There are reasons why a day trader would prefer Eminis over day trading
stocks, and vice versa. Here are a few major considerations.
The edge…
Stock trading can take advantage of the small and variable lag time
between stocks and the futures. This can give a day trader who is
trading stocks an edge, especially if he/she is a scalper. And, if you
are trading a liquid stock which is highly correlated to the Dow or
S&P500, it’s possible to latch on when a “buy program" hits the
market.
This variable lag, however, explains why the Eminis often times give
more accurate support and resistance levels than stock market indices
or individual stocks. Since the stock index futures lead the
stock market, they’re not constantly lagging behind, playing catch up,
or over-shooting a leader’s path, as the stock market is. The
Emini’s movements are more pure, reflecting supply and demand instantly
and accurately.
The leverage and size…
Trading stocks allows you to use less leverage and reduce your trading
size to a level that may be more comfortable for some traders.
Trading one contract in the Emini’s carries a hefty bit of leverage
that some traders may not want. On the other hand, many traders
prefer the futures leverage.
The liquidity…
If you are trading stocks, you may have noticed that many individual
stocks are not very liquid, at least not liquid enough for the kind of
defensive day trading I do. To use my crucial rule, “every trade
starts out as a scalp until proven otherwise," you have to trade
something that is extremely liquid, or slippage will ruin you. However,
if you are interested in trading stocks, there are some stocks that do
have excellent liquidity.
The Eminis are one of the most liquid markets in the world, with very little slippage.
The professional competition…
The NYSE stocks trade in a pit with specialists taking advantage of the
spread, scalping with minimal costs per trade, a huge advantage over
the public. The playing field is not level. Specialists are not
in business to lose money.(The Nasdaq stocks, however, trade
electronically, eliminating these problems.)
Emini’s are traded electronically without a pit and without locals
taking advantage of the spread. (The Maxi contracts are still in
the pit, but the Eminis appear to be leading the Maxis now, so there
doesn’t appear to be direct competition between scalpers of the Eminis
and the locals in the Maxis pit.) It’s true that big Emini
traders who own a seat on the exchange and trade “size" have a cost
advantage, but by historic standards, their costs are not much lower
than the “retail" traders. Any Emini trader can now trade a
“round turn" (buy and sell combined) for $4.80 per contract. And retail
costs have been dropping. They’ll probably continue to fall.
The ease and psychology of two-sided trading…
Stocks are a bit difficult to short due to the “up-tick" rule (which
means a stock has to move up one tick before you can short it).
And there is a view widely held by retail traders that shorting a stock
is not the most “wholesome" thing a person can do. (But actually, short
positions are “squeezed" in uptrends so they provide additional “fuel"
for uptrends. After all, a price rally normally doesn’t stop until most
of the buyers have bought and most of the shorts have been squeezed
out. Take the shorts out of the equation and rallies are not as
sustainable.)
Day trading the Eminis is not hindered by an up-tick rule. Going short
is as easy as going long. And as far as I know, there’s no stigma
attached to shorting the eminis. In fact, most professional stock
index futures traders I’ve met prefer shorts over longs. Maybe
it’s because the public is more comfortable making money on uptrends.
Preparation to trade…
Trading stocks doesn’t necessarily involve stock fundamentals.
But stock fundamentals, including the stock’s “story," can help
determine whether you want to favor longs or shorts. For
instance, if you’re trading the stock of a company that has just
announced a cure for cancer, you might favor the long side. But
you’ve got to dig and read excellent sources to find good fundamental
stock info. And even if you’re not trading with stock fundamentals,
you’ve still got to search hundreds of stock charts for technical
setups and chart patterns. This can take hours per day.
Day trading the eminis doesn’t necessarily involve anything like stock
fundamental analysis. I don’t even pay attention to the content
of important news releases, such as the Fed’s decisions on interest
rates. I just keep track of when the important reports are
scheduled, and I get out of their way until after the news hits.
When the news hits, there are usually two false moves. Then a
decent trend often emerges, and I try to get on board. With no
stock fundamentals to consider, and only the same charts to analyze
each night, I save myself hundreds of hours of work each year.
Taxes…
I’m not an expert on taxes, but one thing is for sure, it’s much easer
to prepare your own tax forms if you’re trading the Eminis than if you
are a taxpayer who is making a living trading stocks or exchange traded
funds (like the Spyders and QQQQ’s). There may also be some
dollar tax advantages. Check with your tax adviser, of course.
Size of your trading account…
Trading stocks requires a $25,000 minimum in your account. I guess the government stepped in to protect us from ourselves.
You can trade the Eminis with as little as $2,000 in your trading
account, which makes it possible for just about anyone to day trade the
Eminis.
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