You never know how long it will last, but recently the Nasdaq 100 futures have been extremely resilient. It seems like every time it sells off a few points, it bounces right back! Of course one can trade an ETF in a stock account, and accomplish much of the movement inherent in the Nasdaq100 emini futures, but not all of the movement.
The Advantages Of Trading The E-mini Nasdaq 100 Over Tech Stocks Or ETFs
Futures have many advantages over the ETFs. With futures, a trader is not bound by all the restrictions inherent in stock trading like "You have to maintain $25,000 in your account to daytrade". "You cannot go short in a cash account or IRA, only in a margin account." "You have to locate the shares to short as there is no naked shorting of stocks (Like that never happens, right!)". "You can't be short naked calls in a cash account". "If you do naked put selling, you have to tie up 100% of the cash that it would take to buy the shares, vs. futures where you put up just enough margin (based on the market delta) to cover the actual overall account risk one is undertaking". "Stock traders must deal with wash sale rules, while futures traders have no such rules." The list goes on and on!
With futures, you can trade using $5,000 to $10,000 to cover margins, and control many more times that amount of stocks through leverage. In the E-mini Nasdaq 100, every full point is worth $20 so multiplying times the current price of 3770, one is controlling over $75,000 of stock. With initial margin of $3250 that one sets aside in their account to trade this vehicle, along with another couple thousand to cover short-term losses, one has 23 to 1 leverage. If one agrees to only daytrade and liquidate all trades at the end of every day's trading session, many brokerage firms cut the margin requirements in half, giving a trader 46 to 1 leverage. With this degree of leverage, and the quick intraday reversals inherent in the stock index futures, most traders will want to get in and get out, within a few minutes or even seconds.
One reason I like trading futures, is that futures "keeps me on my game". I can get very lazy trading stocks and won't cut my losses as I can buy more shares to average down and hold out for several days waiting for the stocks to rally and let me out. With stocks, hope springs eternal! But in futures, one has no choice but to take action through stops or other measures to quickly stop the bleeding when a position turns against you. With stocks I can buy falling knife equities with impunity. But with futures I try never to catch a falling knife as it is just too painful! With stocks, when a daytrade goes bad, I can be as guilty as the next trader in trying to kid myself by renaming the "bad trade" a "long term investment", and usually get away with it. With futures, trades are always trades and you either hit your short-term target or you are stopped out. Nice and clean.
E-mini Nasdaq 100 Trading For Today, June 13, 2014
In looking at the intraday 20 minute bar chart going back 2 weeks and the 30 minute bar chart going back a month, I quickly noticed how recently the Nasdaq 100 is almost always bought up and experiences a late day rally. This is a sign of accumulation by the big guns and has very bullish implications.
From 4:30 a.m. to 6:30 a.m. Central time (Chicago Mercantile Exchange - CME is in Chicago) today, June 13, 2014, one can notice how the September Emini Nasdaq 100 was moving back and forth with a slightly negative bias, not making much progress to the downside, and the MACD was nearly flat for an extended period of time. These types of trades are typically resolved to the upside. I did not take the trade today because I was up half the night trading live cattle and copper, etc. and needed to catch some ZZZs. This is a five minute chart but I use a 2-minute chart to trade. With a close yesterday of 3764.50, the September E-mini Nasdaq 100 was trading over 10 points up, above 3775 at 8:30 a.m. Central Time on the above chart. Hitting 10 points above break even in the premarket, I was looking for the index to fall an equal amount, or about 10 points in the minus, to about 3755, where I expected it would find early support. When the contract fell to that area in early trading and stabilized, my systems gave me a buy signal and so I bought to contracts at 3755. I placed a 3 point stop on one contract and a 5 point stop on the other. I placed sell targets of 4 and 6 points profit and was quickly out of the trade, making $80 and $120 (less commission) within less than 5 minutes. I should have been more patient, especially with the second contract, as it ended up popping back up over 20 points. However, the first and last hours of the day are the most volatile and unpredictable, and I was preoccupied with other "stuff" going on, so I took the quick profit and concentrated on my other trades. In the middle of the day, I would have been more patient.
In the premarket with the NQ trading above 3770, the daily chart (if it closed up) was going to form a bullish harami pattern. I predicted on Stock Talk that the Sept. NQ would close today 3770 or above. Final trade turned out to be 3771 on the intraday chart below, but was 3769 on the official posted close.
Look at the 30 minute bar chart of the last three days and you will see how on the 11th, we took a dip on the opening, and then rallied and closed strong. Thursday, June 12th, the NQ was weak but in the last hour there was a rally from the lows of the day at 2745 to 3770 (late day buying being quite bullish again). Then today, I went long at 3760 again late today when we dipped to as low as 3757.50, and then rode it up to 3765.50, near the 3:00 p.m. Chicago close, where I got out, and missed the final rally in the last few minutes to 3770.
In The Last 9 Weeks, the NQ Has Had A 400 Point Range
The above weekly chart utilizing the nearby prices of the June NQ Contract, shows how 9 weeks ago, the futures contract hit a bottom at 3400. This was followed by an 8 week 400 point rally to 3800 ($8,000 per contract). It then sold off this week about 50 points ($1,000) before closing down about 22 ($440). Hypothetically speaking, a trader owning a contract from 2600 at the beginning of 2013, and holding it for 17 months until the high of 3800, there was potential to earn 2200 points of profit, or $44,000. (I say hypothetical because the trader would have to roll the position over every 90 days as one contract expired and the next contract took over as the most liquid nearby month and the different contract months of March, June September and December have different prices so the rollovers are not exact). Likewise a bear with unlimited funds, who shorted the market at the beginning of 2013 and staying short through the high of 3800, would hypothetically be down that same $44,000 on a contract that they controlled with only an initial margin of $3250.
To successfully trade futures, one must have a setup based on objective criteria, then a properly executed trigger, and then follow-up of the trade until a stop is hit for a loss, or short and/or longer term profit objectives are met. There are only a small percentage of traders with the foresight and discipline to do this successfully on a very short-term or daytrading basis, and even fewer who can hold the trades for several days, weeks or months.
In another article, which I plan to write within the next day or so, I will describe how I managed risk recently in a couple futures market that I actively traded. Proper management of risk is the difference between success or failure. One large loss can wipe out hundreds or thousands of gains. And here is one big difference between stocks and futures. In stocks, if a stock you own goes bankrupt and trades to zero, you can lose 100% of your money invested in that one stock. In shorting stocks the potential losses are unlimited, and the same is true with futures. One can lose the original amount invested several times over, if proper risk management techniques are not employed. A competent broker should be monitoring the account and force liquidation before a margin call is required. I do not go short a futures contract if we are about to hit the upside daily limit, to prevent getting locked limit up. I will likewise not go long in a futures contract, trading down near the daily limit to avoid getting locked limit down. I also use stops or stop equivalents, which I will explain in my next article.
The thoughts and opinions in this article, along with all stock talk posts made by Robert Edwards, are my own. I am merely giving my interpretation of market moves as I see them. I am sharing what I am doing in my own trading. Sometimes I am correct, while other times I am wrong. They are not trading recommendations, but just another opinion that one may consider as one does their own due diligence.