Trading The Dow Mini Future

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Click on the following resources to learn more about trading the e-mini. Note: You will need Adobe Acrobat Reader in order to view/read some of these important links…

http://www.cbot.com/cbot/pub/page/0,3181,1063,00.html

http://www.cbot.com/cbot/docs/49707.pdf

http://www.cbot.com/cbot/docs/42357.pdf

http://www.cbot.com/cbot/docs/62166.pdf

http://www.investopedia.com/university/futures/

The Dow E-Mini is simple to understand. It tracks closely the Dow Jones Index. You Buy [or go ‘long] a Dow ‘Contract’ when you expect the Dow to move up. You Sell [or go ‘short’] a Dow ‘Contract’ when you expect the Dow to move down.

A few basics…

One E-Mini Contract = $5 x Dow Jones Index. So, if the Dow is quoting at 10500, then you are buying 10500 x $5 = $52500. This is NOT your capital requirement, but simply the total value of the contract. Capital requirements to trade one contract, is around $1,950.00. We will discuss more on this in just a few moments.

A Dow Contract has an ‘expiry’ date, eg., March Dow, June Dow, September Dow, and December Dow. The ‘expiry’ date is the third Friday of the contract month. You buy a Dow ‘emini future with a fixed expiry date, eg., “June Dow”, which means [for you and me] that we have to close our position at the very latest, before the third Friday of June. You will always trade the ‘nearest month’ contract. For example, if it is mid May, the nearest month contract is June. If it is mid November, the nearest month contract is December.

When the Inter Market Strength oscillator provides a BUY signal [ie., indicator has changed from falling to rising], we usually trade 3 contracts of the Dow E-mini. You can trade just one contract if you wish, or two or three, it is up to you. To trade a single contract requires around $1,950 deposit [known as margin]. To trade two requires around $3,900. To trade three requires $5,850, and so on…

Imagine it is April, and the Dow is at 10350 and we get our signal to Buy. We check online with our broker, for the current price for the Dow June E-Mini [nearest month], and the quote is 10365-10366. What does this mean? You will see two quotes – known as the bid-ask. The lower price is the ‘bid’, which is the price you would ‘sell/short’ and the higher price is the ‘ask’, which is the price you would ‘buy’ at. The difference, usually only 1 point is the ‘spread’, which we don’t need to worry about right now.

You will notice that the ‘buy’ price of 10366 is actually higher than the Dow itself, which is at 10350. This is because you are buying a ‘futures’ contract. Do not worry if you don’t fully grasp this. Because you are buying a ‘future’, which expires in several weeks time, the price of 10366 includes a premium to the cash market – it is what market makers ‘expect’ the Dow to be at when the contract expires on the third Friday of June. However, because you will be selling [to close your position] before the June expiry date, the premium will remain relatively uniform. Let me explain…

After a few days, the actual, underlying Dow does indeed move up, from 10350 to 10465. That is a 115 point up-move. You check with your broker to see the price for the June E-Mini, and it is now quoting at 10480-10481. Because you are now selling to close your position, you take the lower ‘ask’ price of 10480. Your profit is as follows…

Bought Dow E-Mini Future @ 10366

Sold Dow E-Mini Future @ 10480

Total Profit Achieved = 114 Points

Dollar Profit Per Contract = 114 x $5 = $570

Because you are trading the ‘future’, the price quote for the future is approximately the same amount premium when you buy and sell, so your profit is almost identical to the actual ‘points’ achieved in the Dow. It is important to note, that all of our analysis and entry/exit signals are always based on the main underlying Dow Jones Index itself. We simply use the ‘future’ to trade the Dow. We do not use the ‘futures’ prices to calculate the Inter Market Oscillator, but only the actual ‘main’ Dow Index.

There are a number of brokers whom you may contact and set up an e-mini trading account – you simply apply [usually 100% online], deposit funds, just like in a bank account, and provided you have the required margins [eg., around $1950 to trade one contract Dow E-Mini] you are set and ready to trade. Brokers charge around $3 for a single contract as their commission. On the above trade therefore, you would pay out $6 [$3 to buy, $3 to sell] on the single contract.

Below is a list of a number of online brokers you may contact to get more information – all of them allow you to trade online…

Cannontrading.com

Eminidirect.com

Xpresstrade.com

Velocityfutures.com

Gofutures.com

Gfetc.com

Proactivefutures.com

Nobletrading.com

Proemini.com

Interactivebrokers.com

Thinkorswim.com