Intermediate Guide To E-Mini Futures Contracts - Volume And Volatility
Volume refers to the number of shares or contracts that are traded during a specified period of time. The average daily volume is the number of shares or contracts that are traded - on average - during a particular time period. Many of the e-mini futures contracts trade under high volume; the ES leads the pack with over 2.2 million contracts traded on average per day. To traders, strong volume means that there is good liquidity, ensuring that orders will be filled, filled with minimal slippage and filled without substantially affecting price.
Volatility, on the other hand, is a measurement of the amount and speed at which price moves up and down. When a trading instrument experiences volatility, it provides opportunities for investors and traders to profit from the change in price - whether rising prices in an uptrend or falling prices during a downtrend. Any change in price creates an opportunity to profit: it is difficult (or impossible) to make a profit if the price remains the same.
A quick look at the relative size of the price bars provides an indication of the degree of volatility. Smaller price bars represent decreased volatility, whereas larger bars are indicative of increased volatility. To accurately measure volatility, traders often apply technical indicators such as Average True Range, Bollinger Bands® and the Chaikin Volatility Indicator. Knowing how much price is expected to move throughout a trading session is important for setting reasonable profit targets and protective stop loss levels. If the average daily price fluctuation in a contract were five points, for example, it might be unrealistic to set a daily profit target of 20 points.
Both volume and volatility are important characteristics of the e-minis since these two factors help create profitable trading opportunities. Since the e-mini stock index futures contracts trade nearly round-the-clock on all-electronic exchanges, these contracts attractive to traders around the world. There are times of the day; however, where increased volume and volatility are present. Figure 2 shows a five-minute chart of the June 2012 ES contract; it is apparent from the chart that the times when both volume and volatility are highest coincide with the regular U.S. stock market trading session. The period from approximately 3:00 am (EST) until the U.S. markets open also has noticeable volume and volatility.
Figure 2 - This five-minute ES chart illustrates the times of day that the contract trades with the most volume and volatility. Chart created with TradeStation.
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