Market Overview

Trading The E-mini ES Vs Speculating: What To Know

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Author: Gail Mercer /TradersHelpDesk

Trading the E-mini ES (S&P 500) versus speculating on whether price will go up or down involves two very different mindsets and very different results, as well. As Richard Wykoff (a world renowned trader and volume expert from the early 1900s) stated, “Ninety-five percent of all traders fail because they are speculators and not traders.” Why? Because speculators are willing to risk huge amounts in HOPES of making a windfall in profits. Traders, on the other hand, are willing to risk small amounts to make smaller (more achievable) profits.

Trading The E-mini ES - Speculator's View

For example, using the 15-minute chart below for trading the E-mini ES, the speculator, believing the E-mini ES will come crashing down to 2035 this afternoon, sells short at 2051.75 (highlighted with red arrow) without regard to margin, leverage, or even risk exposure. Instead, the speculator typically only focuses on how much he can make – i.e. thinking he can triple his account in a single trade.

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The speculator may not even place a stop on the trade out of fear of being wrong. If they do place a stop, it is not unusual for them to remove it because they just know the market is on the verge of crashing, especially with all the market analyst predicting as much. Of course because they are over-leveraged, if they receive a margin call then they are out of business until they find a way to add more money to their account. On the flip side, if the market does go exactly where they anticipate, they refuse to take profits believing that it will go even lower making even more money than they anticipated.

Trading the E-mini ES from a Trader's Perspective

Traders use a business model that encompasses analyzing their account size, risk parameters, profit potential, as well as the return on investment, to generate consistent profits for their trading business. The trader’s job is to protect his account and survive another day.
Binary options are perfect for traders because it actually teaches traders to be traders and not speculators. To trade binary options, the trader either believes the strike statement is true or false by expiration. More importantly they promote a mindset of a trader and not a speculator.

  1. Binary options do not use leverage so traders can never lose more than they invested. Futures and forex both use leverage, which is akin to trading on credit. However, as many speculators discovered in January 2015 when the Swiss National Bank "unpegged" the Swiss Franc and Euro, and speculators lost their entire accounts and were left owing money to their brokers.
  2. The order ticket identifies the maximum risk and maximum profit, if held till expiration. Because the risk and profit is identified before entering, traders know the best and worst case effects before they enter.
  3. There are no margin requirements. Since binary options require the risk upfront, there is no need for margins. Binary option traders can never lose more than the risk paid upfront.
  4. Since risk is paid on entry, stops are not an issue. Since options are time based trades, even if the trade moves against the trader, as long as the indicative price closes in their favor by expiration, they make profits. If not, they only lose what they invested in the trade.
  5. Since binary option traders do not utilize leverage, margin, or stops, they are able to focus on their charts and technical analysis for better entries and exits.

For example, a trader with the same belief as the speculator opts to use an out of the money binary option for the US 500, which is based on the underlying E-mini ES, to lower his risk in case the market moves against him.

The US 500 binary option ticket below identifies if the trader sells the US 500 > 2048 strike price with an expiration at 4:15 pm New York time the maximum risk is $33 per contract and the maximum profit is $67 per contract (excluding exchange fees).

Futures, options and swaps trading involve risk and may not be appropriate for all investors. Past performance is not necessarily indicative of future results.

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The trader calculates the best and worst case scenarios:

  • Risk if wrong - $33 per contract, excluding exchange fees
  • Reward if correct - $67 per contract or 203% return on investment, excluding exchange fees

Of course, he could also exit the trade at any point prior to expiration, i.e. he realizes a $33 profit (excluding exchange fees) and opts to exit the trade. In this case, his return on investment is 100% (risking $33 to make $33).
While speculators will throw everything they have at the market in HOPES of hitting a home run, traders are more reserved. Traders focus on a consistent pattern of growth while limiting their risk exposure as much as possible.

Posted-In: Education General

 

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