Day Trading E-mini S&P 500 futures
MANAGING THE RISKS OF E-MINI TRADING
Info on day trading risk management.
The E-mini® S&P 500® futures, like all futures contracts, is risky because it is a highly leveraged instrument. Leverage means that only a small percentage of the market value of the product is required as cash in your account in order to buy or sell the contract. Consequently, a small percentage movement in the price of the E-mini S&P 500 futures can produce a dramatic percentage change in the level of cash in the trading account, either higher or lower and even depleting cash altogether.

Managing the risk that comes with leverage can be done by maintaining excess margin in your trading account. This has the same effect as reducing the degree of leverage used and will also help guard against over-trading. As well, managing the risk of loss associated with day trading can be done with a stop or stop limit order that is designed to close an open position should it incur loss beyond a specified amount.

The effectiveness of the stop limit order can be compromised during especially volatile trading periods. The order may be filled at the limit price (which is the worst price that the trader will accept on the order) or even, in the event of gapping behavior, be unabled to be filled. During these times, the day trader should remain attentive so long as the position remains open or, in the extreme, avoid trading until volatility returns to normal. As well, trading will not be possible if the market moves to the price limit - circuit breakers established by the exchange and designed to temporarily halt trading in an attempt to calm markets.

Beyond the price risks listed above, the day trader also has transaction risk such as error in order entry or usage. However, because day trading the E-mini S&P 500 is done electronically, the trader has the ability to confirm (or cancel) an order prior to transmission and this greatly reduces transaction error. The trading software also generates written records associated with all orders and fills thereby eliminating errors in recording.

Finally, the E-mini S&P 500 day trader is exposed to the risk of communication failure with the Globex platform or even failure of the platform itself. While the trader has no control over the latter, the former is reduced by brokers who provide telephone access for their day trading clients. In the event of online communication failure, clients can execute orders by telephone.

The Magnification Effect of Leverage
A drop in the E-mini S&P 500 futures price from 904.00 to 895.00 is equal to just one percent yet represents a dollar change of $450 per futures contract (9 points x $50 per point). A day trader with a $2000 account who is long one E-mini will see their account value drop to $1550, a decline of over 22%. This magnification of percentage changes is a result of leverage.

 

 

 

Article on the Risks of Day Trading
Learn more about the risks of day trading and how to manage them in this Futures magazine article. (Adobe Reader required.)

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®.

© 2010. World Link Futures, Inc. All rights reserved.
Futures trading involves substantial risk and is not for everyone. Only risk capital should be used.
Keywords: E-mini risk management, managing risks of day trading, managing risks of E-mini trading
Abstract: Managing the risks of day trading E-mini S&P 500 futures.

Day Trading E-mini S&P 500 Basics | About Electronic Trading | E-mini S&P 500 Sample Trades | Day Trading as a Business | Managing the Risks of E-mini Trading
The E-mini Day Trading Plan | Fine Tuning the E-mini Plan | Measuring E-mini Profit Potential | The Psychology of E-mini Day Trading | Real-Time E-mini Demo Account


 

 

 

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