What Kills Day Trading (or Night Trading) Emini Futures?


Ever see the movie, the Untouchables? It's about a government agent, Eliot Ness who, along with his band of G-men (Government men), fights gangsters (like Al Capone) during prohibition. There are great shots in the film, guys hanging from moving cars, holding onto swinging doors while they shoot up restaurants with Tommy guns. Today we have our own Untouchables. We've replaced Tommy guns for computers and trading platforms. We sit in chairs instead of swinging from moving cars. And the killing, well, we've traded in the G-men for the G-word: Greed.

What is greed? Wikipedia defines greed as "an excessive desire to possess wealth or goods with the intention to keep it for one's self." Probably the operative word here is "excessive". To investors day trading or night trading, the G-word may as well be 4 letters.

Lets look at how insane greed can be as it affects futures trading, especially emini futures. Emini futures, just like stocks, trade in price fluctuations, but with futures, price fluctuations are known as ticks. In the world of stocks, one price fluctuation is 1 penny. Generally, 1 tick, 1 price fluctuation, pays out about $12.50...that's correct 1 tick. Futures trade in contracts not shares. Investors can easily find futures brokers who allow you to trade for $500 per contract. Stocks trade in multiples of 100 shares. Stocks that have enough volatility to day trade start anywhere from $25/share to $75/share and more. Even on the low end, realistically, you need $2500. Then when your 100 shares move 1 penny, you make $1.00. But compare that to trading with emini's. For $2500, you can trade 5 contracts. For each tick movement, you make $60. So it's a 60 to 1 ratio, perhaps a bit less, given that the commission for trading futures is a bit higher than stock trading, so call it 50 to 1 ratio.

Want to make $200 a day....make 5 ticks. Watch this. 5 ticks X $12.50 = $62.50 x 5 contracts ($2500) = $312.50. Now take off $25 for commission and say $50 for losses = $235 (give or take). $235/day x 20 days a month is a nice $4,500 a month, or just over $50,000 a year. Futures are unique when it comes to taxes. They were originally designed for farmers. Over the years, farmers ended up with some very sweet IRS deductions, called the 60/40 split. When you trade futures, 60% of the capital gains is considered long term and 40% is considered short term. At the end of the year, your futures broker sends you a one-liner, a net price, of the amount of wins or losses. It is not itemized by transaction. Since it is a net figure, the IRS can't tell if you are a farmer or a speculator trading crude oil futures. So everyone enjoys the 60/40 spilt. For taxes, that puts you in about a 20% tax bracket. Since you are trading and that is your business, you can deduct business expenses from that figure (part of your house, your phone, internet, computer, car, etc.) lowering that tax rate to more like 15%. So 15% of $50,000 gives you around $42,000 spendable a year.

Lets compare that with working 8 hours a day at a job. To make $42,000 a year, first of all your job needs to be paying you about $45 / hour. Why? Most Americans pay an overall tax rate (Federal, State, Local, and Withholding) of about 40%. If you make $45 / hour and say work 2,000 hours a year, that comes to $90,000. Take off $36,000 in taxes, so now you're at $54,000. In order to work, you have commute expenses to deal with. With the price of gas and oil, if you drive 20 miles a day, we'll there is 1 gallon, so call it $5/day or $100/month, so there goes $1200 just to commute. You've got wear and tear on your car, so that will cost another $1000 a year. With a $90,000 a year job, chances are you can't be driving some clunker, so that will cost you another $300 a month, so lets take $3500. While at work, you're probably going to have to eat out, add another, conservatively $5/day (coffee and sandwich), another $1200. And of course you need clothes, unless you are fortunate to work in a place that allows you to work in jeans. Add another $1000 for that. All in all, say that's $8000 and that's on the low end, assuming you only use 1 gallon a day, eat cheaply, and buy simple suits. To be on the safe side, say 10k. So for working 8 hours a day, you net around $44,000 spendable.

Of course, something must be wrong with this calculation, because the average median income in America is not $90,000. It is more in the range of $50,000, more like $25/hour, grossing $200 per day, not spendable.

$200 / day spendable is a lot of money. That puts you WAY above normal by about 35%. Just $200 / day. And here's the best part, to make your 5 ticks, $200 / day, it doesn't take 8 hours, working bell to bell. You can make those ticks in as little as 15 minutes of trading a day, on the high side, maybe an hour and a half. There is no commuting, no wear and tear on your body, no boss, no clients or customers, no specific time you need to be in the office, etc.

So why are Emini Futures killing investors who are day trading or night trading? Because of the illusive G-word....Greed. We have all seen extreme damages that greed can cause. In 2008, larger brokerages created collateralized debt obligations, packaging and repackaging mortgages until they were trading nothing but air, sending the entire world into financial collapse from which we are still not recovered (job wise or housing wise). The problem for day traders and night traders is not that you can't make 5 ticks, it is that you can't stop after you have made them. If you can make $200 in 15 minutes, you tell yourself, well, then I can make $400 in 30 minutes, $600 in an hour, etc. etc. etc. Maybe you can and maybe you can't. The longer you trade, the more mistakes you are bound to have. People say...I am trading in a zone, I can do no wrong today, and boom...loss. Why? There seems to be a direct relationship between the number of wins and the degree of cockiness: the more wins, the more cocky traders become, the more they trade without their own rules and by the seat of their pants.

Investors who are day trading or night trading beware, lest the swinging doors and Tommy guns get you! By the way, while writing this article, I did one trade, made $300 in 43 seconds, and now I am ready to trade again.

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