Volatility: Friend or Foe? by Smart Trade Pro

I’ve had some interesting discussions with folks over the past several weeks on several polarizing topics. For example, we’ve discussed whether government subsidies are a good thing. In general, they’re great for those being subsidized and not so hot for those taxpayers paying the subsidies. Of course, the greater good can be achieved by such government subsidies, but they can also cause undesirable effects. There are definitely two sides to the argument!

In the markets, one of the topics that produces a broad range of responses is volatility. We’ve seen marked increases in volatility across almost all trading instruments since the summer of 2008.

Is this a good or bad thing?

One thing is fairly certain – higher levels of volatility are most likely to be with us for quite a while.

For some investors and traders, this increased level of volatility is tough to deal with. For long term traders and some swing traders, it’s a burr under the saddle. For others it’s an outright menace. But there are those who LOVE volatility. More on them later…

Many long term investors, especially in the institutional world, equate volatility with risk. This is fairly easy to understand; higher volatility means greater variability of results. And higher variability looks like less certainty or more risk.

For swing traders, higher volatility can mean that it’s much more difficult to stay in positions. Stops are hit much more frequently and profitable positions evaporate in moments. Shorter time frames are needed, and reward-to-risk ratios tighten.

Ah, but for some, the increased volatility is the fuel that fires the engine. Intraday traders see volatility as opportunity. Wider daily ranges mean that there are more and better changes to find profitable trades.

The Best Traders’ Market

I have said many times that I believe e-mini index trading is the most potent and efficient way that a trader can employ their trading capital today, especially when using the right tools, strategies and mental approach. To understand this great trading instrument, let’s look at a little background.

In the futures trading world, e-mini index futures have grown into quite a phenomenon. They have experienced growth unlike any other instrument, and for good reason. E-mini contracts were started by the Chicago Mercantile Exchange (CME) in 1998 with the S&P 500 e-mini. It currently is worth 1/5 of the larger, pit traded S&P futures contract..

However, for the reasons we’ll discuss next, the S&P e-mini has far eclipsed its older and more higher valued sibling. As of the first quarter of 2007, the S&P e-mini was trading 4.5 times the dollar volume of the large S&P 500 contract. Today, the e-mini trades more than 10 times the dollar volume of the pit traded contract! There are many reasons for its popularity. Here are just a few:

The e-mini contract is traded electronically on a platform called Globex.
Trades are executed instantaneously and are basically error-free, especially relative to the pit traded contracts that may require several levels of human interaction before orders are executed.
The smaller size and therefore reduced margin requirements of the e-mini contracts allow a high degree of retail participation.

The immense popularity of the S&P e-mini has led to number of other equity indexes trading electronically in the e-mini size. The most popular among traders are the Nasdaq Composites, Dow Industrial, the up and coming Midcap 400 and the Russell 2000. E-mini trading has also spread to commodities (gold, oil) bonds and currencies.

Let’s look at why traders love these instruments so much. After we review these attributes, we’ll talk about what’s happening now in the world of e-mini trading.

Leverage. One of the biggest advantages for e-mini trading is the high amount of leverage they offer. And for day traders, this leverage is increased still further. Let’s look at the actual leverage available: the S&P e-mini trade unit is $50 times the S&P 500 Stock Index. Currently, that calculation is looks like this: $50 x 830 = $41,500. The margin to control $42k worth of stock is around $6k giving you leverage of about 7:1 on your money. However, the day trading margins are dropped significantly with $1,000 margins still available and some reputable firms offering $500 margins. At these rates, you can increase your intraday margin to greater than 80:1!

But leverage is a double edged sword that definitely cuts both ways. While such leverage allows for large returns on very little money, it can also mean that you can lose large amounts as well. In next week’s “Part II” We’ll cover tools that allow us to use this leverage in a big way, while protecting our downside.

Liquidity. Liquidity is usually thought of in terms of volume, and it is the characteristic that gives us the ability to get in out of trade both quickly and at a preferable price. E-mini index trading gives us exceptional liquidity and great fills with little slippage. And these attributes are very necessary to allow us to take advantage of the available leverage.

Scalability. There are certain types of trading that can only be used on a small scale and cannot be translated to larger volumes as success occurs and larger position sizes are required. But e-mini index trading in general and S&P e-mini trading in particular are highly scaleable. Getting virtually no-slippage fills on 200 S&P e-mini contracts an extreme advantage.

Round-the-clock liquidity. The S&P e-mini has liquidity 23.5 hours a day which gives another advantage – the effect of overnight gaps are greatly reduced. You can keep a stop in the market if you’re doing a swing trade and have your protection kick in at a time when your IBM stock is still sleeping.

The Best Market Keeps Getting Better

As I mentioned above, higher volatility equates to greater opportunity for day traders. And today’s markets are giving us unprecedented levels of volatility. Since June of 2008, until July of 2009 we have had ZERO days where the Average True Range (ATR) for the 24 hour S&P 500 e-mini contract was below 20 points! And trading in early 2010 has returned to those lofty volatility levels. Combined with the leverage available in the e-mini markets, we have a place where every trader can compete well with a level playing field and find multiple opportunities every day.

Please note that I’ll be teaching, along with my business partner and market maven Christopher Castroviejo, a new cutting edge workshop on e-mini index trading in Las Vegas on March 27 – 29. It’s a learning experience you don’t want to miss!


Learn how pro traders take consistent profits from the e-mini markets. Register online for Emini Futures Trading Tactics 3-day workshop in Las Vegas. Space is limited. Money back guarantee.

Article Source: ArticleRich.com