More about Futures Trading and Index Futures Trading

Index futures are futures markets where the underlying commodity is a stock index, such as the S&P 500, the DAX, the Dow Jones Industrial Average and the FTSE. Stock market indexes, such as the previous mentioned, cannot be traded directly. The primary way to trade stock indexes is to utilize Futures contracts based on the underlying stock indexes.

Using the S&P 500 as an example, this index is made up of 500 large cap stocks, with a diverse range of different stocks, in different sectors, and these individual stocks trade on either the New York Stock Exchange or the NASDAQ.  While you cannot trade the index directly, trading the S&P 500 futures contract allows you to trade the whole index in one single transaction, without having to buy and sell specific shares. Index futures work in exactly the same way as any other futures contract such as commodity futures.

Our index future of choice and the most popular index future is the E-mini S&P 500 contract. There are some very distinct reasons why we trade this index. The S&P 500 is the most heavily traded index future in the world; it trades on the Chicago Mercantile exchange (CME). It offers a diverse view of the US economy. The full contract is worth $250 per point, with a margin requirement of $5000 per contract traded. While the E-mini contract, being a much smaller contract, is much more accessible to the average investor. The point value for the S&P 500 E-mini contract is $50 and most brokers offer margins of $500 to $1000 allowing anybody with a few thousand dollars to take a trade. The S&P 500 E-mini contract has some of the most liquid and popular market conditions available for the day trader, and with the large participation base, including large firms and more than 2 million contracts traded on an average day, it makes it perfect for day trading and especially automated trading systems.

Trading futures and index futures has risen greatly in popularity recently due to the relative ease of trading either long or short. As an example, if you were to believe the markets are going to rise, you can buy or go long on the index, if the market rises and you were to exit your position at a higher figure, you would profit. To take it one step further, if the current price was 1105.25 and you went long, then the price rose to 1107.25, and you exited your position, your profit would be 2 points or $100 per contract.

The same works in reverse, if you believe the market will fall, you can sell the market or go short, and if you were to exit your position at a lower point in the market you would profit. Again going one step further, if the price was 1105.25 and you went short, and the price fell to 1103.25, you would profit the same 2 points profit or $100.

The ease of short selling or going short to profit from falling markets make trading index futures very popular for large firms as well as retail investors. Compared to shares, the process is very simple and it allows a much more rounded approach to trading. When you are trading index futures, you are taking a general view, or direction of the markets, not on individual stocks. This way you take out the chop or erratic movement associated with individual shares. If one stock was to fall heavily, there is most likely going to be another stock in the index that rises, thus creating a much smoother trading environment. Large institutional firms along with regular investors, use the futures markets for hedging and speculation.

Index futures, especially E-mini futures, offer the investor with a large range of advantages, including extremely high leverage, no physical or electronic delivery hassles and the ability to trade the whole market with one single transaction. The massive liquidity and virtually continuous trading day and night, on electronic platforms throughout the world, make them an ideal candidate for automated trading systems, to take advantage of either the short term intraday movement or the medium term daily market, and most importantly either long and short.
Using a Mechanical automated trading system for trading Index futures is a great way to take advantage of the endless opportunities that present in the markets.