Introduction to Emini Trading - Advantages and Risks
When it comes to trading derivatives, emini trading is definitely among the most popular trading strategies because of many advantages it carries.
We would like to start this article with a simple explanation of E-minis. You have probably all heard for Chicago Mercantile Exchange before. This is an exchange where electronically future contracts are traded. E-mini is exactly that, a future contract with one difference - it represents only a portion of normal futures contracts. You can trade e-minis on variety of stock market indices like Standard and Poors 500, Dow Jones Index, Nasdaq 100, S&P MidCap 400, Russell 2000 and others. In case of e-mini contract tight to S&P 500 Index it represents only a fifth of the normal contract size. Emini trading carries some powerful advantages over trading standard futures contracts, more or less deriving from greater affordability to individual investors all over the world and consequently increased liquidity.
Advantages of Emini Trading
Now that you are aware that eminis are actually small types of futures contracts, lets loot at some of the major advantages emini trading can bring to you. First of all, there are many financial instruments available to you to trade. You can choose among stocks, bonds, commodities, Forex and so on. In comparison to trading stocks directly, eminis have an advantage low decision density. What do we mean by that? When you are trading stocks, there are hundreds of them available and you need to decide which one to trade. Further on you have a problem of correlation, since generally stocks from the same sector or industry move in high correlation to each other; for taking smart decisions you are therefore forced to keep your eyes on the whole industry group as well. Trading a stock market index is a much easier task, since you only focus on the general market trend instead on thousand details.
Another advantage of emini trading is just the right volatility. Just think about trading bonds for a second. In a normal trading day bonds face only very low volatility and this makes them inappropriate for day trading. Commodities on the other side can be very volatile on some days, while this isn't the case on other trading days. Besides, you can easily fall in trap of limit moves when trading commodities. If you are trading eminis you shouldn't have similar problems with volatility.
If you compare emini trading to trading currencies, Forex, FX or whatever term you like to use, there is one important piece of information missing when you do the technical analysis. The most basic fundamentals on which technical analysis is based on are: price and volume; there is no volume data in Forex trading. Eminis charts do include volume as an important supportive factor in decision making process of active trading.
Risks Associated with Emini Trading
Regardless of what you have heard or anybody might tell you, trading eminis involves risk. In this manner it is no different to any other financial instrument. So the rule number one is to trade only the money you really can afford to lose, otherwise things might get complicated. Next, you should learn trading eminis step by step: read some books or any other material, paper trade and only then start trading real money, start with small stakes first and only increase them when you will know you are ready. Get yourself necessary experience before trading with bigger stakes.
One of the most significant features of trading futures including eminis is the fact that trading includes leverage, which can vary and go up to 50. While many traders are excited about possibility to trade ordinary exchange instruments by such a high leverage, you should remember one thing for a lifetime: leverage maximizes your profit but it maximizes your loss as well. It is the second part of the statement you should pay attention to.
Written by: Goran Dolenc
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