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When day trading futures, you take all positions in and out on the same day – you never have a position overnight. Because market movements are difficult to predict overnight, many traders avoid the risk of day trading. Ironically, the public believes that day trading is the riskiest way to trade.
THAT’S A MYTH!
Some traders do day trading futures, make 1 to 3 trades a day, trying to catch the most important intraday movements. Others trade in and out very frequently, trying to “win” a small profit on every trade. (My style uses a unique blend of the two strategies.)
For these day trading futures, the Emini stock index futures have become the most popular day trading vehicle due to their liquidity, leverage and the ease of online trading. You can take short or long positions with equal ease – unlike stocks, which are easier to go long than short due to the “up-tick” rule.
It is important to understand the timing of the eminis (and the “big contracts”) to the cash indices. Let’s start from square one.
The S&P 500 stock index (the cash index, symbol SPX) is central to day trading futures. It has an exchange traded fund (the “Spyders”, symbol SPY) that trades like a stock, but without the “up-tick” rule. The price of the S&P 500 Cash Index moves up and down with the 500 stocks that make up the index. The SPYder follow the S&P 500 Cash Index very closely. You can trade exchange traded funds like the SPY (and QQQQ for the Nasdaq 100) online from your home. For day traders, however, they are not as cheap as day trading futures.
The concept of “futures” is a little confusing, but it boils down to this: The financial industry has made the S&P 500 cash index a “contract” that trades like a stock. The contract (or futures contract) has a price that goes up and down from moment to moment. It has a chart that looks just like a stock chart, and you can make money on it by buying low and selling high, or vice versa. This is complicated as it has to be now.
The “big contracts” or SP Maxis were first invented and they still exist. With the big contracts, a lot of money changes hands. If the price of the SP Maxis moves one point, then $ 250 per contract moves with it. The SP maxi contracts trade in a literal “pit” where traders, called “locals”, yell at each other and buy and sell for anyone who wants to get involved.
The locals are of course not civil servants, they earn money on their own account. They have the advantage of being able to read each other’s body language and the tone of the other trader’s voices. You see what the strongest traders in the pit are doing. They have several other advantages, their cost per trade is tiny compared to the public commissions.
However, the “locals” are not born professional traders, they learn to trade like everyone else, except that they also have a great advantage in learning because they learn to scalp first! Their instant access and low commissions make this possible compared to others, but these days trading futures online can also benefit from scalping trades.
Scalping basically limits your losses to just a tick or two while taking any profit when you get them. It is easier than aiming for multiple points per trade, I have used this strategy day trading futures with great success.
Locals also use the spread (the difference between the bid and ask prices) to make quick profits on orders that come in on both sides of the market. This makes scalping easier for them.
All of these advantages made it impossible for a retail daytrader to be a successful scalper in the past. It was crazy to try. And to this day, many traders have the idea that scalping is too difficult for the general public because you have to compete against traders with an unfair advantage.
But that has all changed now. If you follow some simple but important guidelines, you too can be successful online scalping and day trading futures.
They took the concept of Maxi Futures contracts and developed smaller contracts (the Eminis) that hover around $ 50.00 per SP point instead of $ 250.00. This enables all traders large and small to trade the stock index futures.
But even more radically they align it so that the smaller contracts (the Eminis) are only traded via computers. That was revolutionary, they bypassed the pit, took advantage of the “locals” and leveled the playing field in an unprecedented way. And to level the field even further, retail commission costs fell like a rock. Nowadays, any trader day trading futures with a small account can pay $ 4.80 per round (entering and exiting a trade).
This means that for the first time in history, scalping will be accessible to the day trading audience. But most people who trade futures don’t even know where the new advantage really lies.
Scalping is one of the keys to making a living trading futures like me because I follow a simple rule: “Every trade starts as a scalp until proven otherwise”.
The SP Emini Futures became more and more popular and liquid, breaking many records.
The SP Maxis Futures and the SP Emini Futures are both derived from the S&P 500 index (symbol SPX) which, as I said, has an ETF that trades like a stock (symbol SPY).
So the question is – which of them is the leader and which are followers?
Today the Emini futures follow the maxi contracts almost tick by tick, with the Eminis temporarily leading the maxis and also “overshooting” the maxis in emotional extremes, such as the climax of an intraday rally.
Both the SP eminis and the SP Maxis (the futures) lead the S&P 500 cash index with variable time, often in the range of fractions of a second. Some people call this “the tail wagging the dog” because the futures are derivatives of the stock indices, but call it what you will, the futures are leaders.
The fact that the futures lead the markets makes their chart patterns “cleaner” and more reliable for support and resistance trading. That makes a big difference to me.
I use the stock index futures (the Eminis and Maxis) to calculate the daily support and resistance areas that are the foundation of my own trading style – a trading style that has paid my bills and built my financial security for about 27 years.
I publish my support and resistance levels in the RBI Trader’s Updates, along with my daily trading plan. Since 1996, many professional traders as well as some beginners have subscribed to my work for its accuracy.