But many experienced e-mini traders will tell you that it is not necessarily the easiest contract to trade. On the contrary, it can be one of the most difficult contracts to trade, especially for a beginning trader.
From the onset, let me share that I am a consummate trend trader and seldom, if ever, trade against the trend, except on the ES. With the large participation of High Frequency Trading (HFT) I generally find the best setups in the countertrend category. I will also add that I seldom trade the ES, as it is a one of my least favorite and contracts to trade. Sure, you have liquidity beyond description; but you also have 50% to 70% level of computer participation on this contract along with some of the best traders in the business. It not place for me. But here are some of the things that the beginning e-mini traders should take into consideration when considering whether to trade the ES or eight different contract:
1. Computer-based trading: I combined several disciplines of trading, mostly technical and chaos theory, and my trading. HFT trading is a real thorn in my side as a trend trader. I can remember the “good old days” when the ES was a trending machine; all you needed to do, as an e-mini trader, was to get into a trade on the right side and manage your trade. These days, the ES staggers around like a drunken sailor. This is not to say that you can’t make money on the ES, because you can make money on the ES if you are a real student of this contract. In my programs, I tried to steer new students away from the ES contract and the high level of skills many of the traders possess and the HFT level of activity on this contract. There are just too many good opportunities elsewhere to find opportunities to trade, and learning to trade on the ES is a steep and inexpensive endeavor has the learning curve can dig deep into your pockets.
2. Under-capitalization: if there is a single indicator of potential failure in this business, it is the level of capitalization that with which a beginning e-mini trader starts. Several times in a week, I get calls from potential clients who want to start trading the e-mini contracts with $1000-$2000. I have seen traders start with these very small accounts and succeed wonderfully; but succeeding with an undercapitalized account generally results in a trader blowing out his or her account.
3. Trading on a small account requires a high level of concentration and impeccable trade selection. Further, the new e-mini trader who starts with a small account must be well versed in the money management. As you might suspect, impeccable trade selection and flawless money management are to skills that skills that beginning traders generally lack. More often, I find new traders over trading accounts and trading too many contracts. When you are undercapitalized, you certainly have put yourself behind the eight ball. That being said, a $10,000+ contract gives the new trader opportunity to fail a few times as he or she learns the trading business. Conversely, the highly undercapitalized account can afford very few mistakes before your broker is calling you to put more money in your e-mini trading account. While trading undercapitalized may be the only way a new e-mini trader can enter the market, it is certainly lessons the probability of success. Capitalization is a mighty force wind trading any equity, and the undercapitalized trader starts out with a distinct disadvantage.
4. Low Margin Requirements: in recent years margin requirements have plummeted. Individuals who are undercapitalized can now trade relatively large contract levels. In my mind, low margin requirements only encourage new traders to trade more than they should. In my trading model, I call for trades to fall in the 2 to 3% level per trade. There is absolutely no reason for a new trader to be trading five contracts. In order to entice more potential and futures clients, futures brokerage firms have lowered the margin requirements to excessively low levels; levels at which new traders often find themselves overmatched. My personal perspective confirms this, as I generally trade 5 to eight new contracts. Sometimes I may trade 10 contracts if the trade is particularly attractive. That being said, I am far more nervous trading 10 contracts than 5. I am well aware of the perils of having a high contract trade move against you. It’s all wonderful Lynn trading 10 contracts and you find yourself in the winning column, but it is something quite different if you are trading 10 contracts and are buried deep in the negative column on a given trade. In this situation, it is always best to be trading with the trend which often times can save your position; on the other hand holding 10 contracts against the trend is a very risky proposition, at best. In short, lower contract margins allow larger participations in the market, which is something a new e-mini trader needs.
In summary, I have pointed out for structural problems that exist in the e-mini contract trading paradigm. These structural problems are; computer-based trading and High Frequency Trading, under capitalization, and low margin requirements. I have seen all or just one of these conditions wipeout a new traders portfolio. In my opinion, be informed about these potential problems and work hard to keep them from affecting your trading.
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