently, trying to "scalp" a small profit on
each trade. (My style uses a unique blend of these two
strategies.)
For those day trading futures, the Emini Stock Index Futures
have become the most popular day trading vehicle because of
their liquidity, leverage, and the ease of trading them online.
You can go short or long with equal ease - unlike stocks where
it's easier to go long than short due to the "up tick" rule.
The time relationship of the eminis (and the "big contracts")
to the cash indices is important to understand. Let's start from
square one.
The S&P 500 stock index (the cash index, symbol SPX) is central
to day trading futures. It has an Exchange Traded Fund (the
"Spyders," symbol SPY) that trades like a stock, but without the
"up tick" rule. The price of the S&P 500 cash index moves up and
down with the 500 stocks that make up the index. The SPYders
follow the S&P 500 cash index very closely. You can trade
Exchange Traded Funds such as the SPY (and QQQQ for the Nasdaq
100) online from home. But for day traders, they are not as
favorable as day trading futures.
The concept of "futures" is a little confusing, but it boils
down to this: the financial industry has turned the S&P 500 cash
index into a "contract" that trades like a stock. The contract
(or futures contract) has a price that goes up and down from one
moment to the next. It has a chart that looks just like stock
chart, and you can make money with it by buying low and selling
high, or vice versa. That's a complicated as it needs to be for
now.
The "big contracts" or SP Maxis were invented first and they're
still around. With the big contracts, a lot of money changes
hands. When the price of the SP Maxis moves one point, $250 per
contract moves with it. The SP Maxi contracts trade in a literal
"pit" where the traders, called "locals," shout at each other,
buying and selling for everyone who wants a piece of the action.
The locals are not public servants, of course, they make money
for their own accounts. They have the advantage of being able to
read each other's body language and the tone of the other
trader's voices. They see what the strongest traders in the pit
are doing. They have several other advantages too, their costs
per trade are tiny compared to the public's commissions.
The "locals" aren't born as professional traders though, they
learn to trade like everyone else, except they have a huge
advantage in learning as well because they learn to scalp first!
Their instant access and low commissions make this possible
compared to others, but those day trading futures online can
take advantage of scalping trades as well.
Scalping is basically limiting your losses to only one or two
ticks while taking any profit you get as you get it. It's easier
than going for several points per trade, I've been using this
strategy day trading futures with much success.
Locals also use the spread (the difference between the bid and
ask price), to grab quick profits from orders that come in on
either side of the market. This makes scalping easier for them.
In the past, all these advantages made it impossible for a
"retail" day trader to be a successful scalper. It was insane to
try. And to this day many traders have the idea that scalping is
too difficult for the public because you have to compete against
traders with an unfair advantage.
But all that has changed now. If you follow some simple, yet
important guidelines then you too can be successful scalping and
day trading futures online.
They took the concept of the Maxi futures contracts and came up
with smaller contracts (the eminis) that move $50.00 per SP
point instead of $250.00. This allows all traders, big and
small, to trade the stock index futures.
But even more radically, they set it up so that the smaller
contracts (the eminis) are traded only through computers. This
was revolutionary, they bypassed the pit, taking away the
advantage of the "locals," and leveling the playing field in a
way that has never been done before. And to level the field even
more, retail commission costs fell like a rock. Today, any
trader day trading futures with a small account can pay $4.80
per round turn (entering and exiting a trade).
This means that scalping is open to the day trading public for
the first time in history. But most people who are day trading
futures don't even realize where the new advantage really is.
Scalping is one of the keys to making a living day trading
futures as I do, because I follow a simple rule: "Every trade
starts out as a scalp until proven otherwise" .
The SP emini futures became more and more popular and more
liquid, breaking a lot of records along the way.
The SP Maxis futures and the SP emini futures are both derived
from the S&P 500 index (symbol SPX), which, as I said, has an
ETF that trades like a stock (symbol SPY).
So the question is - which of these is the leader and which are
followers?
Today the emini futures track the Maxi contracts almost tick
for tick, with the emini's beginning to lead the Maxi's at
times, and also "overshooting" the Maxis at emotional extremes,
such as the at the top of an intraday rally.
Both the SP eminis and the SP Maxis (the futures) lead the S&P
500 cash index by a variable amount of time, often in the range
of a fraction of a second. Some people call this "the tail
wagging the dog," because the futures are derivatives of the
stock indices, but call it what you want, the futures are
leading the way.
The fact that the futures lead the markets makes their chart
patterns more "pure" and reliable for support and resistance
trading. This makes a huge difference to me.
I use the stock index futures (the eminis and Maxis) for
calculating daily support and resistance areas, which are the
basis of my own trading style - a style of trading that has paid
my bills and built my financial security for about 20 years now.
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