Please Help Me Understand E-minis' Leverage

[Guest Tresor]

Hello Guys,

 

I am trying to understand the concept of leverage and I am getting a bit confused. I made some miscellaneous readings about e-minis.

 

It is claimed that, e.g. YM has lower leverage than ES, therefore YM is recommended for beginners while ES is recommended for experienced traders.

 

I have made a small spreadseet which shows that YM's leverage is almost twice as high as that of ES. Either guys on the Internet are wrong or I misunderstand the concept of ''leverage'' :crap:

 

My understanding is that as of 31 Dec 2008 with daytrade margin of $500 (the same for YM and ES), I would control $86,610 with 1 YM and only $44,587.50 with 1 ES.

 

With 1% movement, in my direction, of the price action I could earn $866.10 with 1 YM and only $445.88 with 1 ES. Therefore my earnings with this 1% move in price action would be:

(i) 1.73 of the margin with YM, and

(ii) 0.89 of the margin with ES,

 

ergo leverage on YM is much higher than on ES.

 

 

Can you please have a look at the attached spreadsheet and see if my computations are okay?

contract specs.rar

contract specs.xls

Edited January 2, 2009 by Tresor

[brownsfan019 17]

Here's why the YM is recommended for beginners:

 

1 pt = $5

 

1 pt on ES = $50

 

In other words, you can lose 10 pts on the YM and have lost the same as 1 pt on the ES. A 1 pt move on the ES (esp in recent memory) can be rather quick at times, meaning watching a 2-3 pt move flash before your eyes is not uncommon.

 

Therefore, a 2-3 ES pt move = $100-$150 move.

 

That same move on the YM would require 20-30 pts. While the YM can in fact move 20-30 pts quickly at times as well, it's much easier to hit the flatten button when you have a 10 pt 'cushion' vs a 4 tick / 1 pt on the ES.

 

Basically, the YM gives beginners a little bigger 'oh sh*t' ability when compared to the ES. A 1 pt or 4 tick move on the ES is not much at all, esp during volatile times.

 

That's why the YM is recommended over the ES to beginners. Has nothing to do w/ actual leverage numbers you are trying to calculate.

[Guest Tresor]

Ok, Now I understand why YM rather than ES is recommended for beginners. Thank you brownsfan019 :beer:

 

Could someone please have a look at xls and tell me if I calculated the leverage ratio properly? You know I am just trying to build up my money management system.

 

Regards

[Guest Tresor]

Please ignore this thread. I screwed up and applied a multiplier of 10 to YM, where I should have applied 5. In fact YM is slightly less leveraged than ES, but still almost twice as leveraged as NQ.

 

Regards

[firewalker 10]

Please ignore this thread. I screwed up and applied a multiplier of 10 to YM, where I should have applied 5. In fact YM is slightly less leveraged than ES, but still almost twice as leveraged as NQ.

 

Regards

 

Having a look at the average true range can also help determine which market suits you best. It's true that the YM is "only" 5$ per point, but it will move around 20 points at the same time the ES will move around 2 points, which in the end means the same amount of money lost or gained.

 

If you want to take a safe route, you might want to check out the ETF's first, instead of the futures. The DIA, SPY en QQQQ all show the same price action, but you'd have to mess up pretty badly to lose a lot of money. While if you start on the futures, you better have a solid plan tested and worked out before putting real money on the line. Just my

[diablo272 10]

I agree about ETFs instead of e-minis. I first started with uncovered SPY options, and they were much more beginner friendly (much less leverage at the time) than trading even 1 contract lots of ES. SPY or QQQQ are good places to start if you're brand new.

[markl67 10]

Just remember the tax ramifications of trading stocks/ETF's can be disadvantageous compared to trading futures.

[diablo272 10]

Just remember the tax ramifications of trading stocks/ETF's can be disadvantageous compared to trading futures.

 

Here is some tax info comparing stocks and ETFs with the e-minis: http://www.traderslog.com/futures-trading-taxes.htm