Stock Market Day Trading
vs
Emini-Futures Day Trading

There are reasons why a day trader would prefer Eminis over stock market day trading, and vice versa. Here are a few major considerations.

The edge…

Stock market day trading can take advantage of the small and variable lag time between stocks and the futures. This can give a day trader who is stock market day trading 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…

Stock market day trading 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 stock market day trading, 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 stock market day trading, 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…

In stock market day 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 up trends so they provide additional “fuel” for up trends. 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.)

Emini day trading 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…

Stock market day trading 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 day trading the stock of 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 day 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 you own tax forms if you’re day trading the eminis than if you are a taxpayer who is making a living stock market day trading 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…

Stock market day trading requires a $25,000 minimum in your account. The government stepped in to protect us from ourselves, I guess.

I suppose you could trade the emini’s with $2,000 in your account, but I wouldn’t advise starting with less than $15,000… unless you’re already a seasoned professional.

Being an emini day trader myself, I may not be the most unbiased source of information on this subject. But no matter which way you decide to go, my services can be extremely valuable to you whether you are stock market day trading, or Day trading the eminis.

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The financial markets are risky. Investing is risky. Past performance does not guarantee future performance. The foregoing has been prepared solely for informational purposes and is not a solicitation, or an offer to buy or sell any security. Opinions are based on historical research and data believed reliable, but there is no guarantee that future results will be profitable.

We are not advocating trading futures. The prices and contracts in the TradeStalker's RBI Updates specify a manner in which you could trade. We occasionally mention the SP500 and Nasdaq futures markets because it is extremely liquid and tends to lead the other markets. This is not an endorsement or recommendation of the SP500 and Nasdaq futures markets. The risk of loss in futures is substantial. You can lose more than your original investment. We are not Registered Investment Advisors or Commodity Trading Advisors.

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