What are Equity Index Futures?

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Video Transcription:

Hello, traders! Welcome to the Futures Trading Course and the third module Equity Index Futures. In this lesson, we are going to define what equity index futures are, how they are priced, and the futures contracts that we are going to be focusing on on our day trade. Now, a blog definition [inaudible 00:00:19] equity index futures is a futures contracts on a stock or financial index. The more common futures contracts on indices are the E-minis. We have the E-mini S&P 500, which its ticker is ES, the E-mini Dow, which its ticker is YM, and the E-mini Nasdaq, which its ticker is NQ. The contracts are sized at a certain value multiplied by the futures price. This value depends on the particular E-mini contract.

Now, on the example of the E-mini S&P 500, the contract size is $50 times the E-mini S&P futures price. This means that at the current market price of 20.39, the value of the contract is $101,950. There are other interesting vehicles like the German DAX and FTSE 100, which we will also be trading and focusing on. Remember that in this course, we are going to teach you strategies that work with all the index futures contracts that we have named here. For example, daily pivot strategy works with any E-mini, with the DAX, the FTSE, the Nikkei, etc, even the CAC 40, which is the stock index future of France.

What are Equity Index Futures

We are going to focus on the E-Mini’s, because they are the perfect day-trading vehicle if you want to day-trade equities using futures. They are easy to go long and short, and there is always liquidity, and there is no uptick rule. For you that don’t know what the uptick rule is, it’s a rule by the SEC that states that if you are short-selling, then you have to short-sell at a tick that is higher than the last traded price. There is almost 24-hour trading. It’s actually a 23 and half hour trading day for the E-mini’s. So if you live in Asia or Europe, you can still day-trade the E-mini’s alongside the DAX or the FTSE or the Nikkei or the CAC 40.

The level playing field, the Globex electronic trading platform means that large and small traders have equal access to the market, and trades are executed in the order that they arrive, not the size of the trade. Now, another particular reason we like to trade the E-mini’s is that they are volatile. And remember, when we’re day-trading, we can’t fear volatility. In fact, we have to hunt volatility, because we want markets that move. We want active contracts that give us plenty of opportunity to trade. We don’t want to be sitting in front of our computers, in front of our screens looking at a chart that only moves two ticks to the upside and two ticks to the downside and gives us a zero day-trading opportunities. The E-mini S&P 500 can move 20 points. The Dow can move 200 points in a particular day, giving us a lot of opportunities to make money.

What are Equity Index Futures1

Now, here is an interesting chart that I am going to explain to you. Before 1992, 100% of the trading was on a large S&P contract, because it was the only contract available. Then in 1992, there started to appear other futures contract. But in 1997, when the E-mini was introduced, you can see that people jumped or even big traders or big trading houses jumped from day-trading the largest S&P 500 contract to trade in the E-mini S&P 500. And in 2009, the E-mini S&P 500 was trading larger or had more volume than the large S&P 500 contract, which means that traders and the big trading houses preferred to day-trade the E-mini and use the large S&P contract as hedging, all right? Normally, it was the contrary before 2009.

So basically, this is why we’re going to be focusing on the E-minis and the E-mini S&P 500 because of how volatile they are and because they are going to give us a lot of excellent risk-to-reward opportunities for us to be able to make money on a daily basis.

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