Keeping An Eye Mr. Softie

On a longer-term time frame, the main challenge the Qs and underlying equities
have in reversing hard to the upside is the hourly trend and support angle which
remain down. Simply put, the lesser time frames are going to have to show
dramatically improved trend support to get the current barge turned around, and
I’m continuing to look at long entries as short-term contra-trend trades only
until the hourly picture changes.

I mentioned the other day that one of the most frequent questions I receive is
why consider trading the Qs instead of the Nasdaq E-Mini (NQ) futures,
especially since the Qs track NQ in a 1:1 ratio which can never vary without
creating an unsustainable arbitrage situation. While I believe each has its
benefits, and as with any trading vehicle there is no panacea, we can look
closely at four key trading characteristics to help traders better understand
the differences between the two: Leverage, transaction cost, liquidity, and tax
implications.

Leverage:  Clearly, futures trading provides greater leverage. But does
that tip the scale toward the futures? In my opinion, no. My personal opinion,
as I’ve noted in my video
and course, is that I
am not an advocate of strong or excessive leverage, especially for newer
traders developing their skills or even some established traders. While many
traders only look to the upside potential associated with greater leverage, I’ll
be just as quick to point out the downside, as I’ve seen more traders —
including experience traders — get destroyed vs. benefit from excessive
leverage. The 4:1 intraday leverage available on the Qs under the new rules for
adequately capitalized traders is plenty enough and arguably excessive for some.

Transaction Cost:  Comparing commissions between the two becomes an
interesting exercise which is heavily dependent upon trader style and broker
commission schedule. As such, comparison analyses and results will be very
trader specific. When performing the analyses, be sure to factor in frequency of
scaling in and/or out on the Q side (paring in or out, of course, has no impact
on NQ since the fees are per-contract vs. per-trade), along with ECN fees,
including whether you are typically adding or reducing liquidity for those ECNs
who price accordingly. Generally speaking, heavier lot traders and/or those who
often increase ECN liquidity may do better with the Qs.

Liquidity:  This one is a close call which will vary throughout the day as,
at times, NQ contract bid/ask sizes will outnumber Q shares and vice versa. Yet
based on my experience trading both, I tip the scale to the Qs with respect to
order entry. Liquidity on both NQ and the Qs clearly continues to grow
exponentially, yet I’ve found it much easier using penny (and on some
platforms tenths of a penny) spreads to get in and out vs. getting in line on
NQ’s 50-basis-point spread. Having said that, keep in mind that 1 point on NQ
equals approximately $0.02 on the Qs, so it can be a subtle difference. As I
explain and demonstrate extensively in the Q video and school, I advocate
trading the Qs 100% via an ECN, which puts the Qs on absolute par with NQ in
terms of immediate fills.

Taxes:  Advantage NQ as 60% of gains accrue to long-term.

So which is better? Ultimately, I believe it comes down to personal comfort and
trading characteristics. After having traded both, I’m personally much more
comfortable trading the Qs over NQ. Yet many column readers and students are
using the QQQ strategies to trade NQ exclusively. NQ charts and market action
continue to dictate 100% of my Q strategies, and the Q charts are provided in
the daily column solely to provide price reference points.