E Mini Futures Investor Education - The Manifesto

Please visit our E Mini Futures Day Trading Course site at:  http://www.easy-emini.com/

Back in June I published a Manifesto on the importance of investor education.  As education is the reason for this blog and our main site, http://www.easy-emini.com/ I thought it was worth reposting.

http://easy-emini.blogspot.com/2010/06/investor-power-through-education.html?showComment=1277579458718

Futures trading involves substantial risk and is not suitable for all investors

E Mini Futures Leverage Explained

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One of the key attractions to trading the E Mini version of a stock index, or any other futures for that matter is that you can participate at a smaller level than in the standard or “big” futures contracts. Think of it as trying out craps in Las Vegas by playing at the $1.00 table at Circus Circus instead of the $25 table at the Bellagio. Just as in Las Vegas, the E Mini can get you into trouble just as fast. Certainly, there are many positives when utilizing the smaller cousin to the standard contract, but in my experience on the brokerage side of the business one of the areas that seems to get new E Mini futures traders into trouble most is understanding leverage.

In the futures market, margin refers to the initial deposit or "good faith" made into an account in order to enter into a futures contract. This margin is referred to as good faith because it is this money that is used to debit any day-to-day losses.

When you either buy or sell an E Mini futures (or any other futures contract), the futures exchange will state a minimum amount of money that you must deposit into your account. This original deposit of money is called the initial margin. When your contract is liquidated, you will be refunded the initial margin plus or minus any gains or losses that occur over the span of the futures contract. In other words, the amount in your margin account changes daily as the market fluctuates in relation to your futures contract. The minimum-level margin is determined by the futures exchange and is usually 5% to 10% of the futures contract. These predetermined initial margin amounts are continuously under review: at times of high market volatility, initial margin requirements can be raised.

The initial margin is the minimum amount required to enter into a new futures contract, but the maintenance margin is the lowest amount an account can reach before needing to be replenished. For example, if your margin account drops to a certain level because of a series of daily losses, brokers are required to make a margin call and request that you make an additional deposit into your account to bring the margin back up to the initial amount.

Let's say that you had to deposit an initial margin of $6,000 on a, E Mini S&P 500 contract and the maintenance margin level is $4,000. A series of losses dropped the value of your account to $3,000. This would then prompt the broker to make a margin call to you, requesting a deposit of at least an additional $3,000 to bring the account back up to the initial margin level of $6,000.

Leverage
In the futures market, leverage refers to having control over large cash amounts of commodities with comparatively small levels of capital. In other words, with a relatively small amount of cash, you can enter into a futures contract that is worth much more than you initially have to pay (deposit into your margin account). It is said that in the futures market, more than any other form of investment, price changes are highly leveraged, meaning a small change in a futures price can translate into a huge gain or loss.

Futures positions are highly leveraged because the initial margins that are set by the exchanges are relatively small compared to the cash value of the contracts in question (which is part of the reason why the futures market is useful but also very risky). The smaller the margin in relation to the cash value of the futures contract, the higher the leverage. So for an initial margin of $6,000 for the E Mini S&P 500 contract, you may be able to enter into a long position in a futures contract valued at about $59,000, which would be considered highly leveraged investments.

You already know that the futures market can be extremely risky and, therefore, not for the faint of heart. This should become more obvious once you understand the arithmetic of leverage. Highly leveraged investments can produce two results: great profits or greater losses.

As a result of leverage, if the price of the futures contract moves up even slightly, the profit gain will be large in comparison to the initial margin. However, if the price just inches downwards, that same high leverage will yield huge losses in comparison to the initial margin deposit. For example, say that in anticipation of a rise in stock prices across the board, you buy an E Mini futures contract with a margin deposit of $6,000, for an index currently standing at $1182. The value of the contract is worth $50 times the index (e.g. $50 x 1182 = $59,100), meaning that for every point gain or loss, $50 will be gained or lost.

If after a couple of months, the index realized a gain of 5%, this would mean the index gained 59 points to stand at 1241. In terms of money, this would mean that you as an investor earned a profit of $2,950 (59 points x $50) before any commission costs.

On the other hand, if the index declined 5%, it would result in a monetary loss of $2,950 plus commissions - a huge amount compared to the initial margin deposit made to obtain the contract. This means you still have to pay $2,950 plus commissions out of your pocket to cover your losses. The fact that a small change of 5% to the index could result in such a large profit or loss to the investor (sometimes even more than the initial investment made) is the risky arithmetic of leverage. Consequently, while the value of a commodity or a financial instrument may not exhibit very much price volatility, the same percentage gains and losses are much more dramatic in futures contracts due to low margins and high leverage.

Please visit our E Mini Day Trading Course at http://www.easy-emini.com/

Futures trading involves substantial risk and is not suitable for all investors

E Mini Russell 2000 Futures FAQ

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Much attention and trading volume is garnered by the S&P 500 futures and the E Mini version of that contract. While it is an excellent market to trade, have you thought of trading the E Mini Russell 2000 futures instead?

About E-mini Russell 2000 Futures

Designed to track the Russell 2000 Index, the E Mini Russell 2000 futures, this index measures the performance of the 2000 smallest companies in the Russell 3000 Index. This index was designed to be a representative of the investable U.S. small-capitalization equity market. The Index is value-weighted and includes only common stocks belonging to corporations domiciled in the U.S. and its territories. The Russell 2000 Index serves three main purposes: it acts as a performance standard for active managers, it serves as a proxy for asset allocation purposes, and it becomes a purchasable and replicable vehicle for passive investment strategy.
Since its inception, the Russell 2000 Index has become the premier measure of small-capitalization stocks and is widely followed by U.S. fund managers. The Chicago Mercantile Exchange's 1993 introduction of Russell 2000 futures and options gave investors the opportunity to manage small-cap portfolio risk, as well as to gain exposure to this market segment.

CME E-mini Russell 2000 Futures Specifications
E-mini Russell 2000 futures, Intercontinental Exchange (ICE), symbol TF. Contract size is $100 x the Russell 2000 Index. Minimum tick is 0.10 = $10.00.
E-mini Russell futures trade nearly 24 hours per day on the ICE, from 8:00 PM US EST all the way until 6:00 PM US EST the following afternoon.
E-mini Russell 2000 futures trade on a quarterly cycle. Trading months include March, June, September, and December.

Free E Mini Russell 2000 Futures Charts and Quotes
www.Barchart.com does an excellent job of providing charts and quotes: http://www.barchart.com/quotes/futures/RJ*0
Please visit our E Mini day trading course at www.Easy-Emini.com

Futures trading involves substantial risk and is not suitable for all investors

What are Automated Futures Trading Strategies?

Please visit our day trading course web site at:  http://www.easy-emini.com/



Did you know that you can use a fully automated strategy to trade the E Mini and other futures markets?  Algorythmic (Algo) or Black Box Trading is not just for the pro's on Wall Street.  If you are looking for guidance in the way you trade the E Mini or other futures you may want to check out this style of trading in which a computer model makes the decisions for you.  Keep in mind that all the same risk warnings apply but you may want to check this out.  Check out this short video which explains what exactly is an Automated Futures Trading Strategy.

Please visit our day trading course web site at: www.Easy-Emini.com


Futures trading involves substantial risk and is not suitable for all investors.

Gold Futures Prices and Charts

Please visit our E Mini Futures Day Trading Course web site at:  http://www.easy-emini.com/

Now that Goldman Sachs has updated their projection for gold to go to over $1,600 per ounce, I thought it would be timely to share a great link to the CME Group's web page that offers an excellent package of free market data on gold futures.  Charts, prices (10 minutes delayed), volume, contract specifications, and performance bonds/margins are all contained on this clean and easy-to-use page:

http://www.cmegroup.com/trading/metals/precious/gold.html

Please visit our E Mini Futures Day Trading Course web site at:  http://www.easy-emini.com/

Futures trading involves substantial risk and is not suitable for all investors.

Futures Order Types and Tutorial

Please visit our E Mini futures day trading course web site at: http://www.easy-emini.com/

The CME Group has assembled an excellent guide for futures order placement that I believe will be or help, especially if you are new to E Mini and other futures markets. While this is not inclusive of all types of orders, it is a good start for the basics.

2.1 Futures and Options Order Types

The following order types are supported by CME Globex for both futures and options:

• Limit Orders

• Market-limit Orders

• Market Orders with Protection



2.1.1 Limit Orders

Limit orders allow the buyer to define the maximum purchase price for buying an instrument and the seller

to define the minimum sale price for selling an instrument.

Any portion of the order that can be matched is immediately executed. Limit orders submitted for buying an

instrument are executed at or below the limit price. Limit orders submitted for selling an instrument are executed

at or above the limit price. A limit order remains on the book until the order is either executed, cancelled,

or expires.



2.1.2 Market-limit Orders

Market-limit orders are executed at the best price available in the market. If the market-limit order can only

be partially filled, the order becomes a limit order and the remaining quantity remains on the order book at

the specified limit price.

Example: Market-limit Order (Bid)

1. The client sends a New Order to CME Globex.

- Bid, ESZ8, Market-Limit.

2. CME Globex responds with an Execution Report - Order Confirmation.

3. The market-limit order becomes a limit order at the best available market price (90025).



Order Types Futures Options

Limit X X

Market Orders with Protection X X

Market-limit X X

Stop-limit X

Stop Orders with Protection X

Hidden Quantity X X

Minimum Quantity X X

Orders

Electronic Trading Concepts Version 1.8 Page 7

4. CME Globex sends an Execution Report - Partial Fill.

- 2-Lot @ 90025

5. The remaining quantity rests on the book at 90025.



2.1.3 Market Orders with Protection

Market orders with protection are intended to avoid cascading market orders being filled at extreme prices.

Market orders with protection are filled within a pre-defined range of prices referred to as the protected

range. For bid orders, protection points are added to the current best offer price to calculate the protection

price limit. For offer orders, protection points are subtracted from the current best bid price.

CME Globex matches the order at the best available price level without exceeding the protection price

limit. If the entire order cannot be filled within the protected range immediately, the unfilled quantity

remains in the order book as a limit order at the limit of the protected range. Refer to www.cme.com/files/

PriceBanding.pdf for a list of the "no bust" ranges for products.



2.1.3.1 Example: Market Order with Protection Bid

The following example illustrates how the client interacts with CME Globex to process a market order with

protection bid.

1. The client sends a Market Order to CME Globex.

- Bid, ESZ8, Market Order.

- Best Offer = 90025 and Protection Points = 600.

- Protection Price Limit = 90025 + 600 = 90625.

2. CME Globex sends an Execution Report - Partial Fill.

2-Lot @ 90025

3. CME Globex sends an Execution Report - Partial Fill.

3-Lot @ 90300

4. CME Globex sends an Execution Report - Partial Fill.

3-Lot @ 90550

5. Next Best Offer = 90675. This value exceeds the protection price limit. CME Globex places the remaining

quantity on the order book at a protection price limit of 90625.



2.1.3.2 Example: Market Order with Protection Offer

The following example illustrates how the client interacts with CME Globex to process a market order with

protection offer.

1. The client sends a Market Order to CME Globex.

- Offer, ESZ8, Market Order.

- Best Bid = 90000 and Protection Points = 600

- Protection Price Limit = 90000 - 600 = 89400

2. CME Globex sends an Execution Report - Partial Fill.

Orders

Electronic Trading Concepts Version 1.8 Page 8

2-Lot @ 90000

3. CME sends an Execution Report - Partial Fill.

3-Lot @ 89900

4. CME Globex sends an Execution Report - Partial Fill.

3-Lot @ 89650

5. Next Best Bid = 89300. This value is below the protection price limit. CME Globex places the remaining

quantity on the order book at a protection price limit of 89400.



2.2 Futures Order Types

The following order types are supported by CME Globex for futures only:

• Stop-limit Orders

• Stop Orders with Protection



2.2.1 Stop-limit Orders

Stop-limit orders are activated when an order's trigger price is traded in the market. For a bid order, the

trigger price must be higher than the last traded price. For a sell order, the trigger price must be lower than

the last traded price. After the trigger price is traded in the market, the order enters the order book as a

limit order at the order limit price. The limit price is the highest/lowest price at which the stop order can be

filled. The order can be filled at all price levels between the trigger price and the limit price. If any quantity

remains unfilled, it remains on the order book as a limit order at the limit price.



2.2.2 Stop Orders with Protection

Stop orders with protection are intended to avoid cascading stop orders being filled at extreme prices. A

stop order with protection is activated when the market trades at the stop trigger price and can only be executed

within the protection range limits. The order enters the order book as a limit order with the protection

price limit equal to the trigger price plus or minus the pre-defined protection point range.

Protection point ranges are equal to 50% of the product's "no bust” range. Refer to www.cme.com/files/PriceBanding.

pdf for a list of the "no bust" ranges for products. For bid orders, protection points are added to

the trigger price to calculate the protection price limit. For offer orders, protection points are subtracted

from the trigger price.

CME Globex matches the order at all price levels between the trigger price and the protection price limit. If

the order is not completely filled, the remaining quantity is placed in the order book at the protection price

limit. Refer to “Stop Spike Logic” on Page 11 for more information.



2.2.2.1 Example: Stop Order with Protection Bid

The following example illustrates how the client interacts with CME Globex to process a stop order with

protection bid.

1. The client sends a Market Order to CME Globex.

• Bid, ESZ8, Stop Order, 90000 Trigger Price

2. A trade occurs at the trigger price of 90000. The order is activated and CME Globex responds with an

Execution Report - Order Confirmation (Notification that order was triggered).

Orders

Electronic Trading Concepts Version 1.8 Page 9

• Trigger Price = 90000, Protection Points = 600

• Protection Price Limit = 90000 + 600 = 90600

3. CME Globex sends an Execution Report - Partial Fill.

2-Lot @ 90025

4. CME Globex sends an Execution Report - Partial Fill.

3-Lot @ 90300

5. CME Globex sends an Execution Report - Partial Fill.

3-Lot @ 90550

6. Next Best Offer = 90675. This value exceeds the protection price limit. CME Globex places the remaining

quantity on the order book at a protection price limit of 90600.



2.2.2.2 Example: Stop Order with Protection Offer

The following example illustrates how the client interacts with CME Globex to process a stop order with

protection offer.

1. The client sends a New Order to CME Globex.

• Offer, ESZ8, Stop Order (with protection), 90025 Trigger Price

2. CME Globex responds with an Execution Report - Order Confirmation.

3. A trade occurs at the trigger price of 90025. The client's order is activated and CME Globex responds

with an Execution Report - Order Confirmation (Notification that order was triggered).

• Trigger Price = 90025, Protection Points = 600

• Protection Price Limit = 90025 - 600 = 89425

4. CME Globex sends an Execution Report - Partial Fill.

2-Lot @ 90000

5. CME Globex sends an Execution Report - Partial Fill.

3-Lot @ 89900

6. CME Globex sends an Execution Report - Partial Fill.

3-Lot @ 89650

7. Next Best Bid = 89300. This value is below the protection price limit. CME Globex places the remaining

quantity on the order book at a protection price

Please visit our E Mini futures day trading course web site at: http://www.easy-emini.com/

Futures trading involves substantial risk and is not suitable for all investors

Should you be Investing Like the Super-Rich and Buy Gold Now?

Please visit our E Mini futures day trading course site at http://www.easy-emini.com/

Coming up with your investing plan is challenging for all of us. Do we follow an analyst, the talking heads on CNBC, or the trail of people that publish every move of Warren Buffett? Granted, we should be doing our own research and if you are reading this, you are probably already on that path. What about checking out what the super-rich are up to?

An interesting article published by Reuters on October 4, 2010 highlighted the fact that some of the world’s wealthiest are responding to the current economic crisis by buying gold. And not just buying some gold, they point out that some are literally buying it by the ton. For the story, Reuters interviewed UBS executive Josef Stadler who runs the Swiss bank’s services for clients with over $50 million to invest. UBS is recommending top-tier clients hold 7-10 percent of their assets in precious metals like gold.

“we had a clear example of a couple buying over a ton of gold…and carrying it to another place.” Stadler said. At today’s prices, that shipment would be worth over $42 million.

So, is it time to follow the super-rich and get into gold? We assembled a few posts from our blog to help you:



FAQ – Gold Futures           http://easy-emini.blogspot.com/2010/08/faq-gold-futures.html

Gold Futures Versus Leveraged Metals           http://easy-emini.blogspot.com/2010/06/gold-futures-versus-leveraged-metals.html

Gold Futures Versus ETF’s           http://easy-emini.blogspot.com/2010/05/gold-futures-vs-gold-etfs.html



Futures trading involves substantial risk and is not suitable for all investors

Please visit our E Mini futures day trading course site at http://www.easy-emini.com/