Beginner's Guide To E-Mini Futures Contracts: Trading The E-Minis

E-mini traders enjoy relatively low costs in terms of commissions and exchange execution, and clearing fees. Commissions vary depending on the particular broker. TradeStation, for example, offers a sliding commission schedule based on trading activity. If the trader executes 300 or fewer trades per month, the commission would be $1.20 per side, per contract. This means that the trader will pay $1.20 per contract to get into the trade, and $1.20 per contract to get out of the trade (collectively known as a "round-trip" trade). Commissions drop to as little as 25 cents per side, per contract if more than 20,000 contracts are traded each month. Exchange execution and clearing fees for CME, for example, add another $1.14 per side, per contract. Non-exchange members are also charged an additional NFA Regulatory Fee of 2 cents per contract.

In addition to fees and commissions for trade executions, many traders will be required to pay monthly subscription fees to receive the appropriate data feeds. This may involve two separate data feed subscriptions: one for CME data, the other for ICE.

Trading Platforms
Trading platforms often go hand in hand with brokers. TradeStation, for example, offers both a professional trading platform and brokerage services. In general, trading platforms are either stand-alone (residing on the trader's computer) or web-based. Stand-alone applications tend to be more robust. However, web-based platforms offer the flexibility to trade from any location with an Internet connection. Many platforms offer both stand-alone and web-based options, allowing traders to choose the one that will suit his or her needs best.

Since the platform will be the trader's portal to the markets, it should be easy to learn and use, and should support reliable data feeds. Many e-mini traders execute trades frequently with the expectation of taking small profits on a regular basis. A bad data feed can mean the difference between being profitable and losing money. In addition, customer service and technical support must be taken into consideration. If the trader loses an Internet connection in the middle of a trade, he or she will want to be able to connect via phone to a live person immediately.

Depending on the trader's goals, he or she may also wish to look for a platform that has advanced features, such as the ability to back-test trading ideas on historical data, the ability to program custom indicators and strategies or one that supports fully automated trading.


SEE: Broker Summary: E-Trade Financial


Trading Techniques
E-mini traders, like those trading other instruments, have options when it comes to trade placement methodology. Traders may elect to place discretionary, semi-automated or fully-automated trades.

• Discretionary

Many traders start out as discretionary traders, making entry and exit decisions based on non-quantifiable data (such as advice from a perceived expert, observations and intuition). Discretionary traders watch the markets and look for trading opportunities, but ultimately use discretion (thus the name) when deciding whether or not to execute the trade. Two of the biggest challenges for discretionary traders is dealing with emotions and pilot error - costly order entry mistakes.

• Semi-Automated

A semi-automated trading method typically involves using discretionary methods to enter trades, while relying on automated signals to exit positions. For example, a trader may enter a long position once price breaks above a trendline. As soon as the trade entry is filled, the trader's computer (the platform) will automatically enter two orders: one for a profit target, and one as a protective stop loss in case the trades moves against him.

• Automated

Fully automated trading occurs when the trader's platform performs all trade executions based on a customized trading strategy or a commercially available system. To develop a custom strategy, traders must program in the platform's proprietary language (such as TradeStation's EasyLanguage) or work with a qualified programmer. The development process involves identifying absolute, objective trading conditions, back- and forward-testing to determine the system's potential, optimization and, if all goes well, implementation in a live market. Figure 10 shows a fully automated stop-and-reverse strategy applied to the 5-minute TF contract.

Figure 10: An automated stop-and-reverse strategy applied to the five-minute TF. The blue arrows represent long trades; the red arrows show where the strategy took a short position.

While a fully automated system does remove the emotion from trading and allow the trader to thoroughly evaluate an idea before risking real money, it does not allow the trader to press the "Go" button and leave to play golf for the day (as many traders wish it would). The platform and trading system still needs to be monitored because Internet connections can be lost, or an order could get a partial fill, leaving an unattended order in the market. Things can and do go wrong with fully automated systems, and it is in the trader's best interest to monitor the system.

Because of the technical nature of the e-minis, they are well-suited to fully automated trading systems that are based on quantifiable conditions and filters. Many e-mini traders choose to semi- or fully-automate their trading strategies to take the emotion out of trading, avoid pilot error and employ a system that has proven itself during historical testing.

SEE: The Pros And Cons Of Automated Trading Systems

Position Sizing
One of the most attractive features of the e-minis is the low margin. A trader can buy and sell e-mini contracts with a relatively small trading account, such as $2,000 for example. If a trader can reliably make (on average) one point on the TF during a trading session (one point = $100), adding more contracts can multiply the trader's winnings. Since margin rates are typically low, the additional contracts can be traded for a small investment.

As traders gain confidence and develop profitable systems, position sizing can be utilized to increase the potential for profits. Of course, additional contracts also increase the potential for losses, so position sizing techniques should be utilized cautiously, and only once a system has proven that it can be profitable over time.