The Uncertainty of Trading E-Mini S&P Futures - ToughNickel - Money
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The Uncertainty of Trading E-Mini S&P Futures

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Glenn Stok writes about investment and risk-control strategies that he has perfected during 45 years trading stocks, options, and futures.

I like to trade the S&P 500 E-mini Futures since it's a more diversified way to trade stocks. I don't need to focus on what's happening with one particular company. Just a general knowledge of where the market is heading, as a whole, is useful.

Also, trading futures is treated better tax-wise because the IRS allows 60% of the gains to be taxed as long-term gain even if you hold it for only one minute! It also requires fewer resources to purchase a futures contract than it does to own the equivalent value in stocks.

The logic of uncertainly that I will discuss applies to any trading strategy. So if you prefer individual stocks or portfolios with ETFs, this article will help you as well.

I like to use candlestick charts such as this one just to have a visual of where the market is heading.

I like to use candlestick charts such as this one just to have a visual of where the market is heading.

Risk Control Is Crucial

There is an important thing to understand: S&P 500 E-mini Futures are highly leveraged. One contract is equivalent to 500 shares of the S&P index (Symbol: SPY). So you need to know how to control your risk. You can't let emotion guide you. And you can't be greedy, as that will make you mess up your trades.

When I started trading the S&P Futures, I always protected myself with stop-loss orders on every trade. I decided to limit my losses to $200 and let my winners run a little further, but taking the profit quickly before it turned around again.

Taking small profits from tiny moves is called scalping. Scalping can be done in either direction, up or down. Just take the profit from the move, as long as you chose the right direction. But this is where the uncertainty becomes an issue.

How I Began Trading S&P Futures

When I began, I thought this would be a reasonably sure thing. I reasoned that every trade has a 50/50 chance of going in my favor. That's how it is with buying stocks. The odds are pretty much balanced.

So if I force half my trades to be limited to losing $200 while at the same time allowing half my trades to make more than $200, I thought I'd be on the positive side most of the time.

That didn't work. I got stopped out half the time.

And the other half the time, those trades that went up high, always came back down to the point where I just had a $200 gain.

Not wanting to give it all back, I had another rule, when a good trade seems to start coming back down, get out while I still have a gain.

Well, with all that, you can see that on the average I was gaining $200 half the time and losing $200 half the time.

Due to my strict discipline and risk management, I never lost money by trading futures. But I wasn’t making money either.

Some futures traders do so many things wrong when they start,that they lose all their money. They either trade too big, they trade on greed, they let emotion get in the way, or they don't use protective stops. It's essential to get a handle on these things.

Analysis of the Trades

As for me, I was keeping a detailed log of all my trades. After a while, I had enough data to have something sufficient to analyze.

Looking over all my losing trades, I discovered that I was always right. Every single trade that I was stopped out on with a $200 loss had later turned around and would have become a $200 gain—most within the same day, and a few by the next day. But none took any longer than 24 hours to turn around.

Hold your horses! Before you run and try this for yourself, I need to tell you how it goes through the process of going from a losing position to a winner, and the risks involved. There are no sure things in trading. If there were, everyone would be billionaires.

The process involved vicious swings. Without a protective stop to limit risk, I found the losing trades would go very much in the wrong direction before turning around. It was not uncommon to be sitting on a paper loss of one or two thousand dollars, before turning around and ending up with a $200 gain.

As I tested this theory, I always placed a closing order to take just $200 because I didn't want to be greedy. Greed is something that I learned to avoid for successful trading.

Roller Coaster Trading

So what have I learned? I was always right. All I had to do was to wait and be patient. But in between, it’s a roller coaster—one that we have to endure for this to work, I imagined. If one doesn't have the trading capital to warrant such a risk, it's not feasible.

I still had a risk limitation that I imposed on my trades, but I set it way down to give each trade enough wiggle-room to go through that roller coaster ride.

Based on my analysis, it sure looked like I couldn't lose as long as I was willing to experience significant losses without panicking and pulling the plug while a trade went through its gyrations.

Is this practical? Will it work each time? Can it be true that I am always right as long as I wait for it? There are reasons why it seems to work, but it is extremely uncertain that it will be consistent. Read on to learn why.

S&P roller coaster in a single day. Ending up where it started, but money made by trading in between.

S&P roller coaster in a single day. Ending up where it started, but money made by trading in between.

The Reason Why It Seems to Work

To figure out if I stumbled upon a sensible method of trading, I first have to explain why it seems I was always right.

I was trading in small market moves, taking losses and profits in the same day, usually within less than an hour, from small fluctuations in the market in either direction.

Within such a small timeframe, the market has constant minor gyrations. It never moves consistently in one direction. Even when there is a perceivable trend, it still fluctuates within that trend.

So when trading within a tight range, even when I'm wrong on the direction, it has been working out very successfully that those gyrations would bring the trade to me for a win, as long as I was patient, trading small, and taking little profits rather than going for a home run.

I can see that this logic may not hold up when trading longer-term for bigger gains. Some very successful traders put on trades that run for months or years at a time. That's a different ball game. They have to be right for the right reasons.

Trading for small gains taken from the minute-by-minute market gyrations allows one to be right for the wrong reasons. But is this feasible?

The Uncertainty of Trading

Is this a good thing? Did I really learn something beneficial, something that I can use for the rest of my life making money?

Sorry to disappoint you, but I'm not telling you to do this. I studied logic and statistics in my college days, and I realize that what I think I had learned from my trading experience is only the tip of the iceberg. I know that there's a bigger part to the puzzle that is hidden from view.

How do I know this? Mainly because, as I mentioned earlier, if a sure thing really existed, everyone would be billionaires.

So what am I missing with my reasoning? One word: uncertainty!

My logic may be right. But statistically, it's still only 50/50. If I were to put complete trust in my idea and allow significant moves in the wrong direction—thinking that the market always turns around—the day would come that this rule breaks and the market continues to move against me. It not only can happen, but it will happen.

A three-hour steep decline of the S&P.

A three-hour steep decline of the S&P.

Even Market Wizards Experience Major Losses

Many traders are very successful with trading futures. And when you read about their stories, every one of them experienced a major loss at one time or another.

The trick with success is limiting those losses and keeping them small, within reason based on the amount of trading capital available.

I learned this, and a lot more, from a book I recommend by Jack D. Schwager. He interviewed many well-known successful traders. You can find his book on Amazon: The Little Book of Market Wizards: Lessons from the Greatest Traders.

Jack Schwager shares critical lessons he learned by interviewing some of the best Futures traders. I found this to be a sincere presentation without the hype of unrealistic success some other books claim to provide.

Avoid Flash-Crashes

As with any trade, use a protective stop order, and make it GTC.

I always choose the max loss I'm willing to risk, and I put a stop at that price. It's best not to make it too close, or you will be stopped out prematurely. I use stops mainly to avoid flash-crashes.

You can even use a trailing stop, so your profit growth is locked in as the price rises.

Some brokers don't support stop orders on futures. If you don't have this feature, I would suggest you get another broker.

What Did You Learn?

Whatever you do, whatever you believe works at the moment, always keep the notion in the back of your mind that you're missing something in your reasoning that can change anytime.

Remember that once we feel we discovered something that works with trading, or even longer-term investing, it can change in a heartbeat. The game can change before we even realize it.

This article is accurate and true to the best of the author’s knowledge. Content is for informational or entertainment purposes only and does not substitute for personal counsel or professional advice in business, financial, legal, or technical matters.

© 2014 Glenn Stok

Comments

Glenn Stok (author) from Long Island, NY on August 10, 2014:

Suzanne Day - What you're doing is actually a good thing. Take smaller profits than others might take, but at least you increase your chances of success. I've had cases where I was too greedy, and even when I had a nice profit I would hold out for more, only to give it all back. Of course this logic only applies to short term trades. Stocks that we plan to hold long-term fall under a different category. Better, sometimes, to not even look at those too often. Thanks for the vote up.

Suzanne Day from Melbourne, Victoria, Australia on August 10, 2014:

A hub that has piqued my interest! Having traded regular stocks, I always set down a limit to sell, no matter what else I do...that way I don't force myself to sell under what I paid. Having some greed, I set the sell point up a little from what I paid too (below what everyone else might think is a good profit). Voted interesting and up!

Glenn Stok (author) from Long Island, NY on April 02, 2014:

Writer Fox - Thanks for the positive feedback. Trading Futures is not for everyone. And I had to go through many years of trial and error to learn how to trade safely, and overcome the negatives.

Writer Fox from the wadi near the little river on April 01, 2014:

What an interesting article on E-mini Futures! Your experience shows and I think many will benefit from your advice here. Enjoyed and voted up!

Glenn Stok (author) from Long Island, NY on March 24, 2014:

Hi Kate, It means a lot to me to have someone of your stature in the brokerage business giving me such a positive review on this hub. Thank you very much.

Preston and Kate from the Midwest on March 24, 2014:

Hi Glenn. This brings back some memories. Up until last year, I was a compliance officer at a local brokerage firm. (Now I stay home with my son.) Disclaimers, ethics, AML, trading practices...I studied it all and ended up really enjoying the industry. Very complex and fascinating. Great hub and congratulations on your hubpot win! -Kate