Don Miller’s E-Mini Strategy Course, Part III
Why Trade The E-Minis Over Stocks?
Let’s move on and look at the
many advantages that E-minis have over trading individual stocks.
Leverage
The first advantage the E-minis
have over stocks is the fact that the leverage is amongst the best in the
business. If you daytrade stocks, you can leverage your money 4:1. If you hold
positions overnight, the leverage drops to 2:1.
But with the E-mini futures
contract, you are getting a leverage factor of approximately 11:1.
For example, if the E-mini
contract is trading at 900.00, you are controlling $45,000 of S&P 500 Index
equities.
If your overnight margin (the
amount you have to post as bond or the amount held in your account by your
broker) is $4000, your leverage is also about 11:1.
When you daytrade the E-mini
contract, some brokers will allow a margin of 50% of the overnight. You can see
how quickly the leverage can approach over 20:1.
Think about what leverage has
done for you with your home. If you buy a home for $250,000 and you put 10% down
($25,000), you will double your money if your home simply goes up 10%. You’ll
triple your money if it goes up by $50,000. This is the magic of leverage.
But as you know, this same
leverage can bite you. If your home depreciates by 10%, you have lost all the
capital you have placed in it. This is why protective stops and correct
positions are essential, especially when leverage is in place. But when
correctly used, the leverage in the E-mini markets allows your capital to
rapidly accumulate at a far greater pace than the leverage offered to you in
stocks.
24-Hour-A-Day Trading
Stocks officially trade from
9:30 a.m. ET to 4:00 p.m. ET, plus a few more hours in pre-market and
after-hours trading. The E-minis trade throughout the day, for a total of
approximately 23 hours. This is key. Why?
Let’s imagine if you are long
stocks and a terrorist attack occurs at 8:30 p.m. ET. What can you do about
getting out of your stocks? Nothing! And you have to wait until morning to be
able to get yourself out. BUT if you are long E-minis, you simply go to your
screen, click a button and voila…you are flat! And in this day and age, my
scenario here is unfortunately not farfetched.
You have unlimited overnight
exposure with stocks. With the E-minis, your exposure is limited to the time you
receive the information to the time you exit your trade.
There Are Few Overnight "Holes" In The
E-Minis
We’ve all seen stocks open at
half their previous day’s closing price (or worse!) after they have announced
negative news. This is a gut-wrenching event when it occurs.
If you were long D & K
Healthcare (DKWD) on Monday 9/16/02, you might have thought the stock
would soon attempt to break above 25. The next morning, however, you saw
your share value plunge nearly 60%. That was on news that the company had
forecast lower earnings for the first quarter.
If you held shares of
IMClone Systems (IMCL) on 12/31/01, you were kicked in the gut as the stock
dropped 16% when the FDA declined to accept its application for a new cancer
drug.
This sort of thing has never
happened to the E-minis. Yes, they gap higher or lower, sometimes 2% – 3%. But
they have never gapped down to the extent that stocks sometimes do (as much as
50% – 80%!). And this lower overnight risk allows you to better plan your
position size and potential risk on a trade. Remember, stocks make large
overnight "holes" all the time. E-minis rarely do.
No Upticks Needed To Short E-Minis
We’ve all had the unfortunate experience of wanting to get short a stock at a
certain price, only to see it not uptick for quite some time. When this happens,
our fill is far worse than we hoped for and our edge was greatly diminished.
Just as unpleasant are cases in which we see a huge plunge occurring and we
don’t even dare to pull the trigger because we know there is no way to avoid
getting a horrible entry price.
With the E-minis, no uptick is required. Nor do you need to "borrow" it as you
do with stocks. You simply hit the bid and you are immediately short.
As I walk you through the real-world examples later in my course, you will
see that when my trend and momentum criteria are met, the ease of being able to
short the market provides you and me with a huge edge when we trade the E-minis.
E-Minis Are More Difficult to Manipulate
Call me a cynic, but when you have stocks that plunge shortly after brokerage
firms make their recommendations, plus the specialists or market makers involved
— the possibility of manipulation exists.
And I would rather not be short a stock that some analyst just happens to fall
in love with and then watch as it moves against me when I wake up in the
morning. Also, many stocks trade thinly due to the market makers or specialists
being unwilling to take size.
This is less of a problem with the E-minis. When they become more popular, their
liquidity will become better and better.
The E-Minis Only Have One Personality
Individual stocks trade differently from each other. This is because their price
is controlled by individual specialist firms or market makers. You may see
exactly the same trading setup in several stocks, but they can all react
differently because of the way the specialists run their book. This can be very
frustrating.
This is not a problem with the E-minis. In my opinion, they trade much more
cleanly and smoothly than stocks, and this makes their behavior much more
predictable and easier to trade.
Stocks are not tightly correlated to the movement of the overall market. Let’s
say you felt the overall market would rise sharply. Obviously, your E-mini
position would rise with the overall market. But there is no guarantee that an
individual stock will rise, too. As you know, on good market days up to 50% of
the stocks will not rise. This leaves you at a big disadvantage. Now even though
I am going to teach you how to identify exact buying and selling opportunities,
you may want to add your own market-timing indicators to them. These market
timing indicators might include the VIX, put/call ratios, Advance/Decline
Indicators, the TRIN, etc. If you do decide to use these indicators, they are
keyed off of directly timing the market (E-minis). Individual stocks will move
in a less correlated manner to these indicators.
The bottom line is: You can have an opinion about direction of the overall
market and then try to trade an individual stock according to your directional
bias. But then even though you are 100% correct about the market…you can still
lose money because the stock went the opposite direction of the market. With the
E-minis, you don’t have to worry about it moving in a different direction from
the overall market.
In conclusion, I have given you a half dozen strong reasons why you should trade
the E-minis over stocks. There are other reasons as well which I won’t go into
detail about here. But just so you know, they include tax advantages (talk to a
qualified accountant) and cost-effective commissions.
Don Miller