So you’ve read about this great way to make money online, called emini trading. You may even be thinking of purchasing an e-book or trading course. But first things first! Just what does a trader do in the trading business? What is traded and how?
In emini trading, what is bought and sold are futures contracts on stock index prices. It’s not the same as buying and selling stock indices themselves, and it certainly doesn’t involve the stocks themselves. A key difference between dealing with stock indices and their futures is that in the former, the underlying factor is ownership of shares; with the latter it is the cash index. You also deal with different types of brokers. For eminis, you need a Series 3 licensed broker.
Now, no matter what you’re trading and where, you always make a profit in the same way: buying low, and selling high. The difference is where you make your money. It is no different in emini trading.
You may have read about “going long” and “shorting the market.” What do they mean? These are the two approaches to the market. Which one you take depends on where you think the prices are going.
Going long in emini trading means you will buy futures with the intent to sell them. Shorting the market, on the other hand, means you will sell with the intent to buy. In both cases, you’re hoping your final position, called the “close”, will be the profitable one.
So how does this work? Let’s explain that.
Suppose you think the prices of apples are about to go down. You want to sell apples now. So you go to some fellow who lends you a bunch of applies. You sell that and earn $50. Next day, the price for the same amount of apples drops to $45. The man who loaned you his fruits wants them back. So you buy fresh apples from the market at $45 and give them to the lender. You then pocket the $5 for a profit. This is basically how “shorting” works.
Now in the world of emini trading, there are as many losers as there are winners. In this example, someone bought the $50 apples from you believing the prices would go even higher. Let’s say they bought the items on borrowed money. Next day when the prices went down, they were forced to sell those $50 apples for only $45. Even though this was a loss for them, they had to do it to return what they owed to the lender, and then some.
Put another way, let’s say you sold the apples for $50 but instead of dropping, their prices went up to $55! What then? You need to give back to your fruit lender. So you buy $55 worth of apples for them. As in the previous example, you lose $5.
Emini trading works like that, but one deals with futures and brokers. There is a lot of risk involved. Obviously knowing how the market behaves is a key to success in it. We recommend you read some good books and tutorials first.
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