Emini Systems - The Logic Behind Emini Trading Systems

By Waldemar Puszkarz

I could equally well call this article "Emini systems - the lack of logic behind emini trading systems" as, in fact, sometimes such lack illustrates better what the proper logic should be. And that's what this article will focus on, hoping that by exposing the lack of logic behind emini trading systems, we should be able to come up with the right logic, the logic needed to produce good, robust emini systems.

But, first things first. Let's start from what eminis are for as opposed to stocks, this is hardly a household term. While a large percentage of American households do maintain some position in stocks, the overwhelming majority of them have never dabbled in something as esoteric as eminis. Emini futures, to be more specific.

Emini futures are simply smaller-sized contracts of "full-grown" futures contracts that have been around for a few decades. Unlike the latter that have been traded on physical exchanges, eminis have always been traded electronically, allowing retail traders with access to the Internet to compete against institutional traders from the comfort of their homes or home based offices. That's what the "e" in their name stands for, namely "electronic."

The most popular such contracts include ES, YM, and ER2, that is the emini contracts of S&P 500 futures, the Dow futures and the Russell 2000 futures. In other words, these are eminis of stock index futures.

One of the best ways to approach trading eminis is through mechanical trading systems. A system like that consists of a set of objective rules that determine how to open a position in the emini futures market and then how to close it.

It is possible to make money trading eminis in a purely mechanical fashion. This author has designed several successful and relatively simple, robust emini systems so this opinion is grounded in his considerable experience.

However, not all trading systems are born equal.

This applies also to mechanical emini trading systems. One category of such systems consists of day trading systems. These are systems that open and close their positions the same day, thus allowing traders to use the intraday margin, which is much lower than the overnight margin. For this reason, emini day trading systems appeal particularly to retail traders, those market participants whose budgets (and so also trading accounts) tend to be smaller. Because of smaller intraday margins, those traders can trade with more contracts and thus can stand a better chance to make more money.

Since more and more traders enter the thrilling arena of day trading emini futures, more emini day trading systems are being made available to them by people who specialize in designing such systems, usually referred to as vendors. We could, in principle, also call them experts, although calling someone that way does not necessarily make him or her a true expert. Judging by the quality of what is available out there, the field of vendors is hardly crowded with experts.

One way to judge the quality of a trading system, whether it is an emini trading system or not, is by examining its logic. Systems with a poor logic, that upon a closer inspection can even be found self-contradictory, are usually poor performers or have parameters that are rather unappealing to serious traders who know their stuff.

A good example of a faulty logic is that of many simple (or rather simplistic) breakout systems that try to capitalize on catching a strong trend in the market. In other words, they attempt to identify periods of wide range expansion. From the logical point of view, the problem with such systems is that they usually take position on 50-60% of trading days, while such expansion periods, or strong trends, occur only about 30% of the time. There is a clear inconsistency in what the systems do compared to what they were really designed to do. As a result of this, many simple breakout systems overtrade, which reduces their performance. In the long run, this performance can become too poor to make such systems good enough for trading.

The reason why overtrading reduces the profits here is quite simple. On the days when the strong trend does not materialize, but the system is active, three trading outcomes are possible: a small profit, a small loss, and a big loss. The small profits are likely to be offset by small losses and what we are left with are only big losses. While these big losses may not be frequent, in some systems they can be as big as the big profits from strong trends that the systems like that try to catch, which is clearly bound to affect their performance.

The way to prevent the system from overtrading (and thus the degradation of its performance) is to ensure that it trades only (in practice, mainly) on the days the strong trends really occur. Can such a system be designed? The answer is: yes, it can be, but you cannot do this with simplistic ideas.

Emini Future Trading Explained For Beginners

By Doug Fisher

Emini contracts have experienced a boom in new market participants since their introduction mainly because of their lower margin requirements which allows traders that don't have unlimited funds to participate in the index futures markets. Emini contracts are available to trade on all three major indexes including the S&P 500, NASDAQ and the DOW and are widely utilized by traders for both day trading and scalp trading.

The S&P emini contract is one-fifth the size of the large contract which makes it appealing to traders with smaller brokerage accounts. Because the emini futures market is fluid, volatility creates opportunities for traders to profit everyday. Stagnant and sideways markets that so often are a part of the stock market is virtually non-existent in the index futures market. The New York lunch hour is usually the only slow time during any given daily session since floor traders and other market participants break for lunch, with action quickly resuming once the lunch hour is over.

Some traders only trade the first hour to hour and half each day, taking their profit and doing whatever they wish for the rest of the day, while others will trade only during the first and last hours of the day. The opening and closing hours of the day often see the most volatility and market moves, although many opportunities to profit are available throughout the day.
One of the most exciting features of the index futures markets and what attracts traders is that market direction is not a concern. Traders can profit by executing trades both long or short and only care about being on the right side of the trade. Unlike stock trading, hours of research and chart scanning for potential stocks to trade is eliminated with emini index futures trading. Since the same contract will be traded each day, there is no need to look over hundreds of charts each night.

Emini future trading offers and opportunity for traders to profit on volatility within the market on a daily basis. Although the futures market is influenced by financial news reports and geo-political events, the emini trader can usually sit on the sidelines when financial reports are scheduled to be released. Almost all financial reports have specified release times which allow the trader to plan his strategy around these reports. There is no need to worry about stock analyst downgrades or unexpected news events that are so common on the stock exchanges, which can adversely affect a trader's positions.