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The Uncertainty of Trading E-Mini S&P Futures

This article is based on my experience from over 45 years of perfecting my stock-trading strategies and risk-control skills.

S&P roller coaster in a single day.

S&P roller coaster in a single day.

Uncertainty Can Behave Like a Roller Coaster

I like to trade the S&P 500 E-mini Futures since it's a more diversified way to trade stocks. Therefore, I can focus on something other than what's happening with individual companies. In addition, it simplifies the strategy just to follow the market's general direction.

However, that strategy can nevertheless be challenging due to market fluctuations. The logic of uncertainty that I will discuss applies to any trading strategy. So if you prefer ETFs that invest in niche stocks, this article will help you as well.

The reason why I like trading futures is that they have better treatment tax-wise. For example, the IRS allows 60% of the gains to be taxed as long-term, even if you hold it for only one minute!

You also don't need to list each individual trade when you file your taxes. Instead, a combined total gain or loss of all Futures trades for the year is all you need to put on your 1040 Schedule D.

So now that I have given you that introduction let's get right into it.

Why I Thought It Would Work

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 introduced another rule, when a good trade seems to start coming back down, get out while I still have a gain.

You can see that, on average, I was gaining $200 half the time and losing $200 half the time.

I never lost money by trading futures due to my strict discipline and risk management, but I wasn’t making a profit either.

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

Risk Control Is Crucial

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 your emotions influence your trading decisions. And you can't be greedy, as that will mess up your trades.

When 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, taking the profit quickly before it turned around again.

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

Analysis of the Trades

As for me, I kept 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 I was always right. Every trade that I was stopped out on with a $200 loss later turned around and would have become a $200 gain—often within the same day and a few by the next day. But few 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 involves vicious swings. Without a protective stop to limit risk, the losing trades would go very much in the wrong direction before turning around. As a result, 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 to be successful.

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, and I imagined it was one that we must endure for this to work. 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? Is it true that I am always right as long as I wait for it? There are reasons why it seems to work, but it is uncertain that it will be consistent. Read on to learn why.

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

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

The Reason Why It Seems to Work

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

I was trading in small market moves, taking losses and profits on 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.

The chart above indicates how that is. I like to use candlestick charts. They give me a clearer idea of where the market is heading. Notice the tight ranges of the fluctuations.

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.

  • Be patient.
  • Trade small.
  • Take little profits.

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 Logic of Uncertainty

Is this a good thing? Did I really learn something beneficial 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 realized that what I thought I had learned from this trading method was 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.

My logic may be correct. 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 when this rule breaks and the market continues to move against me.

It not only can happen, but it will happen. And it already did happen, as you can see in the chart below.

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 significant 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 his book to be a sincere presentation without the hype of unrealistic success some other authors 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 online brokers don't support stop orders on futures. If you don't have this feature available, I suggest you find another broker.

What Have We Learned?

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 have discovered something that works, 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


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