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Trading Basics Part 4: A Brief Overview of the E-Mini S&P

In part one of our trading basics seriesInvest Word Button Representing Saving Stocks And Interest, we discussed that stocks are minute percentages of a company’s ownership. In part two, we covered what an index is, and the different types. In part three, we gave an overview of what futures and commodities are, and how trading them works. With this foundation established, today we’re going to conclude our series with a brief overview of the E-mini S&P, courtesy of our Head Trader.

Even if a trader does not trade the S&P futures, most traders follow the S&P 500 and monitor its present value throughout each trading day. It’s the single most important barometer of overall market sentiment and it’s used as a gauge by traders and investors of all levels worldwide.  That being the case, it makes the most sense to trade the index itself, as the strength or weakness of the S&P 500 affects all other markets all over the world. Especially equity markets, and certainly individual issues here in U.S. markets.

Any equities trader worth their salt would be constantly monitoring the S&P 500 and would not want to go against, or fade, the S&P 500.  They would look for strong stock candidates to buy when the S&P is exhibiting strength. Likewise, they’d look for weak stock candidates to short when the S&P is exhibiting weakness, and not the opposite.  So if the index needs to be monitored anyway for overall market strength or weakness, it makes sense to look at it as your primary trading vehicle.

The S&P is a better trading vehicle than individual equities

There are many reasons why the S&P makes a better trading vehicle than individual equities.  First of all, trading the index eliminates the need to go on a hunt every day to try to find a good trading candidate.  The S&P, like its Dow counterpart, moves every day with decent range and liquidity.  It’s not subject to the shenanigans, manipulations or spikes which are far more frequent in individual stocks. This is because the S&P has to comport with its given matrix of valuation for the actual value of the 500 stocks that it represents.

There is a ratio that changes ever so slightly every day. But, for the purposes of this conversation, let’s just say that the S&P moves approximately 1/10th of what the DJIA does. So, if the Dow is up 100 points on the day, the S&P would be up roughly 10 points.  However, the S&P pays out at a rate approximately 10 times what the Dow futures pay.  So, that seeming disparity is negated.

The S&P margin requirement stays the same

One of the best characteristics about trading the E-mini S&P futures (symbol ES, for E-mini S&P) is that, regardless of the starting point of any trade, the margin requirement is exactly the same. The maintenance margin to hold a trade overnight is set by the exchange. The day trade margin is set by your broker, and is typically $500 or less to control one ES contract. But, it can be as low as $200 or even $100.

So, if a trader wants to buy the ES when it’s trading at a level of 1970, the margin requirement would be $500, or whatever your arrangement is. If a trader wanted to sell the ES short at say 2014, then the margin requirement would be that same $500. Obviously, this is vastly different from stock trading where the share price dictates the margin requirements on entry and as the share price changes, so does the margin requirement for any subsequent trade.

S&P has opportunities for high return

The smallest increment the ES can be broken down into is 1/4 of a point (like a dollar being broken down into quarters). These quarter units are called ticks. Whole points in the ES market have a $50 value per contract traded, which breaks down to $12.50 per quarter point.  Typically, there are an average of 20 points or so available in the ES market on a daily basis. So, by trading just one contract with a $500 or less margin, there are plenty of opportunities to make as much as 100{e92785ee740f94a83fc90c6a87194b4ad5e655218be4369ff8f2633ee322067f} or more of the amount traded.  Also, the commission structure and tax consequences for trading futures vs. equities are or can be more advantageous than equities.

S&P market is logical

Finally, the S&P market is incredibly logical, which means that the levels the market uses are very precise. This minimizes the risk on any trade, while yielding the maximum in profits for any particular move. Naturally, it helps to have a thorough understanding of the markets, and the ES in particular. It also helps to know how to have it all mapped out specifically, as in more or less to the tick, ahead of time. That is where we come in. We can help show you how that can be done all day, every day, regardless of market conditions.

Want to learn even more? Check out our Website at www.LeadingEdgeTrading.com to discover what it takes to trade like a pro.

Posted by Ford Saeks on November 5, 2014 in Trading Basics.

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