DAY TRADING PROFIT POTENTIAL
For any contract, the day trading profit potential is captured by the Daily Range Value, calculated as the dollar value
of the contract's high-low price range over the trading day. In the case of the E-mini® S&P 500® futures ("Emini"),
the high-low price range is multiplied by $50, the contract's multiplier.
The result is the theoretical maximum profit or loss possible during the day from trading one Emini contract. For example,
a day's trading range of 12.50 points represents a Daily Range Value
of $625, the per-contract maximum that could be earned (or lost) by buying an Emini at one price extreme and selling at the other.
From January to December 2011, the Daily Range Value of the Emini fluctuated between a minimum of just $75 and a maximum of $4,925 with
the average being $1,064 per contract.
Show me the Money. A quick glance at the chart above shows why the Emini S&P 500 is so popular among day traders: there is plenty of
profit potential, more so than with most other futures contracts. (Chart shows Daily Range Values of the nearby Emini from
January to December 2011.) |
The histogram
(below) is more revealing: almost half of the trading days in 2011 had a Daily Range Value of $1,000 or more per contract
with 19% of the days exceeding $1,500.
How often is often? The histogram shows the frequency or how often the Daily Range Value fell into one of the
intervals specified. For example, the Daily Range Value fell between $1,000 and $1,250 per contract 14.7% of the trading
days in 2011. There are even very active days
that provide the potential to earn thousands of dollars over just one trading day.
(Chart shows frequency of various Daily Range Values of the nearby Emini from
January to December 2011.) |
No Emini day trader can or should expect to buy at the low and sell at the high. For that reason, the Daily Range Value
represents a maximum theoretical measure. In practice, though, a day trader can strive to capture some percentage of the
Daily Range Value as target performance for their trading system.
Apart from showing profit potential, the histogram is also useful in quantizing the expected frequency of "spectacular days" and the opposite, "down days"
in the Emini market.
Spectacular days - when the Daily Range Value surpasses $2,000 - occur with more likelihood than one might expect
so any trading system should at least provide the opportunity for the day trader to stay in the market and capture these
large price swings.
The number of down days, when trading is too quiet to generate much if any opportunity, depends in part on the criteria for
initiating a trade as detailed in
the trading system. For example, a day trading system that requires a predetermined movement away from a local high or low prior to
establishing a trade will require a sustained price movement to trigger a trade. Depending upon the size of the requisite movement,
days having a Daily Range Value below $500 may not provide many trading opportunities. Based on the histogram, a trader following
this system might end up sitting on the sidelines one in every five trading days. As another example, a trader who plans to capture
only the relatively large movements in the Emini, say beyond a $2,000 Daily Range Value, should realize that such movements
have in the recent past occurred only about 8% of the time.
|
The following trademarks and service marks are owned by Chicago Mercantile Exchange Inc.: CHICAGO MERCANTILE EXCHANGE®,
CME E-mini®, CME®, E-mini® and Globex®. The following are trademarks of The McGraw-Hill Companies: S&P®, S&P 500®.