Would You Like To Trade The E-Minis For A Living? Here’s How…

We are
privileged to be joined today by professional E-mini trader, Don Miller.  The
fast, unforgiving E-mini futures market has destroyed many traders’ accounts. 
Don was able to crack the code and consistently extracts profits from this
volatile market.  In this interview, he will share his insights into what it
takes to successfully trade the E-mini market.

Dave:  Don, welcome to Real World Trading.

Don:  Thank you, Dave. 
It’s a pleasure to be here today.

Dave: 
Let’s start from the beginning: What exactly is the E-mini market, and what
E-minis do you trade?

Don:
Most stock traders have heard of the “S&P Futures.” Yet because you need a large
amount of money to trade them, the S&Ps have been largely the domain of
institutions and large market players with deep pockets.  So to open up index
futures trading to a wider spectrum of traders, the CME created smaller-sized
contracts in 1997 called the E-minis. The E-mini S&P 500 contract was designed
with the individual investor and smaller-sized trader in mind. For example, the
E-mini S&P contract value is 50 times the underlying index (as opposed to 250),
just 1/5 the size of the “big” contract.

The S&P and Nasdaq E-minis
represent my main trading vehicles, although I also trade the DAX (Germany’s
equivalent of the U.S. Dow Jones) and European currencies to some extent.

Dave: OK, How do the E-minis differ from
ETFs like the QQQs and the DIAs?

Don:  While the underlying group of assets represented by both index ETF
and futures contracts are similar, there are four important product differences:
(1) leverage, (2) liquidity, (3) transaction costs, and (4) tax treatment.

In the case of leverage, E-mini futures allow one to control a significantly
greater amount with less capital compared to the ETFs.  For example, ETF traders
can typically trade with up to 4:1 intraday leverage, while trading the E-minis
can often provide 10:1 to 20:1 intraday leverage, depending on the broker’s
specific margin rules.

Liquidity differences include both market access hours and what I call
“ability-to-fill” issues.  With respect to market access, E-minis can be traded
pretty much on a 24-hour basis, while access to ETFs is roughly half that (main
trading session plus slightly expanded pre- and post-trading sessions).  In
terms of “ability-to-fill”, spreads on the ETFs can be narrower than their
E-mini counterparts since ETFs are traded in pennies versus fixed increments on
a first-come first-served basis.

Dave: What are the advantages of trading E-minis
over the ETFs?

Don:  To
best answer that, we again have to go back to the four key distinctions I
mentioned.  For example, while one might think that leverage is “better” with
the E-minis, higher or excessive leverage is a double-edged sword and absolutely
the worst product attribute for an emerging trader whose skills aren’t yet
refined, or for a professional experiencing a slump.  And a 4:1 leverage rate
for “pattern daytraders” is more than sufficient for many traders.  Yet if one
is skilled and disciplined, leverage can certainly work to a trader’s advantage.

Dave: Is there a fixed futures commission rate across the board?  What
should a trader expect to pay to buy and sell one contract?

Don: 
If you mean a standard industry rate, there’s really not one.  For example, I’ve
seen retail per-contract rates range between sub-$2.00 and $3.00 and higher, so
it definitely makes sense to shop around.  As the E-minis have become more
popular and widely accessible over the last few years, there’s been a general
tendency for commissions to drop, similar to how equity commissions dropped over
the last decade, which is great for all traders.

Dave:  I see it can really add up if you
are a scalper. Is the commission negotiable? 

Don: 
There’s room for negotiation with some brokers, primarily those who cater to
larger-volume traders. Yet as many brokers have implemented volume-based rates
which result in smaller rates as one’s trading volume increases, the need for
individual negotiation has be lessened.

I should also mention that higher-volume E-mini traders should
strongly consider leasing a seat on the CME which can significantly reduce
commission expenses, since a portion of a futures broker’s commission rate flows
right to the CME to cover their cost components.  Traders can check with their
futures broker or the CME for more information on that.

Dave: Do
you lease a seat on the CME?

Don:  Yes I do …primarily for the commission benefits.

Dave:  What is the typical cost and term for a leased seat?

Don: 
The lease term is typically six months.  As with the general market, monthly
lease prices fluctuate based on changes in demand, yet have

Dave: Interesting, I see the Pattern Day Trader
rule does not apply to the E-minis.  With this is mind, what would you suggest
as the minimum capital for someone just starting out trading E-minis? 

Don:
That’s a tough question to answer, as I believe that minimal capital balances
for someone just starting out should include what I call a “learning curve”
buffer.  What I mean by that is that there will be many “expenses” in the
context of losing trades as one learns and refines the “skill” of trading — and
trading is indeed a developed “skill” not at all unlike that acquired and honed
over the years by professional golfers, pilots, and surgeons.  Sort of like an
emerging golfer’s cost of practice buckets and broken windows.  Then, assuming
the skill has been acquired, trading capital requirements will vary greatly
based on differences in income objective, level of skill attained, and other
factors.

Dave:  What increments do the big two equity index
E-minis move in — the ES and NQ?

Don:  ES moves in 25
basis point (0.25) increments, with each full point change reflecting $50 in
profit or loss.  NQ moves in 50 basis point increments with one point being
worth $20.

Dave:  Wow !  I can really see how these
things can be profitable.  Talk about leverage! I can also see how they can
destroy your account pretty fast without excellent money management.

Don: 
Absolutely.  Keeping your perspective in terms of what you’re trading in the
heat of the battle is essential, and can be where many traders fail.

Dave: 
Let’s move into the nitty-gritty of your trading technique.  First, how is your
trading screen set up?

Don: 
I pretty much use a multiple-timeframe technique, meaning I monitor the markets
on various micro- and macro-timeframes to determine the current market “bias.” 
My current primary style is that of a short-term trader, meaning that I seek
high-probability short-term trade price movements and scale in and out of trade
sequences using the market bias at my back.

Dave:  What time frames do you have on
your charts?

Don:  I primarily use
one, three, 13, and 60 minute charts for my intraday analysis, although I’m also
aware of larger timeframes.

Dave:  Three and 13 minute charts seem a bit
unusual.  Why do you use those versus, say, five and 15-minute charts?

Don:  That’s a good question.  The primary reason is because I use 15
period moving averages (MAs) on all of my timeframes to help define trend, and
the three-minute 15MA approximates the one-minute 50MA (3×15=45) while the
13-minute 15MA approximates the one-minute 200 (13×15=195), both of which
coincide with benchmarks that many traders reference.  Yet there’s no “right”
interval so long as one is simply aware of market activity on both a micro- and
macro- basis and they keep their indicators consistent across timeframes.

Dave: Do you wait for all the different time frames
to line up before you enter a trade?

Don:  Not necessarily,
so long as the larger timeframe bias appears clear.  For example, I’ll often put
on partial position as what I call “wholesale prices” begin to become available.

Don:  Absolutely, although I prefer to manage risk as much — if not more
so — through the use of size instead of stops alone.  For example, trading a
quarter-lot with a wider price stop is similar to trading a full lot with a
tighter stop in terms of risk management.  I think that’s one area where traders
are often misled, meaning they think only in terms of price stops to manage risk
instead of making size adjustments, especially in volatile markets.

Dave:  You mentioned moving averages —
what other indicators do you use?

Don:  I use stochastics
to gauge momentum, and Bollinger Bands on some of my larger timeframes to gauge
extremes.  I’m also aware of daily pivot and three-line break supports, yet
those are more supplemental in nature.

Dave:  If you had to use just one
indicator, what would it be?

Don:
Moving averages. And while
some may argue that a moving average is a rather lame lagging indicator, it’s as
old dirt and I still haven’t seen a better trend indicator.  Its slope Moving
for example, especially when compared on multiple timeframes, can say a thousand
words.

Dave:  Do you watch any other markets or
stocks when trading the E-minis?

Don:  Not really,
although I try to be aware of some of the underlying sub-sectors, such as the
banking and semiconductor groups which can help me decide whether to trade ES or
NQ depending on which sector has a clearer pattern.  Yet having said that, the
pattern of the index itself is most important.

Dave: Can you explain your basic trade
setup?  What are you looking for before you enter a trade?

Don:  While I have a menu of preferred setups, my current
bread and butter is a first pullback and reaction, as I mentioned earlier.  So
basically, that means a market has begun a potential trend on a certain
timeframe, and has “caught” two sets of traders …those needing to exit losing
positions and those wanting to enter potentially profitable positions.  The
combination of the two groups is typically sufficient to push the market higher
or lower, even if the market remains in a longer term trading range.

Dave: Do you have a profit target per
trade?

Don:  No, in part
because true profit potential depends on the timeframe in play, trade size
selected, etc. 

Dave: How about a per-day profit target?

Don:  While I’m
generally aware of my intraday P&L — although I purposely hide it during most of
the day — I try not to place much emphasis on it.  My goal is to stop trading
when either the pattern has played itself out or I’ve lost my focus.  Most of my
financial goals are longer-term in basis…from monthly to annually to a
longer-term strategic plan, similar to many corporate entities.  In the long
run, what happens on a daily basis in the course of 250 annual trading days or
thousands of trading days over a career is pretty irrelevant, although I do have
a few shorter-term performance benchmarks that I use to monitor my performance
on a more immediate basis.

Dave: Let’s take the opposite of the
previous question.  Do you have a set per-trade loss limit and/or a set
per-trading day loss limit?

Don:  My general rule is
when the initial trade premise is no longer valid, whether it’s because the
pattern has disappeared or my focus is off, I’d better back off until either
presents itself once again.  In both cases, trading opportunities or improved
focus can sometimes be regained in minutes, while other times it may take until
the next day.  I think a decent trader knows when he/she or the market is off,
without using specific “stop trading” rules. My most specific personal “rule” —
if you will — is to regroup after consecutive losing trade sequences or losing
days.

Dave: Have you noticed any recent changes
in the E-mini market?

Don: 
Not really, although the ever-increasing volume and liquidity continues to
endanger the longevity of in-person trading processes, which isn’t necessarily a
bad thing in terms of more efficient market access.

Dave:  Are they getting easier or more
difficult to trade successfully?

Don:  I think successful
trading is more dependent on one’s ability to learn the trade — no pun intended
— and maintain a certain level of peak performance more than the underlying
characteristics of any specific market.  What I mean by that is whether one is
trading E-minis or tiddly winks, trade results ultimately come down to how well
one executes over the long run.  For despite proven and time-tested probability
patterns that repeat over and over again, many studies have shown that the vast
majority of futures traders fail and there’s a transfer of wealth in this
zero-sum game from a vast majority who lose to a small minority that
consistently win.  I think that says a lot about many of the non-technical and
non-market aspects that ultimately drives results.

Dave: Any final words
of wisdom?

Don: I
noticed that you mentioned when we started that I was able to crack the code. 
Yet I think the real code that has to be cracked is one’s internal code, meaning
learning how one deals with pressure, fear, mistakes, conviction, perseverance
and faith.  It’s frankly a required journey that never ends and one most folks
refuse to take, or only take half-heartedly, which probably explains why so few
ever make it over the long run. 

Dave: Thank you for joining us today, Don.

Don:  You’re very welcome

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