This article covers the definitions and basics you need to know if you’re looking to start trading e-minis.
What are E-Mini futures?
Perhaps it’ll be easier to understand E-minis once you understand their full-fledged counterparts. Futures are essentially financial contracts between a buyer and seller. This contract is an agreement that the buyer and seller will exchange a specific commodity at a certain date, for an agreed price.
The thing with trading futures is that the market typically requires significant initial capital. It’s not uncommon for futures brokers to require a minimum deposit of USD$10,000 if you want to start day trading. One of the first things that traders learn is to never invest more money than you can afford to lose.
E-Mini futures are futures contracts that are only a fraction of the size of the original full-size contract. They’re also electronically traded and are predominantly found on the CME (Chicago Mercantile Exchange). You can trade E-mini futures for nearly any sort of asset, including stocks, indexes, forex, and commodities. The only difference between trading e-minis and full-sized futures contracts is that the e-mini is smaller. Other than that, everything else can be done exactly the same way.
Choose your market
When you start trading futures, there are two main categories that your options fall into. These are financial futures and commodity futures.
Financial futures are things like stocks, forex, and indices. A great example is the S&P 500 E-mini futures contract, which is one-fifth the size of the full-size contract.
Commodity futures are any product that you can physically hold. Things like raw materials, precious metals, and even livestock would all be considered commodities.
You should do your research on each specific market to understand it before buying or selling any E-mini future. For instance, instead of blindly investing, you’d want to research gold and silver before investing in precious metals.
Risk management can be considered the foundation of trading e-mini futures. After all, you’re entering into a contract to buy something in the future at a fixed price, so it’s crucial to understand this. Hedging is the main type of risk management used in the futures market.
The best way to explain this is to give you an example. Think of a jewelry production company that needs gold to produce its pieces. This is the buyer. Now think of a company that sells gold, which would be the seller. So, you’ve got one company that needs gold and another company that sells it. They’re about to enter into a futures contract.
In this example, imagine the price of gold is currently $2. The buyer speculates that the price will rise above $2 in six months. So, they sign a futures contract with the seller to buy gold from them for $2 in six months. After the time has passed, due to other external factors, the price of gold is now $2,50. However, thanks to the contract, the seller is obligated to sell their gold to the buyer for $2. In this case, the buyer is happy because they could buy for lower than the current value.
On the other hand, the price of gold could’ve decreased in those six months. For instance, say it fell to $1.50. But the buyer is obligated to buy that gold for $2 because that’s what they agreed to. In this case, the seller gets to sell for higher than the current market value.
While rudimentary, this is an example of how hedging works. It’s the core of what you’re doing when trading futures, whether you’re trading commodities, stocks, or currencies.
Learn the investment options
Of course, you don’t want mass quantities of a resource showing up at your home. You can enter the futures market by becoming an investor, also known as a speculator.
The current price of a particular contract is also called the spot price. In the earlier example, it would be $2. The unsurprising detail about spot prices is that they fluctuate, as shown earlier, due to various factors. These could rise or fall due to a change in supply and demand, economic factors, environmental factors, and many other things.
As a speculator, you can make or lose money from E-minis because a change in the spot price means that the value of your contract changes. If you sign an E-mini futures contract and the price of that contract has risen by the agreed-upon buying date, you earn because you’ll buy it for more than its current value. The opposite is true, too, as you can lose money if the price drops.
This article serves as a guide to some of the basic core understandings you need to enter the E-mini futures trading market. There’s a lot of profit in the futures market, but only if you know what you’re doing.
Understand how futures and risk management (hedging) work before doing anything else. It’s a good idea to learn more about your particular asset or commodity as well before entering into any contracts.