Will Swing Trading The E-mini Help My Portfolio ?

Good day traders, I hope each and every one of you is having a great day. Whenever the market becomes a bit more volatile than usual I get tons of emails and calls asking me if swing trading the E-Mini is a good alternative to the traditional buy and hold trading method. This week is no different, the U.S. stock market is exhibiting extended volatility and Im getting my usual phone calls, I guess traders have patterns just like the markets.

When I ask traders if they consider hedging their portfolio or swing trading the E-mini in addition to their trading strategy, I find that many traders are not familiar with the idea. Often times I wrongly assume that most people are aware of swing trading the E-mini or hedging the E-mini and how it can help them reduce risk and/or increase profit.

This article is going to be tailored towards beginners, so if you are a seasoned trader who is very familiar with swing trading E-mini contract or understand the concept of hedging or swing trading, you may be reading something you already know.

The E-mini contracts came into existence in September of 1997; the first E-mini contract was the E-mini SP 500 futures contract. The contract is 1/5 the size of the large SP 500 Futures contract and trades completely electronically 23 hours per day. The E-mini became an instant hit and volume began drifting away from the large SP 500 futures contract and into the E-mini futures contract almost immediately.

Following the success of the E-mini SP contract; the exchange introduced a miniature version of the large Nasdaq 100 futures contract. You may have guessed it, the E-mini Nasdaq was the name given to the miniature version and it is also 1/5 the size of the large Nasdaq 100 futures contract.

Additional E-mini contracts started coming out with the E-Mini Dow Jones following the release of the E-mini Nasdaq futures contract. Many fund managers and professional traders abandoned the large contract and switched to swing trading the E-mini because it offers more flexibility, quicker execution, less slippage and more liquidity. Further, since the E-mini is traded totally electronically, traders are able to get their price fill instantaneously compared to the regular sized contract that is traded in the pit.

Here are the specifications you need to know:

The E-mini SP Contract is valued at $50.00 * The value of the SP 500 Index. = Each point move equals $50.00

The E-mini Nasdaq Contract is valued at $20.00 * The value of the Nasdaq 100 Index = Each point move equals $20.00

The E-mini Dow Jones Contract is valued at $5.00 * The value of the Dow Jones Index = Each point move equals $5.00

How Are These Contracts Utilized

There are two ways traders primarily trade the E-mini contracts. The first way is to hedge an existing portfolio of stocks. For example, lets say you are currently holding $50,000 worth of stocks that are centered around the technology industry and you think the market is going to have a sell off.

To hedge your portfolio you would sell approximately $50,000 dollars worth of the E-mini Nasdaq Futures contract to offset the loss to your portfolio if the market drops. You would simply multiply the value of the index by $20.00 ($20.00 * 2500 = $50,000) and then divide that number into the value of your stock portfolio which happens to be $50,000 ($50,000 / $50,000 = 1) so you would need exactly 1 contract to hedge against a market decline.

The type of stocks that make up your portfolio would determine which E-mini contract you would need to sell. If your portfolio is primarily composed of blue chip stocks the E-mini Dow Jones would be your first choice. If on the other hand your portfolio is composed of a mix of stocks, then the E-mini SP Futures contract would be the obvious pick. Your stock portfolio is the primary determining factor in choosing the correct index to trade.

Swing Trading The E-mini Is Big Business

Swing trading the E-mini is the most often way the E-mini contracts are utilized today and there are three primary reasons for this:

1. Contract Size Before the small contracts began trading, the only other option was to trade the larger ones and they were just too big for most traders. Most traders just could not afford the risk and the large leverage the big sized contracts needed. Imagine you just started trading and entered a large SP 500 contract. If you contract moved 3 points you would be out of $750 dollars, this was just too much risk for small traders.

2. Execution Since the E-mini contracts are traded electronically, the execution is literally instantaneous, this makes it ideal for swing trading the E-mini and is very different then when trading the larger pit traded index futures contracts. Pit execution has not changed in over 100 years, each step from entering an order to filling the order to getting your fill back is done by people and mostly different people so it can take anywhere from 30 seconds to 2 minutes to get a fill on a market order. Can you imagine what type of movement the index can produce in that time period? Thats the second reason why E-mini contracts are so much more popular than the larger counterparts.

3. Access The E-mini contracts are available almost 24/7, what this means to you is you can enter and exit the market at any time day or night. The larger contracts are pit traded, this means you cannot enter or exit orders on the weekends and there are large breaks between the day pit session and the evening session. The spreads between the bid and offer are substantially wider because there is lack of liquidity when the large contract is not being traded in the pit.

These are the primary three reasons why the E-mini contract became and remains very popular to hedge or to speculate. In the coming weeks I will be doing several tutorials and trading strategies using these contracts. Several of these strategies will be swing trading the E-mini type of strategies.

There are several great strategies for swing trading the E-mini on our site for more info. And for more articles on this topic, please go to: