E-mini Trading Strategy: Backtest and Example Analysis

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 is an e-mini trading strategy?

An e-mini trading strategy is a strategy that trades one of the e-mini contracts. 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. Before that, 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.

Why you need a deposit to trade futures

Here’s why you need a margin requirement: 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)

Let’s backtest a strategy that resembles a Rubber Band trading strategy. We backtest the @ES e-mini contract (@ES is the ticker code for S&P 500). For simplicity, we use a compounding equity test – not a futures test.

We make the following trading rules and settings:

Trading Rules

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First, we make an in-sample backtest from January 2000 until the end of 2021, and we test the strategy out-of-sample on the 2022 data. We define the daily trading session from 0930 to 1600 ET and we enter and exit at the close.

This is the equity curve:

The number of trades is 163 and the average gain per trade is 0.89%. The win ratio is pretty high at 79%, and the profit factor is 2. It’s a decent strategy, but not spectacular.

How did the strategy fare in the bear market of 2022? Here is the equity curve:

The 13 trades generated an average of 0.18%. Obviously, that is not a lot, but it has to be compared to a loss of 15% (as of writing) for the S&P 500.

If you want the Amibroker code to this strategy, you can get access by clicking on the green banner below in the next headline:

List of trading strategies

Since this blog’s inception back in 2012, we have written more than 800 articles. Many of those articles contain strategies (including this article), and we have compiled many of those into a package of code that you can order. We have thus far over 160 different strategies in the compilation.

The strategies are taken from our list of trading strategies that work. The strategies are an excellent resource to help you get some trading ideas.

The strategies also come with logic in plain English (plain English is for Python traders).

For a list of the strategies we have made please click on the green banner:

These strategies must not be misunderstood for the premium strategies that we charge a fee for:

E-mini futures scalping strategy

Before you even think about scalping, what is your trading plan? Scalping e-mini futures contracts is probably one of the most competitive areas of trading. What makes you think you can make money? What do you have or bring to the table that makes you profitable?

We believe, in general, that scalping is a very bad idea. Not only is it extremely competitive with players that are better equipped and capitalized than you are, but you are also fighting commissions and slippage.

FAQ – E-mini futures trading strategy

Based on the number of e-mails we get we decided to make a FAQ to better address any issues about the e-mini futures trading strategy:

Q: What are e-mini futures?

A: E-mini futures are a type of futures contract that trades on a variety of stock indices, commodities, and currency pairs. They are smaller in size than regular futures contracts, allowing them to be traded with less capital. E-mini futures are popular among day traders, as they offer low margin requirements, leverage, and the ability to take advantage of price movements in the underlying asset. Additionally, they can be traded in a very liquid and efficient market, with low transaction costs.

Q: How can I trade e-mini futures?

A: To trade e-mini futures, you will need to open an account with a futures broker. Once you have an account, you can place orders to buy or sell e-mini futures contracts. Before trading, it is important to understand the basics of futures trading, such as margin requirements, order types, and risk management.

Q: What are the risks of e-mini futures trading?

A: Like all types of trading, there is always the risk of losses. It is important to understand that e-mini futures trading can be highly speculative and risky. The high degree of leverage inherent in futures trading can work against you, as well as for you. You should also be aware of the risks related to the underlying asset, such as market volatility and illiquidity. Additionally, you should familiarise yourself with the particular contract you are trading, including features such as expiration dates and margin requirements.

Q: What strategies can I use when trading e-mini futures?

There are various strategies you can use when trading. However, in trading, no size fits all. Stocks tend to work very well using mean reversion strategies, while this doesn’t work at all for commodities, for example. You need to backtest before you employ a particular strategy. You can read here how to backtest a trading strategy, or you can have a look at our backtesting course:

Q: What resources are available to help me learn more about e-mini futures trading?

A: There are a variety of resources available to help you learn more about e-mini futures trading. These include books, online courses, and educational videos. Additionally, many futures brokers offer educational materials and resources to help their clients get started with trading e-mini futures. These can include tutorials, webinars, and other materials to help you understand the basics of futures trading.

Q: Can you make a living trading e-mini?

Of course, many do, but the great majority fail. Don’t expect any great results unless you work hard, are disciplined, and keep detailed records of all you do. We also strongly recommend backtesting your trading ideas because our experience is that most traders don’t have an edge in the first place. Please also read our take on how to improve your trading.

Keep in mind that the e-mini contract is a derivative and the derivative market is a zero-sum game.

Q: How much does it cost to trade 1 e-mini contract?

With online trading, costs have fallen dramatically over the last few years. The cost of trading 1 e-mini contract can vary depending on the broker and the current market conditions. Generally, it will cost between $0.50 and $2.50 per contract plus any applicable exchange, broker, and clearing fees.

Q: What happens when e-mini futures expire?

When an e-mini futures contract expires, all open positions must be settled. This is done by either the trader accepting delivery of the underlying asset or by entering into an offsetting transaction in the market, such as buying or selling a similar contract. Any profits or losses are realized at the time of settlement, and the contract is then considered expired.

Q: How many times per day can you legally day trade e-mini futures?

There is no legal limit on the number of times per day that you can day trade e-mini futures contracts. However, some brokers may impose a limit or pattern day trader rule.

Q: What happens if I’m flagged as an e-mini futures day trader?

If you are flagged as an e-mini futures day trader, you may be subject to additional restrictions, such as higher margin requirements and/or a restriction on the number of trades you can make in a day. Additionally, you may be subject to a higher minimum account balance and/or having your account monitored more closely by your broker.

Q. How much do you need to trade e-mini contracts?

The cost of trading an e-mini contract varies depending on the broker and the market volatility, but generally speaking, the margin requirement to trade an e-mini contract is around $400 to $900. That said, to start trading we recommend many times the margin requirement.

Q. How do I trade the e-mini contract?

You need a plan, and hopefully, that plan is based on some statistics or at least a backtest. If you have no specific plan of how to make money, you’ll most likely fail and be eaten like prey.

E-mini trading strategy – conclusion

If you are going to dip your toes in the e-mini futures market, we would recommend that you make a written plan on how you are going to win. Victor Niederhoffer once said that the retail trader’s role in the futures market is to be eaten. To avoid losing money (avoid the skills of the failing traders), we believe you should have a backtested plan. This is the most reliable path to a successful e-mini futures trading strategy.