Top 5 Reasons Why Day Trading Emini Is Better Than Day Trading Stocks
By Lawrence
I have been asked about the advantages of day trading the Emini S&P (and the other Eminis) over day trading stocks many times. Many people are familiar with concepts related to the stock markets like shares and stock prices but are intimidated by the idea of trading the stock market index itself. Here are the reasons why day trading Emini S&P is better than day trading stocks.
More Trading Opportunities
Emini S&P swings in both directions during the day. It is typical nowadays that you see Emini S&P moving more than 10 points during the US stock market session. Within the day, you get multiple swings each going from a few points to more than 10 points. Since each point translates to $50 US dollars per contract. There are many good day trading opportunities there to make serious money even by trading only one single contract.
Stocks in general do not offer the same level of volatility during the day. To be able to get multiple trading opportunities within a day, stock day traders often need to monitor quite a number of stocks in real-time. For many people, the tracking of multiple stocks in real-time can be a challenge.
Better Overall Liquidity
Emini S&P and the other Emini index future contracts like Nasdaq 100 are very liquid. That means you can get in and out of a position at the cost of giving in 1 tick most of the time. A tick is the minimum price movement of the Emini contract. For Emini S&P, it is 0.25 point which is $12.50 US dollars. Until you get to the point where your own trading size can affect the liquidity of the Emini S&P market, or that it is special news or important announcements time, you can expect that you will be able to get out of your position quickly with well defined cost as long as you are willing to close the position at market price.
For stocks, if you are not a seasoned professional day trader, you are likely to pick stocks that you like or stocks recommended to you by the media or your brokerage company. In this case, you could be getting yourself into very ill liquid stocks which you will have difficulty in getting out of the positions unless you are willing to take significant slippage to get out at market price.
Easier to Make Better Trading Decisions
During the day, Emini S&P moves up and down not because of fundamental evaluation bullshit. It moves around because people are betting on the stock market index itself, the component stocks that make up the stock index and the various derivatives traded around them. Every participant who committed to a position affects the overall stock market. The stock market indices move around like the football in a football game (the American football, not soccer) as the participants pushing the index price level around. By observing the aggregated behaviour among the participants, it is easy to make intelligent guesses where the indices are heading next when the conditions line up.
For stocks, they move on their own when there are news releases on the day for the particular stock. When there is no news on a stock and that it is a liquid issue, you often see that it moves like the indices it belongs to. When you can gauge the indices, why waste energy tracking the stocks then as sudden individual company news release can ruin your day.
An exception to the rule above are the junior stocks that do not belong to the major indices. This stocks move more freely and their chart patterns are quite consistent. The issue is that they are better for swing trading than day trading. If your focus is to day trade only, you cannot take advantage of the price movements of these stocks.
Better Use of Leverage
It is well known that the index future contracts have a relatively low margin requirement. By putting up only 5% of the face value of the index you can trade one contract. For Emini S&P at the current level near 2000, with each point equals to $50 US dollars, the face value of the contract is now standing close to $100,000 US dollars. It is a significant amount of money.
As a comparison, the average nest egg of an upper middle class American family is just $200,000. Trading 2 contracts of Emini S&P is already the same face value of that. But you get to control those 2 contracts with only 5% margin. That’s about $10,000 only. The high leverage is the reason why people can make a lot of money from trading Emini. High leverage, however, is also the number one reason how retail traders blow up their trading accounts.
For day trading Emini, there are firms offering $500 or less day trading margin per contract as long as you close your open positions by the end of the trading day. This makes Emini trading very accessible (and dangerous) to many people.
For stocks, most of the time you get up to 50% margin for retail traders. If you trade at a prop firm, you have to be licensed and that will get you a much better leverage. Not every one likes to trade at a prop firm. Not every one day trade full time either. So going the prop firm route is not really applicable to many people.
I almost forget to mention the $25,000 pattern day trading rule for US people. This rule creates a huge hurdle for people who want to participate in stock trading but do not have the necessary capital. The rule does not really help those who want to profit from speculations. These people are just driven to other markets like Emini and forex.
Around the Clock Availability
Emini trading is available almost 24 hours a day, 5 days a week. Almost because between each trading day, there is a short break of less than an hour for Chicago Mercantile Exchange to conduct certain contract clearing and system maintenance. The rest of the time, you can trade Emini pretty much anywhere around the world with basic internet access.
Do not under estimate this accessibility advantage. I know people who trade Emini exclusively in the after hours using the correlation between Emini S&P and the various local indices that are active at the time. People from various countries around the world can trade Emini S&P during day time in their own countries if they choose to. Emini S&P is really a global trading vehicle.
For stocks, retail traders do not really have access to 24 hours trading at all unless they have enough capital parked at the better brokerages. This means the retail traders cannot get out of their stocks when company announcements or earning surprises affected the stock prices even if they want to. This is known as the overnight risk for those who hold stocks overnight. For day traders, these are good trading opportunities but majority of retail traders still cannot participate in.
Maybe you can think of more reasons why day trading Emini is better. Maybe you find day trading stocks better suits you. Feel free to comment below.
#6: fewer one-tick false breakous/fakeouts. For those who buy/sell on stop , ES has a clear advantage over SPY, for instance.
Definitely. Adapting trading models from ES to SPY often requires a much larger stop size because of this.