INTRODUCTION TO

DAYTRADING THE S&P 500

E-MINI FUTURES

Presented by Brian Leip

Stocks vs. Options vs. Futures

Stocks Options Futures

Minimum acct. balance to day trade

$25,000 $25,000 As low as $3,000 (depends on broker)

Leverage Between 0x and 2x

Around 15x for ATM option

Between 8x and 87x

Equivalents 500 shares 10 ATM calls 1 future contract

Capital gains: daytrading

100% short term

100% short term

1256 contracts = 40% short term 60% long term

Non-1256 contracts = 100% short term

Advantages of Trading the ES (S&P e-mini)

No pattern day trading rule Efficient use of capital 1256 contract means 60% gains/losses

taxed at long term rate VOLATILE!

Futures Basics Futures trade on margin Initial margin amount is set by the exchange

and is subject to changeExample: ES is set by CME at $5,625 per contract

Each future has a different tick amount, dollar value per tick, and trading hours, expiration datesKnow these before considering trading a specific

future

Futures Basics Futures are speculations about future prices,

NOT what the future will actually bring Always a buyer and seller No difference between buying and selling Contracts have expiration dates similar to

optionsBut no greeks (other than delta)

At expiration, held contracts must be performedGoods exchanged, cash settled, etcNever hold over expiration!

Futures Naming Format /XXY#

XX = Symbol name○ S&P 500 e-mini = ES

Y = month code○ June = M

# = last digit of the year○ 2009 = 9

Example: June 2009 S&P e-mini = /ESM9

Types of Futures Commodity Futures

Gold, Corn, Wheat, Oil, Natural Gas, etc. Index Futures

S&P 500, Dow, NASDAQ, Russell 2000, FTSE, Nikkei, etc.

Forex FuturesEuro, Pound, Yen, Aussie, etc.

Interest Rates30 year Treasury bond, 10 year, etc.

WeatherCooling, Heating, Hurricanes, Snowfall, etc.

How Futures Margin Works Trader puts up a performance bond (margin) to

guarantee against lossesES - $5,625 initial margin controls $43,300

Gains and losses are settled immediately Margin call if account less than 80% of initial

margin Intraday margins are set by the broker (like TOS)

and not by the exchangeThese vary from as low as $500 to as high as the initial

$5,625TOS is 25% of the initial margin = $1,406.25 (30x

leverage)

Why Trade the ES (S&P 500 e-mini)

Most liquid of all futures products Widely followed and discussed Best representative of the market as a

whole Best way to introduce yourself into the

futures market Some people make their entire living off

of this one product

ES Basics Tick size = 0.25 point Tick dollar increment = $12.50 4 ticks per point 1 point = $50 Average daily range – currently around 25 points

$50 * 25 = $1,250 Trading Hours: 24/5

Intraday hours: 9:30am to 4:15pm ESTClosed from 4:15pm to 4:30pm EST dailyWeekly: Open Sunday 6pm to Friday 4:15pm EST

For more information check out www.CME.com

Importance of Volume

Volume and liquidity are very important for short term futures trading

Bid / Ask should be 1 tick wide Daytraders need to get in and out quickly Each future has different time frames

when volume is heaviestExamples:

○ S&P (ES) – best during US market hours○ Euro currency (6E) best during European

market hours

Importance of Commissions

If you trade with any volume, commissions are vital

Scenario 1: 10 round-trip trades per day, 5 contracts, $3.50 commissions ($7 RT)10 * 5 * $7 = $350 per day$350 * 5 = $1,750 per week$1,750 * 4 = $7,000 per month

$7,000 * 12 = $84,000 per year

Importance of Commissions

Scenario 2: 10 round-trip trades per day, 5 contracts, $2.20 commissions ($4.40 RT)10 * 5 * $4.40 = $220 per day$220 * 5 = $1,100 per week$1,100 * 4 = $4,400 per month

$4,400 * 12 = $52,800 per year

Importance of Commissions

$3.50 comm. $2.20 comm. Savings

Daily $350 $220 $130

Weekly $1,750 $1,100 $650

Monthly $7,000 $4,400 $2,600

Yearly $84,000 $52,800 $31,200

$31,200 = Annual salary working full time at $15 per hour

Profit Potential: Conservative

Using scenario 2 from before:10 trades per day, 5 contracts, $2.20

commissionsAssume conservative average of 2 points per

day2 points * 5 contracts * $50 per point = $500$500 - $220 commissions = $280 per day$280 * 5 = $1,400 per week$1,400 * 4 = $5,600 per month$5,600 * 12 = $67,200 per year

Profit Potential: Aggressive

Same scenario:10 trades per day, 5 contracts, $2.20

commissionsNow assume aggressive average of 6 points

per day6 points * 5 contracts * $50 per point = $1,500$1,500 - $220 commissions = $1,280 per day$1,280 * 5 = $6,400 per week$6,400 * 4 = $25,600 per month$25,600 * 12 = $307,200 per year

Choosing a Broker

1. Software / Tools

2. Commissions

3. Data Feed

4. Intraday Margin $500 to $5,625

5. Customer Service

Recommended Brokers

www.mirusfutures.com www.thinkorswim.com www.interactivebrokers.com www.infinityfutures.com www.alaron.com www.mfglobalfutures.com www.pfgbest.com

Tools of the Trade: Charts

Futures can be fast movers Many futures day traders prefer to use

tick or constant volume bar charts Warning: Prophet charts are terrible for

intraday futures trading Recommend TOS charts or NinjaTrader

charts with a good data feed

Tools of the Trade: DOM Ladder

Allows you to set multiple price targets and stops

Easy visual representation of the market Shows depth of market (DOM)

Tools of the Trade: Technicals

Moving Averages Oscillators Trendlines Price Patterns Pivot Points Fibonacci Retracements Value Areas

**too deep to go into all these today**

LEVERAGE WARNING!!!

The majority of futures traders blow out their account very quickly

Respect the leverage! Start in Simulation / Papermoney Do not hold overnight yet ALWAYS have a stop loss in place Progress to 1 live contract after

consecutive long term successes Continue progression slowly