All About Futures & E-Mini Futures ~ what you need to know. Larry Gaines, Founder

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2 FUTURES TRADING! All About Futures & E-Mini Futures ~ what you need to know. Larry Gaines, Founder 2

3 Table of Contents Characteristics of Futures 3 Overview of the main futures traded.6 What are Equity Index Futures..7 The Markets.9 Favorites to trade ~ E-Mini S&P & E-Mini NASDAX 100~ Advantages..14 Future Market Advantages 15 Futures Margin Rates.18 Contract Specifications.22 OCO ~ Futures Trading Execution

4 All About Futures ~ what you need to know. Characteristics of Futures A futures contract is a type of derivative instrument, or financial contract, in which two parties agree to transact a set of financial instruments or physical commodities for future delivery at a particular price. If you buy a futures contract, you are basically agreeing to buy something that a seller has not yet produced for a set price. But participating in the futures market does not necessarily mean that you will be responsible for receiving or delivering large inventories of physical commodities - remember, buyers and sellers in the futures market primarily enter into futures contracts to hedge risk or speculate rather than to exchange physical goods (which is the primary activity of the cash/spot market). That is why futures are used as financial instruments by not only producers and consumers but also speculators. 4

5 The consensus in the investment world is that the futures market is a major financial hub, providing an outlet for intense competition among buyers and sellers and, more importantly, providing a center to manage price risks. The futures market is extremely liquid, risky and complex by nature, but it can be understood if we break down how it functions. In the futures market, margin has a definition distinct from its definition in the stock market, where margin is the use of borrowed money to purchase securities. In the futures market, margin refers to the initial deposit of "good faith" made into an account in order to enter into a futures contract. This margin is referred to as good faith because it is this money that is used to debit any day-to-day losses. 5

6 When you open a futures contract, the futures exchange will state a minimum amount of money that you must deposit into your account. This original deposit of money is called the initial margin. When your contract is liquidated, you will be refunded the initial margin plus or minus any gains or losses that occur over the span of the futures contract. In other words, the amount in your margin account changes daily as the market fluctuates in relation to your futures contract. The minimum-level margin is determined by the futures exchange and is usually 5% to 10% of the futures contract. These predetermined initial margin amounts are continuously under review: at times of high market volatility, initial margin requirements can be raised. The initial margin is the minimum amount required to enter into a new futures contract, but the maintenance margin is the lowest amount an account can reach before needing to be replenished. For example, if your margin account drops to a certain level because of a series of daily losses, brokers are required to make a margin call and request that you make an additional deposit into your account to bring the margin back up to the initial amount. 6

Overview of the main futures traded There are many quality futures markets around the world. Below are some but not all of the Futures markets that can be traded using the PCFDTM.

7 Overview of the main futures traded There are many quality futures markets around the world. Below are some but not all of the Futures markets that can be traded using the PCFDTM. I would recommend the main U.S. Equity Index markets to start with. Figure 1 For active traders, the favorite and most popular futures markets, however, are the Equity index futures. While they all move in the same direction, there are differences in them that allow traders to match these markets to their personalities. 7

8 What are the Equity Index Futures? Equity index futures are designed to trade in relation to a specific equity index which is comprised of a basket of securities. These products allow traders to speculate and hedge risk associated with these markets. Why Equity Index Futures? 8

9 The following is a unique combination of features that offers retail and institutional traders fantastic opportunity: Significant Tax Benefit Advantages of Stocks & Mutual funds combined Lower Margin costs Low Commissions Highly Liquid Investments Huge Volume Transparency Near 24-Hour Trading (except for a 15 minute period for settlement) Hedging Portfolio Diversification Lower risk than stocks (reduced overnight gap risk) 9

10 The Markets S&P Mini Very popular Highest volume / Most liquid $50.00 per point per contract (Example: If you buy 1 S&P E- mini Futures contract at and sell it at , you made $250.00) Represents a basket of stocks (S&P 500) Very orderly market because of its high volume Ideal for the more conservative trader NASDAQ Mini Solid volume $20.00 per point per contract Represents a basket of NASDAQ stocks Orderly market but larger swings partly because of lower volume than the S&P 10

11 DOW Mini Low volume which means large swings in price, very volatile $5.00 per point per contract but don't let that fool you, it is volatile Represents a basket of Dow stocks Because of low volume, you may consider doing your analysis for this market on the S&P chart 11

12 Russell Low volume Popular because of its price point, this is not a market for conservative personalities $ per point per contract Represents a basket of Russell stocks The combination of low volume and the high price point means a big money, fast moving market (not for the beginner) DAX Similar to the Russell Lower volume Traded on the Eurex Exchange Euros per full point, per contract This is a big money market that can really move so beginners beware 12

13 FESX Saving one of the best for last Super high volume on a 100% electronic exchange (Eurex) Euros per point, per contract For those in Europe, this is a great market to trade 13

14 For more information on these and other futures markets, see the following websites: In the world of equities, there are MANY different ways to take advantage of a move in the market. Knowing the details of the different markets helps you make the best decision based on your individual goals and requirements. 14

15 Favorites to trade ~ E-Mini S&P & E-Mini NASDAX 100~ Advantages 1. Relatively Small Trade Size. The E-mini S&P (ES) Contract is 1/5th the size of the regular S&P Contract so a 1 point move in the market is equal to $50 per E Mini S&P contract instead of $250 per contract for the full sized contract. 2. The E-mini NASDAQ 100 (NQ) ~ a 1 point move in the market is equal to $20 per E Mini NASDAQ 100. Each tick equals $5 per contract. 3. A Completely Electronic Market. There is no open outcry trading for the E Mini S&P (ES) or NQ contract, so all trades are made electronically, which many traders feel puts everyone on a more level playing field. 4. Highly Liquid Market. These contracts trade millions of contracts a day, meaning almost 24 hour liquidity and very low transaction costs. 15

16 Future Market Advantages 1. No Day-trading Restrictions. Unlike the stock market where you must have at least $25,000 in your account to daytrade, there are no such restrictions in the futures market. 2. Much Lower Margin Requirements. Day-trading margins for the E Mini S&P go as low as $500 per contract giving traders much more access to buying power than in the stock market. It is important to remember here however that leverage is a sword that cuts both ways, meaning that just as you can increase profit potential through the use of leverage this also increases your loss potential, something which we will cover in future lessons. 3. No Interest Paid on Margin. Unlike the stock market where you pay interest on margin used, you do not pay any interest on used margin in the futures market. 16

17 4. Tax Advantages. Futures Trades are generally taxed via the 60/40 rule meaning that 60% of gains are treated as long term capital gains and 40% are treated as short term capital gains. For most short term traders this tax treatment is a large advantage over the stock market, where 100% of short term gains are taxed at the higher rate. Now that I have covered the advantages of the futures market, and the E Mini S&P 500 contract specifically, here are the general details about the contract which traders will want to know: Trading Symbol: ES - The trading symbol for the E Mini S&P 500 contract is ES followed by the symbol for the month and year. For example the June 2012 contract is ESM12. Contract Size: $50 X the Index. For example, say the E Mini S&P 500 was 1365, which would make the contract size 1365 X $50 = $68,

18 Minimum Price Fluctuation:.25 Points or $12.50 equals 1 tick which is what the minimum price movement in a futures contract is referred to. Trading Hours: Market is open from Sunday Night at 5pm Central Standard Time, until Friday at 3:15 Central Standard time except for between 3:15-3:30 PM CST and 4:30 PM-5PM when the market is closed for maintenance. Contract Months: H = March, M = June, U = September, Z = December Last Day of Trading: 8:30 AM on the third Friday of the contract month. 18

Futures Margin Rates Stock Index Name Symbol Exchange Initial Margin DayTrade Margin E-mini S&P 500 Index ES CME/Globex $4,375.00 $400.00 DAX Index FDAX Eurex 13,950.00 $3,500.

19 Futures Margin Rates Stock Index Name Symbol Exchange Initial Margin DayTrade Margin E-mini S&P 500 Index ES CME/Globex $4, $ DAX Index FDAX Eurex 13, $3, E-mini NASDAQ 100 Index NQ CME/Globex $2, $ S&P 500 Index SP CME/Globex $21, $7, Russell 2000 Index Mini ($100) TF ICE Futures U.S. $6, $ Dow Jones $5 Mini YM CBOT/Globex $3, $ Currencies Name Symbol Exchange Initial Margin DayTrade Margin Australian Dollar 6A CME/Globex $2, $ British Pound 6B CME/Globex $2, $ Canadian Dollar 6C CME/Globex $2, $ EuroFX 6E CME/Globex $4, $ Japanese Yen 6J CME/Globex $2, $ Dollar Index DX ICE Futures U.S. $1, $ E-mini EuroFX E7 CME/Globex $2, $ E-mini Japanese Yen J7 CME/Globex $1, $

Energies Name Symbol Exchange Initial Margin DayTrade Margin Brent Crude Oil BRN ICE Europe $6,250.00 $1,875.00 Crude Oil CL NYMEX/Globex (NYMEXG) $6,885.00 $1,000.

20 Energies Name Symbol Exchange Initial Margin DayTrade Margin Brent Crude Oil BRN ICE Europe $6, $1, Crude Oil CL NYMEX/Globex (NYMEXG) $6, $1, E-mini Natural Gas QG NYMEX/Globex (NYMEXG) $ $ E-mini Crude Light QM NYMEX/Globex (NYMEXG) $4, $ E-mini Unleaded Gasoline QU NYMEX/Globex (NYMEXG) $4, $ Metals Name Symbol Exchange Initial Margin DayTrade Margin Gold GC COMEX/Globex (COMEXG) $11, $1, Copper HG COMEX/Globex (COMEXG) $5, $1, miny Copper QC COMEX/Globex (COMEXG) $2, $ miny Silver QI COMEX/Globex (COMEXG) $10, $3, miny Gold QO COMEX/Globex (COMEXG) $3, $ Silver SI COMEX/Globex (COMEXG) $21, $6,

Financials Name Symbol Exchange Initial Margin DayTrade Margin Euro Bund 10-Year FGBL Eurex $1,400.00 $500.00 Ultra T-Bond UB CBOT/Globex $4,050.00 $1,000.

21 Financials Name Symbol Exchange Initial Margin DayTrade Margin Euro Bund 10-Year FGBL Eurex $1, $ Ultra T-Bond UB CBOT/Globex $4, $1, US 30-Year Treasury Bond ZB CBOT/Globex $4, $ US 5-Year Treasury Note ZF CBOT/Globex $1, $ US 10-Year Treasury Note ZN CBOT/Globex $1, $ Grains Name Symbol Exchange Initial Margin DayTrade Margin Mini-Sized Corn XC CBOT/Globex $ $ Mini-Sized Soybeans XK CBOT/Globex $ $ Mini-Sized Wheat XW CBOT/Globex $ $ Corn ZC CBOT/Globex $2, $ Soybean Oil ZL CBOT/Globex $1, $ Soybean Meal ZM CBOT/Globex $2, $ Soybeans ZS CBOT/Globex $3, $1, Wheat ZW CBOT/Globex $4, $1,

Softs Name Symbol Exchange Initial Margin DayTrade Margin Cocoa CC ICE Futures U.S. $1,750.00 $525.00 Cotton CT ICE Futures U.S. $8,400.00 $2,520.00 Coffee KC ICE Futures U.S. $4,970.00 $2,268.

22 Softs Name Symbol Exchange Initial Margin DayTrade Margin Cocoa CC ICE Futures U.S. $1, $ Cotton CT ICE Futures U.S. $8, $2, Coffee KC ICE Futures U.S. $4, $2, Lumber LBS CME/Globex $2, $ Orange Juice OJ ICE Futures U.S. $5, $ Sugar #11 SB ICE Futures U.S. $2, $ Meats Name Symbol Exchange Initial Margin DayTrade Margin Feeder Cattle GF CME/Globex $2, $ Pork Bellies GPB CME/Globex $2, $ Lean Hogs HE CME/Globex $1, $ Live Cattle LE CME/Globex $1, $

23 Contract Specifications: Stock Index Name Symbol Exchange Contract Size Months Tick / $ Value E-mini S&P 500 Index DAX Index E-mini NASDAQ 100 Index S&P 500 Index Russell 2000 Index Mini ($100) Dow Jones $5 Mini ES FDAX NQ SP TF YM CME/Globex Eurex CME/Globex CME/Globex ICE Futures U.S. CBOT/Globex $50 x Index Value 25 x Index Value $20 x Index Value $250 x Index Value $100 x Index Value $5 x Index Value H,M,U,Z 0.25 / $12.50 H,M,U,Z 0.5 / H,M,U,Z 0.25 / $5.00 H,M,U,Z 0.10 / $25.00 H,M,U,Z 0.1 / $10.00 H,M,U,Z 1 / $5.00 Currencies Name Symbol Exchange Contract Size Months Tick / $ Value Australian Dollar 6A CME/Globex 100K AUD H,M,U,Z / $10.00 British Pound 6B CME/Globex 62.5K H,M,U,Z / $6.25 Canadian Dollar 6C CME/Globex 100K $ H,M,U,Z / $10.00 EuroFX 6E CME/Globex 125K H,M,U,Z / $12.50 Japanese Yen 6J CME/Globex 12.5 mil H,M,U,Z / $12.50 Swiss Franc 6S CME/Globex 125K CHF H,M,U,Z / $12.50 Dollar Index ICE Futures U.S. $1000 X Index DX Value H,M,U,Z / $5.00 E-mini EuroFX E7 CME/Globex 62.5K H,M,U,Z 0.01 / $6.25 E-mini Japanese Yen J7 CME/Globex 6.25 mil H,M,U,Z 0.01 / $

24 E-micro AUD/USD M6A CME/Globex 10K AUD H,M,U,Z / $1.00 AUD E-micro GBP/USD M6B CME/Globex 6,250 H,M,U,Z / $0.625 E-micro USD/CAD M6C CME/Globex 10,000 CAD H,M,U,Z /1.00 CAD E-micro EUR/USD M6E CME/Globex 12,500 H,M,U,Z / $1.25 E-micro USD/JPY M6J CME/Globex 10,000 H,M,U,Z.01/100 E-micro USD/CHF M6S CME/Globex 10,000 CHF H,M,U,Z.0001/1.00 CHF Energies Name Symbol Exchange Contract Size Months Tick / $ Value Brent Crude Oil BRN ICE Europe 42K gal All 0.01 / $10.00 Crude Oil CL NYMEX/Globex (NYMEXG) 42K gal All 0.01 / $10.00 Gas Oil GAS ICE Europe 42K gal H,M,U,Z / $4.20 Heating Oil HO NYMEX/Globex (NYMEXG) 42K gal All / $4.20 Natural Gas NYMEX/Globex (NYMEXG) 10,000 mmbtu All / $10.00 NG E-mini Natural Gas QG NYMEX/Globex (NYMEXG) 2,500 mmbtu All / $12.50 E-mini Heating Oil QH NYMEX/Globex (NYMEXG) 21K gal ALL / $2.10 E-mini Crude Light QM NYMEX/Globex (NYMEXG) 21K gal All / $12.50 E-mini Unleaded Gasoline QU NYMEX/Globex (NYMEXG) 21K gal All / $21.00 NY Harbor RBOB Gasoline RT NYMEX/Globex (NYMEXG) 42K gal All / $4.20 WTI Light Sweet Crude Oil WBS ICE Europe 42K gal All 0.01 / $

25 Metals Name Symbol Exchange Contract Size Months Tick / $ Value Gold GC COMEX/Globex (COMEXG) 100 oz G,J,M,Q,V,Z 0.1 / $10.00 miny Copper QC COMEX/Globex (COMEXG) 12,500 lbs All / $25.00 miny Silver QI COMEX/Globex (COMEXG) 2,500 oz F,G,H,K,N,U,Z / $31.25 miny Gold QO COMEX/Globex (COMEXG) 50 oz F,G,J,M,Q,V,Z 0.25 / $12.50 Silver SI COMEX/Globex (COMEXG) 5,000 oz F,H,K,N,U,Z / $25.00 Financials Name Symbol Exchange Contract Size Months Tick / $ Value Euro Bund 10-Year FGBL Eurex 100K H,M,U,Z 0.01 / 10.0 Ultra T-Bond UB CBOT/Globex $100K bond H,M,U,Z 1/32 / $

26 Grains Name Symbol Exchange Contract Size Months Tick / $ Value Mini-Sized Corn XC CBOT/Globex 1,000 bu H,K,N,U,Z 1/8 / $1.25 Mini-Sized Soybeans XK CBOT/Globex 1,000 bu H,K,N,U,Z 1/8 / $1.25 Mini-Sized Wheat XW CBOT/Globex 1,000 bu H,K,N,U,Z 1/8 / $1.25 Corn ZC CBOT/Globex 5,000 bu H,K,N,U,Z 1/4 / $12.50 Soybean Oil ZL CBOT/Globex 60K lbs F,H,K,N,Q,U,V,Z 1/100 / $6.00 Soybean Meal ZM CBOT/Globex 100 tons F,H,K,N,Q,U,V,Z 0.10 / $10.00 Oats ZO CBOT/Globex 5,000 bu H,K,N,U,Z 1/4 / $12.50 Rough Rice ZR CBOT/Globex 2,000 cwt F,H,K,N,U,X / $10.00 Soybeans ZS CBOT/Globex 5,000 bu F,H,K,N,Q,U,X 1/4 / $12.50 Wheat ZW CBOT/Globex 5,000 bu H,K,N,U,Z 1/4 / $12.50 Softs Name Symbol Exchange Contract Size Months Tick / $ Value Cocoa CC ICE Futures U.S. 10 tons H,K,N,U,Z 1 / $10.00 Cotton CT ICE Futures U.S. 50k lbs H,K,N,V,Z / $5.00 Milk Class III DA CME/Globex 200K lbs All 0.01 / $20.00 Coffee KC ICE Futures U.S. 37.5k lbs H,K,N,U,Z / $18.75 Lumber LBS CME/Globex 110K board feet F,H,K,N,U,X 0.10 / $11.00 Orange Juice OJ ICE Futures U.S. 15k lbs H,K,N,U,X / $7.50 Sugar #11 SB ICE Futures U.S. 112k lbs H,K,N,V / $

27 Meats Name Symbol Exchange Contract Size Months Tick / $ Value Feeder Cattle GF CME/Globex 50K lbs F,H,J,Q,U,V,X / $12.50 Pork Bellies GPB CME/Globex 40K lbs G,H,K,N,Q / $10.00 Lean Hogs CME/Globex 40K lbs G,J,K,M,N,Q,V,Z / $10.00 HE Live Cattle LE CME/Globex 40K lbs G,J,M,Q,V,Z / $10.00 OCO ~Futures Trading Execution Orders 'One-Cancels-the-Other Order - OCO' A pair of orders stipulating that if one order is executed, then the other order is automatically canceled. A one-cancels-the- other order (OCO) combines a stop order with a limit order on an automated trading platform. When either the stop or limit level is reached and the order executed, the other order will be automatically canceled. Seasoned traders use OCO orders to mitigate risk. TradeStation uses the MATRIX and Ninja Trader uses the DOME. 27

28 When either the stop or limit level is reached and the order executed, the other order will be automatically canceled. Seasoned traders use OCO orders to mitigate risk. TradeStation uses the MATRIX and Ninja Trader uses the DOME. 28

29 For example, assume you just bought 10 contracts of NQ (Emini NASDAQ) futures for a momentum break out trade at $2555 per contract. You expect it to break out to the up-side quickly and your profit target is 6 ticks or $30 per contract but for risk mitigation, you would like to lose no more than 6 ticks or $30 per contract. To do this use an OCO order, which would consist of a stop-loss order to sell 10 contract at $2525 (6tick stop-loss) and a simultaneous limit order to sell 10 contracts at $2585 (6 tick profit take), whichever occurs first. These orders could either be day orders or good-till-canceled orders. All the best, Larry Gaines 29

30 P.S. ** Don t forget to checkout for FREE bi-weekly options trading tips videos did I mention it was FREE? Join the Camaraderie of our Trading Club: Power Cycle Trading provides top quality trading education based on a proven model developed by veteran professional trader Larry Gaines after 3 decades of trading professionally. Our programs help traders and investors become experts in the areas of Day Trading with Stocks and ETF s, Futures Day Trading, and Swing Trading or Longer Term Investing. Ongoing support is provided through our virtual trading room where Larry teaches daily along with the Power Cycle Trading community. Larry Gaines has been involved in trading and brokering commodities and financial markets for over thirty years. He started his career trading tanker cargoes of foreign crude oil for a large independent oil company in the 1980 s in their Houston and Singapore offices. He quickly advanced his career to become an Executive Vice President of one of the largest international oil trading companies in the world. In this position he managed their international trading and marketing for over ten years from their corporate office in Bermuda. During his tenure he traded and managed billions of dollars worth of oil, foreign exchange and financial market derivatives including futures and options. His trading group was one of the first to trade over the counter options on cargoes of foreign crude oil and traded millions of barrels of north sea Brent crude oil options. Larry has also worked with a number of hedge funds on a consulting basis and in 2009 set up an over the counter crude oil options brokerage desk for the world s largest privately owned oil brokerage company. Today, Larry trades options and futures and is the Founder and CEO of Power Cycle Trading, where he enjoys teaching others to generate income from trading using a disciplined systematic approach through a price cycle trading system he developed based on decades of trading experience. The model is successfully used by his clients for options, stocks, etf s, futures and forex trading to capitalize on achieving higher trading profit margins with smaller capital investments. This same model is also used by investors for swing trading in addition to longer term investing. Larry lives in the Texas Hill country with his wife of almost 30 years and yellow Lab. He has two sons in college. 30

31 This publication is sold with the understanding that neither the publisher nor author is engaged in rendering legal, accounting, investment or other professional services. Trading and investing involves substantial risk. Financial loss, even above the amount invested, is possible and common. Seek the services of a competent professional person before investing or trading with money. By accepting this trading course you agree that use of the information of this course is entirely at your own risk. Neither the author nor the publisher is a registered investment advisor or a broker dealer. You understand and acknowledge that there is a very high degree of risk involved in trading options, futures and securities. Past results of any individual trader are not indicative of future returns by that trader, and are not indicative of future returns which may be realized by you. Neither the author nor publisher assumes responsibility or liability for your trading and investment results. This course is provided for informational and educational purposes only and should not be construed as investment advice. The author and/or publisher may hold positions in the stocks, futures or industries discussed here. You should not rely solely on this information in making any investment. The information in this course should only be used as a starting point for doing additional independent research in order to allow you to form your own opinion regarding investments and trading strategies. It should not be assumed that the information in this manual will result in you being a profitable trader or that it will not result in losses. Past results are not necessarily indicative of future results. You should never trade with money you cannot afford to lose. The information in this product is for educational purposes only and in no way a solicitation of any order to buy or sell. The author and publisher assume no responsibility for your trading results. There is an extremely high risk in trading. This course is sold AS IS, without any implied or express warranty as to its performance or to the results that may be obtained by using the information. Factual statements in this course are made as of the date the course was created and are subject to change without notice. HYPOTHETICAL OR SIMULATED PERFORMANCE RESULTS HAVE CERTAIN INHERENT LIMITATIONS. UNLIKE AN ACTUAL PERFORMANCE RECORD, SIMULATED RESULTS DO NOT REPRESENT ACTUAL TRADING. ALSO, SINCE THE TRADES HAVE NOT ACTUALLY BEEN EXECUTED, THE RESULTS MAY HAVE UNDER- OR OVER-COMPENSATED FOR THE IMPACT, IF ANY, OF CERTAIN MARKET FACTORS, SUCH AS LACK OF LIQUIDITY. SIMULATED TRADING PROGRAMS IN GENERAL ARE ALSO SUBJECT TO THE FACT THAT THEY ARE DESIGNED WITH THE BENEFIT OF HINDSIGHT. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFITS OR LOSSES SIMILAR TO THOSE SHOWN. 31

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