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suby

E-Minis Vs Volatile Etfs

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Hey guys,

 

I am trying to narrow my instruments and I am having a hard time deciding between E-Minis like QM and MGC and ETFS like VXX, TZA, and USO.

 

I was wondering if I could get some opinions from the laboratory on this...

 

Do you feel e-minis are safer or risker than etfs?

 

Which of the two are easier to get started with as a beginner

 

Are E-mini's better for day trading and ETFS better for swings....?

 

Any advice is appreciated!

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  suby said:
Hey guys,

 

I am trying to narrow my instruments and I am having a hard time deciding between E-Minis like QM and MGC and ETFS like VXX, TZA, and USO.

 

I was wondering if I could get some opinions from the laboratory on this...

 

Do you feel e-minis are safer or risker than etfs?

 

Which of the two are easier to get started with as a beginner

 

Are E-mini's better for day trading and ETFS better for swings....?

 

Any advice is appreciated!

 

You get a lot more leverage with the Emini than you do with etf. If you know how to take advantage of leverage, then use the emini, otherwise either will produce the same result. The underlying is the same.

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  MightyMouse said:
You get a lot more leverage with the Emini than you do with etf. If you know how to take advantage of leverage, then use the emini, otherwise either will produce the same result. The underlying is the same.

 

How do you "know" how to take advantage of Leverage...

 

What about time decay on ETFS....

 

Have you ever swing traded etfs?

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  suby said:
How do you "know" how to take advantage of Leverage...

 

What about time decay on ETFS....

 

Have you ever swing traded etfs?

 

You "know" how to do these in part by extensive sim trading and waiting until you are consistently profitable over an extended time period before transitioning to live trading.

 

Be very careful in your selection of instruments to trade, some of the ones you've listed trade at extremely low volumes. The result is that there will often be large spreads between bid and ask and it might be difficult to exit positions without a lot of slippage. These issues might not show up in sim trading depending on your platform. I'd look at daily trading volume as a key factor in deciding what to trade.

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  suby said:
How do you "know" how to take advantage of Leverage...

 

What about time decay on ETFS....

 

Have you ever swing traded etfs?

 

Leverage magnifies wins ..... and loses. If your system has a decent win rate and proper risk reward then any leverage instrument would give you better 'bang' for your dollar.

 

Only ETF I trade is Spy and even then only its options.

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A major consideration is the size and type of your account. If you day trade ETF's then you need a min of $25,000 of buying power in the account per the SEC rules on daytrading stock. Futures do not have the same rules. You can day trade futures for the margin requirement which is around $2,500 for the NQ so that is all you need in the account. You can trade ETF's in your IRA, but not futures. IRA's are not allowed to offer margin. If you plan to day trade ETF's in an IRA you have to be aware of settlement restrictions (talk to your broker). Usually you cannot go in and of them all day long like you can in a normal margin account.

 

I trade a lot of the triple leaveraged ETF's. They move fast, in both directions. Since the VIX index can make big percentage moves, the ETF's that track them do too. If the market is crashing, the VXX can easily move more than 10% in a day. The leaveraged VIX tracking ETF's, such as TVIX and UVXY are double the VXX and can move 25% in one day.

 

I am not worried about trading ETF's that have low volume. The company that offers an ETF makes sure the spreads do not get very wide. They make money from that ETF and want to build volume so they keep the spreads pretty tight. One time TVIX got totally out of sync with the VIX index. The volumes were huge and the company (I think it was UBS) decided to not issue more shares to keep up with demand. UBS made a mess of it and personally I took some a big loss on that trade (My bad for not having a firm stop).

 

Decay is only a problem for an ETF that doesn't go anywhere. If you use them for their intended purpose in a trending situation, then they work as advertised and sometimes better.

 

Good Trading.

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  garylroth said:
A major consideration is the size and type of your account. If you day trade ETF's then you need a min of $25,000 of buying power in the account per the SEC rules on daytrading stock. Futures do not have the same rules. You can day trade futures for the margin requirement which is around $2,500 for the NQ so that is all you need in the account. You can trade ETF's in your IRA, but not futures. IRA's are not allowed to offer margin. If you plan to day trade ETF's in an IRA you have to be aware of settlement restrictions (talk to your broker). Usually you cannot go in and of them all day long like you can in a normal margin account.

 

I trade a lot of the triple leaveraged ETF's. They move fast, in both directions. Since the VIX index can make big percentage moves, the ETF's that track them do too. If the market is crashing, the VXX can easily move more than 10% in a day. The leaveraged VIX tracking ETF's, such as TVIX and UVXY are double the VXX and can move 25% in one day.

 

 

I am not worried about trading ETF's that have low volume. The company that offers an ETF makes sure the spreads do not get very wide. They make money from that ETF and want to build volume so they keep the spreads pretty tight. One time TVIX got totally out of sync with the VIX index. The volumes were huge and the company (I think it was UBS) decided to not issue more shares to keep up with demand. UBS made a mess of it and personally I took some a big loss on that trade (My bad for not having a firm stop).

 

Decay is only a problem for an ETF that doesn't go anywhere. If you use them for their intended purpose in a trending situation, then they work as advertised and sometimes better.

 

Good Trading.

 

Hey Garylorthe,

 

Thanks for the indepth reply. I have never in my life heard about having a minimum of $25,000 in an account to day trade stock by the SEC. Can you clarify this?

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  suby said:
Hey Garylorthe,

 

Thanks for the indepth reply. I have never in my life heard about having a minimum of $25,000 in an account to day trade stock by the SEC. Can you clarify this?

 

try doing a few short term day trades in quick succession, and you'll soon find out when they stop you trading ! :crap:

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The main and most important advantage for Emini vs ETF is that Emini's are taxed at long term capital gains. Also, at the end of the year you have one piece of paper to attach to your tax return vs. a whole stack of transactions. No brainer... Eminis...

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It's called the "pattern day trading" rule. Wikipedia has a good article on it at Pattern day trader - Wikipedia, the free encyclopedia

 

Here are the key parts:

Pattern day trader is a term defined by the U.S. Securities and Exchange Commission to describe a stock market trader who executes 4 (or more) day trades in 5 business days in a margin account, provided the number of day trades are more than six percent of the customer's total trading activity for that same five-day period.

 

Under the rules of NYSE and Financial Industry Regulatory Authority, a trader who is deemed to be exhibiting a pattern of day trading will be subject to the "Pattern Day Trader" laws and restrictions, which is treated differently from a normal trader. In order to day trade: Day trading minimum equity: the account must maintain at least US$25,000 worth of equity.

 

The good side of this is that if you have the $25,000 equity (cash or stocks) in the account the day trading buying power is better. With $25,000 you can day trade up to $100,000 but you better be back under $50,000 by the end of the day and if you keep positions over night it subtracts from your day trading buying power the following day.

 

This applies to a margin account, but not to a cash account. However, in a cash account each trade ties up money for 3 days waiting for settlement.

 

Your broker can tell you exactly how all this works.

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  suby said:
Neither lol...?

 

So then what?

 

Both have their pros/cons.

 

Personally I think Forex is the best instrument for a beginner if only because you can risk an extremely small amount, $0.10/pip on nano, and scale up as you become proficient and have the capital for it.

 

Everything else, the chart reading, money management, managing emotions etc are the same regardless of the instrument you trade.

 

However between E-mini and ETF I would suggest ETF although there is the $25,000 day trading requirement. Not an issue if you swing trade.

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I have extensive experience trading both the volatility ETFs and various EMini futures. The slippage in dollars on the futures is VERY significant for market orders. The slippage for the VXX is only .01, but for various futures contracts it can range anywhere from $5 to $20!!!

 

The VXX is leveraged approximately 4:1 vs the SPY so that should give you all the leverage you need.

 

Leverage is a wonderful thing when it's working for you and a terrible thing when it's against you.

 

If you don't get the slippage calculations correct, all your SIM and backtesting is useless.

 

Best of luck trading REAL money in real time in the real markets...

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  suby said:
Hey Garylorthe,

 

Thanks for the indepth reply. I have never in my life heard about having a minimum of $25,000 in an account to day trade stock by the SEC. Can you clarify this?

 

Google "pattern day trader", or search for that term on this site, or on your broker's site. Basically a pattern day trader is anyone who completes 4 or more stock day trades within 5 days.

 

It is very important that you understand your brokers minimums and other rules for pattern day traders. There are significant benefits as well, including more favorable margins and availability of funds.

 

If you have not heard of this I'd suggest you go back to go and read a very basic intro to day trading book so that you'll understand some of the very fundamental rules and concepts.

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  eqsys said:
I have extensive experience trading both the volatility ETFs and various EMini futures. The slippage in dollars on the futures is VERY significant for market orders. The slippage for the VXX is only .01, but for various futures contracts it can range anywhere from $5 to $20!!!

 

The VXX is leveraged approximately 4:1 vs the SPY so that should give you all the leverage you need.

 

Leverage is a wonderful thing when it's working for you and a terrible thing when it's against you.

 

If you don't get the slippage calculations correct, all your SIM and backtesting is useless.

 

Best of luck trading REAL money in real time in the real markets...

 

Hey eqsys,

 

I'm still pretty new to backtesting and would love to learn more.

 

Do you have any reading material you could send my way.

 

What programs do you use to backtest?

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Suby...

 

I use TradeStation. I am able to thoroughly backtest any trading idea on stocks, options, futures, or Forex. As an active trader I pay about $1 per stock or options trade, and $2.40 round turn for futures. Most brokerages charge a LOT more than this, and between the commissions and slippage, it's very difficult to be profitable, no matter what you trade or how you trade.

 

I trade both "manually" and with automatic execution turned on. With automatic execution the computer places the trades for me based on the formulas and strategies I have come up with. Options can't be "auto" traded per exchange rules.

 

I want to be perfectly clear about this - making money by trading is NOT easy. You have to come up with systems, thoroughly backtest them, employ money management, and have the emotional discipline to stay on track - you have to keep the fear and greed under control. I do not recommend it as a way to earn a living unless it's something you absolutely love to do.

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What EQSYS said... and then some.

 

Do not take a trade for amusement or boredom or the thrill of jumping on board.

There is a reason 95% of people lose money. To be in the top 5% you have to have a tested biz plan and stick to it. Otherwise... go to Vega... the odds are better.

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  philipwade said:
E-mini futures provide opportunity to leverage capital to a greater extent than ETFs. In some cases there may be a tax advantage associated with trading E-mini stock index futures over ETFs.

 

Haven't bothered to read from beginning of topic? Mentioned a few times already.

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The VIX based ETFs have a lot of leverage, as do the various 2x and 3x ETFs. The futures do have a tax advantage, especially at tax reporting time, as you don't have to itemize your trades to the IRS. However, the slippage and commission drag on your net can be significant. This is why I went back to trading stock and ETF products. If you want leverage you can get all the leverage you want with stock options. I do NOT recommend much leverage for novice traders. It is almost always the reason they wipe out.

 

I have also found that the NQ produces better results in backtesting and real time trading than does the ES.

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