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I've read options are far far far more difficult especially for someone like me who barely knows a thing or 2. You have to look out for many factors and so forth, and sooooooooooooooooooooooooooooo many places warn beginners to stay away from options.
Many say ES is more friendly compared to Options. I've just scratched the surface on Futures, I don't even know how options or ETF work lol, but i will take a look at that.
Thanks
Can you help answer these questions from other members on NexusFi?
Bear also in mind ES is only one futures instrument. There are others that are more volatile and others that are less volatile. You may want to spend some time on identifying the one that most suits you.
The current value of 1 x ES contract is around $100,000
So if you're paying $400 for 1 contract then the leverage is more like 250:1
When you trade on margin with you broker, you are essentially posting margin on a performance bond, which is only a small percentage of the real contract the value, the contract is then offered to you in good faith.
If you want to trade the ES without using leverage, you need roughly $100k.
"Free markets work because they allow people to be lucky, thanks to aggressive trial and error, not by giving rewards or incentives for skill. The strategy is, then, to tinker as much as possible and try to collect as many Black Swan opportunities as you can"
Damn, that was my second guess on the leverage. I thought it would be a 1:5 ratio since I was basing it off of the current market price (~$2000). Thanks for the clarification, I appreciate it
noobforlyfe, welcome to futures, and a whole new world of trading. I get the sense you might be coming from FX or some-such other trading ideology.
No need to get bogged down with all the technicalities about performance bonds and leverages and ratios.
Look at it this way.
Take ES as an example. Your broker says you need $400 to enter into a 1 contract ES trade. You have the $400. You enter the trade.
The trade turns against you, and you decide to get out of the trade for a $10 loss. Well, now your account is at $390. You can no longer try again in the ES (or anything else for that matter), because your cash available is only $390, and you need $400 to enter into a single ES contract.
If you wish to enter a single gold contract, your broker may have a $1,000 requirement to enter that trade. You only have $400? You can't do it.
As for your query abut interest...No, there is no interest required on the money you have "on margin", or as collateral or whatever. Aside from trading fees, the only fee you pay would be an exchange fee of some sort, depending upon your trading package. (15 bux is the norm for a non-pro, unless you add extras like ICE data.)
Thanks for extremely informative post HoopyTrading, that really clarified things up crystal clear.
Why would you need the exchange fee? All the quotes i got from a broker require USD deposit to open a trading account, and I am trading in USD, and would have USD balance at the end of the day. I understand if there is an exchange fee upon withdrawing but if it's possible I'd like to withdraw USD and then just keep it or convert it on my own.
"Exchange fee" has nothing to do with the currency exchange rate. It talks about the exchange where the trades take place. See Exchange Definition | Investopedia
For instance, if you want to trade Apple equities, you can do that on the NASDAQ Exchange. If you want to trade British Petroleum equities you can do that on the London Stock Exchange.
If you want to trade the ES you can to that on the Chicago Mercantile Exchange. And so on.
There is a fee because who maintains the exhange needs to pay for the exchange's infrastructure cost.
@noobforlyfe, just to add some additional context to what @Neo1 said, which is entirely correct.
I think you really don't yet know what is being traded on a futures exchange. You need to do some research before even thinking of doing any trading. Wikipedia would be a simple start.
Here are some highlights.
1. You are not "buying" or "selling" anything. A futures contract is not an asset like a stock; you can't buy one. (The buy and sell terminology is used, but its meaning is different. See #2.)
2. You are entering into a contract to buy or sell something at a future date (settlement date) at a specified price. If you "buy" (enter into a contract to buy) the S&P, for instance, you are obligated, at settlement, to come up with enough money (in the hundred thousand dollar range) to settle the buy side of a large sale. The other side will be a large holder of stock who is hedging his portfolio with a short in the futures market. Yes, this is getting complicated. Start doing your research....
3. In the meantime, you can go in and out of long or short positions, "buying" and "selling" contracts, using only the margin required of you to secure the trades. It is very much less than the eventual settlement of the contract, and its purpose is simply as (a) a good-faith deposit and (b) to cover price fluctuations.
Why price fluctuations? Because, either when you close the trade, or at the end of every trading day if the trade is still open, your account is "marked to market." This means that, if the price of the contract you were long in, for instance, goes down, you are charged for the dollar loss, a debit against your margin. If it went up, you are credited for the profit. You will have to have enough margin in the account to cover the likely fluctuations. This has nothing to do with "margin" in stocks, for instance, and nothing is being loaned to you. It is just money that you put up to enable you to be in the trade.
The amount you are debited/credited depends on the value of a tick (the minimum move for a particular futures contract.) For the S&P, the ES, a tick is valued at $12.50, and there are 4 ticks per point. So 1 point movement on ES equals a value change of $50.
Example: assume your margin is $500 (if you have this little, you are very, very foolish, but never mind). Assume you go long S&P, the ES, one contract. ES typically moves around 20 points a day, give or take. So assume it moves 10 points down, against you. 10 points times $50/point equals a loss of $500. That is equal to your margin, and so you are wiped out. 100% loss. It could have taken only about an hour. Today, ES went from about 2018 just after 10:00 EDT to 2006 at about 11:30. A drop of 12 points, taking an hour and a half.
Now you may understand leverage.
Sure, it may go the other way, and you would make a lot of money. How easy do you imagine it is to do that consistently?
So, some advice:
- Learn more. No kidding.
- Don't think about trading futures with tiny little margins. You will get wiped out in a hurry.
- SIM trading is one way to learn, but it is very different from live trading with real money at stake. Your hands will shake more when you have money on the line. Be careful about how easy SIM trading may seem. It's not real. The psychology of winning and losing is very different when you are actually winning and losing real money.
- Start trading something other than futures -- something that is not so extreme in its leverage. Use real money, in small amounts. You might just trade stocks or ETF's for a while, maybe even a few shares at a time. Learn about markets by doing. Learn about managing risk by having something at risk, which SIM does not.
- Save some money. How much margin might you need? Think about that 12 point move in an hour and a half. Then think about how much you would need to be able to stay alive in that kind of market. Be very conservative about it.
- Stay with this community on this forum, read lots of posts on many threads. Invest 100 bucks in an Elite membership, so you can access the large amount of content -- trading journals and threads -- in the Elite section.
- Work at it. No large amounts of money are available easily, and without effort, knowledge and practice.
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From long experience, I understand that probably none of this advice will be followed. People come here looking for quick money all the time, and then disappear. Probably not because they became rich....
Thanks you bobwest for the great reply. I just have one issue with it, which follows in italics (plus the rest)...
There is a way to mitigate that exposure and experience the true nature of the beast, and that is to setup a sim account exactly like your live account would look like if you funded it. Only have $2,500 of real money to put into your live account? Then setup your sim account exactly the same way, and trade with that in sim. See how you perform.
An old guru once gave me the salad advice of..."Once you have been able to double your original sim account three times without blowing out the original, you are ready for live trading."
Amazing advice. Because if you blow out the original amount once after you have doubled it, you still have the original amount left. Try again. If you blow it out after getting to the triple mark, you have twice as much left to try again and work from there.
P.S. noobforlyfe, here's the basic formulae that the futures traders I know of use for calculating total costs of fees and commissions etc...
$5 per round trip trade per contract. That includes most brokers' commissions and all associated fees with data feeds and exchanges etc etc, plus US taxes!
So if you entered and then exited 1 contract on the YM and made 10 tics, you are up $50, since YM is $5.00 per tic x 10 tics = $50.
Minus the $5 for the round-trip cost, and you have net profit of $45.
You need to do some research before even thinking of doing any trading. Wikipedia would be a simple start.