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 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®.