E-mini Trading Strategy (Backtest)

Last Updated on September 22, 2022 by Oddmund Groette

With e-minis, the Chicago Mercantile Exchange’s Globex electronic trading platform has made it possible for individuals with less capital to play the futures and commodity markets from around the world. It is one of the most efficient and cost-effective ways to gain market exposure. But what exactly does e-mini mean?

An E-mini is an electronically traded futures contract that is a fraction of the value of corresponding standard futures contracts. E-minis are available on a wide range of indexes, commodities, and currencies. These contracts were first created by the Chicago Mercantile Exchange (CME) and are predominantly traded on that exchange via its electronic trading platform.

At the end of the article, we present you with an e-mini trading strategy with a backtest.

In this post, we take a look at e-mini and the electronic futures market.

What is the E-mini?

E-minis are electronically traded futures contracts that are a fraction of the value of corresponding standard futures contracts. E-minis are available on a wide range of indexes, commodities, and currencies. These contracts were first created by the Chicago Mercantile Exchange and are predominantly traded on that exchange via its electronic trading platform, the Globex electronic trading platform.

The first E-mini futures contract was launched in 1997 by the CME to give individual investors, for whom standard contract sizes were often too expensive, access to the futures market. It was first offered for the S&P 500 index. Now, E-minis are traded on both the CME and other exchanges, and they are now available on a wide range of assets, including stock market indices, commodities, currencies, and even individual stocks. However, the S&P 500 E-Mini, which is based on the S&P 500 index, remains the most actively traded e-mini.

E-minis allow investors to hedge their bets or speculate on the price movements of the underlying asset. The “E” in the name stands for electronic, and as such, they are primarily traded electronically. An n-mini contract is 20% of the size of a typical futures contract, and like other futures contracts, investors typically only need to have cash equal to a fraction of the e-minis contract’s value to enter the position. Although E-minis are readily available and easily traded, they are limited in scope and may be highly volatile.

Is e-mini a futures contract?

Yes, an e-mini is a type of futures contract, so they work like futures. It is a futures contract that is one-fifth the size of a typical futures contract. A futures contract is a financial derivative contract that obligates the holder to buy or sell an asset, such as a physical commodity or a financial instrument, at a predetermined future date and price. It represents an agreement between the buyer and the seller to exchange the underlying asset. So, futures contracts detail the quality and quantity of the underlying asset and are standardized to facilitate trading on a futures exchange.

Some futures contracts may call for physical delivery of the asset, while others, such as index futures, are settled in cash. When the time for delivery arrives, the two parties to the contract simply exchange cash to settle the transaction. In electronic trading, traders typically close out their positions by opening an equivalent but opposite position. For example, if you sell one e-mini contract of the S&P 500 Index, you can close your position by buying one contract of the same S&P 500 e-mini. You profit or lose money based on the prices at which you bought and sold the contracts.

Since the standard futures typically involve large amounts of money, e-minis serve as a vehicle for retail traders who want to trade smaller amounts. Futures are traded almost 24 hours a day, and E-minis are highly liquid because more traders have access to it. Another reason e-mins are popular is that they let you use leverage to gain control over a much larger amount of money than your account’s balance would typically allow.

E-minis are also used to hedge against drops in the stock market. For example, if you have a stock portfolio you want to hold long term but you believe that the market would experience some volatility over the short term, you can sell some e-mini contracts to profit when the market drops. The leverage involved means your gains will be relatively greater than the drop in the index’s value; however, if you’re wrong, the leverage would magnify your losses.

How much money do you need to trade the e-mini?

How much you would need to trade any e-mini contract depends on the value of the contract and the minimum margin required by the futures exchange and your futures broker. Thus, we have to first find the value of the contract and its minimum margin requirement. For example, the contract size of the S&P 500 Index e-mini is equal to $50 multiplied by the S&P 500 index. So, if the S&P 500 is at 4,000 points, the value of one e-mini contract would be $200,000 ($50 x 4,000).

For most exchanges, the minimum maintenance margin is usually 5% of the contract’s worth, but this can vary with assets based on volatility. In this case, the CME specified $10,000 for the e-mini S&P 500 Index futures contracts. So, if you want to buy/sell 1 S&P e-mini futures contract, you must have at least $10,000.00 in your account at all times. But the broker would require more than that because futures are settled on a daily basis, and there is no guarantee that your first trades won’t encounter a loss before they become profitable. You need some extra money to take care of potential losses.

Many brokers like Interactive Brokers post the minimum deposit you must have to trade any specific contract, so you check with your broker. But we know that some brokers may not post that on their websites, which is why you want to know. To trade e-mini S&P 500 future, you must have more than $10,000 — budget about $13,000 to $15,000. And here’s why: let’s say you are long 1 contract at 4000, and you lost your bet, as it settles at 3970 at the end of the trading day. You have lost $1,500. If your account is not bigger than the $10,000 maintenance margin by more than $1,500, the broker will close the position and come after you for the balance. In fact, the broker would close your account before the losses could affect the required maintenance margin.

E-mini trading strategy (backtest)

An e-mini trading strategy is coming soon.

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