The Power of $SPY and ES mini

The power of $SPY and ES mini

Successful traders promote fewer trading strategies than those promoted by unsuccessful traders. Anything I mention isn't a strategy that will make you rich. Trading is complex and does not have a one-size-fits-all plan. I am an order flow trader focusing on volume, timing, and interest in what participants do at certain levels. To help encourage all traders, new or intermediate level, I have made this reading public. I hope this reading helps with your 2023 trading.

COMMON QUESTIONS

Here are some common questions that deserve some clarity.

My main reason is since the splits of $GOOGL $AMZN, these have lost their importance to me since they are no longer big movers in the market. When I am trading, I look for liquidity and large movements.

My most inconsistent years have come because of my inability to focus. If you can have 100 stocks, stay focused, not miss plays, and contain emotions, then it is my guess. If I am focused on the same Index daily, I can follow what buyers and sellers do in that specific index or ETF.

$SPY ETF controls the majority of the market, so I am tracking this every day as it allows me to understand the movement and what other stocks may be affected the most or the least.

Here is a simple example from 2018: I could not find an updated chart. This should clarify why the whole market can get weighted down when a huge company takes a fall.

SYMBOLS & COST DETAILS

Your average investor understands the concept of the S&P 500 and how $SPY essentially tracks the average price of a large group of stocks. If you refer to the diagram above, you will understand that tracking1 ETF(group of stocks) while trading allows you to understand the direction of the market and the cause and effects of the economy much more. You get to see in real-time which companies are holding back $SPY from growth, which companies are trading in similar or opposite directions, and the impact that some major companies have. Since most people buy equity for long-term investing, most retail traders use options to make money on this ETF's volatility.

Once you master the S&P's movements and tendencies, you can mix that with economic data, earnings releases, FOMC, interest rates, etc. Some traders who do not track at least one index can lack a holistic market view. Successful trading is not about finding charts that appear bullish or bearish, but it's more about understanding timing, risk level, tendencies, and following price action.

I am not necessarily a chart trader, even though I sometimes like Bollinger bands. The last time I said this on Twitter, I had a few people make jokes. I am not saying I don't look at a chart; I am saying I do not rely on charts. Stocks move because of volume, price action, and news.

So, we know that $SPY is an ETF. ( a portfolio of companies that is designed to track a specific index, commodity, or sector of the economy)

While SPY is an ETF backed by actual stock shares in companies listed on the S&P 500, SPX is a theoretical index driven by the price of the S&P 500 itself. This means that it is impossible to buy directly into SPX since no shares can be bought and sold. SPY is an exchange-traded fund (ETF), while SPX is a theoretical index.

Because you cannot buy directly into $SPX, your only choice is to use it to trade options. THE KEY DIFFERENCES BETWEEN $SPY and $SPX options trading are speed of movement, cost, potential gains, and potential losses. For example:

Further explanation:

SPY: 1.00 goes to 6 on 10 point move

$SPX: 4.00 goes to 14.00 on a 125-point move.

Also, for new traders, 1.00 means $100, 4.00 means $400, and 14.00 means $1,400 for reference.

Futures are derivative contract agreements to buy or sell a specific commodity asset or security at a set future date for a set price. A futures contract involves both a buyer and a seller, similar to an options contract. Unlike options, which can become worthless at expiration, when a futures contract expires, the buyer is obligated to buy and receive the underlying asset, and the seller of the futures contract is obligated to provide and deliver the underlying asset.

For a quick reference, there are many types of futures that you can purchase:

Just like you would buy one share of a company, you are buying 1 unit of a futures contract. These futures contracts similarly track the benchmark index of the S&P 500.

ES (Futures) and /MES (Mini Futures) - I have them listed together because they are essentially the same thing; the difference is cost. /ES uses more margin and has a delta of $50. This means that for every 1 dollar the/ES moves, you make 50.

/ES

/MES

Now, futures are only for some. You can make a lot of money quickly but also lose a lot if you do not have discipline. Therefore, it can get costly, but if you merge futures, $SPX, and $SPY, you have a group of strategies for different scenarios.

Remember that the ability to track the same price action but have three different ways to limit your risk makes these futures, ETFs, and indexes so powerful. Each asset has its characteristics and holding time length. Let us get into a few scenarios below.

Individual Characteristics

$SPX

Where else could you turn a $40 contract into $1,200? If you catch the movement, 100+ point move days are volatile and profitable. This is far more profitable than using a $SPY call, where 125 points are equivalent to 10 points. You only see half of the profit.

FUTURES (/ES &/MES)

Futures trade 24 hours a day besides Saturday and only half of Sunday. On many occasions, I've bought the dip in an overnight session and sold it by 8 a.m. before the market even opened. This strategy allows you to take time off during the day, make more gains, or make up any losses in the overnight session.

Mental Health:

Even though this is a great benefit to trade whenever you want, your mental health is more at risk trading futures in an overnight session plus standard trading hours. This is mainly due to a lack of sleep and over-trading. Keep this in mind if you are looking to find the best time of day to trade. I recommend using TD Ameritrade and creating a paper trade account on thinkorswim.

A few characteristics are

A few strategies:

I prefer to use $SPY for options or $MES for equity/units for monthly swings.

$SPY

For example:

On January 5th, 2023, $SPX 3900 calls for Feb 5th expiration costs $6,700. (10 spots out of the money)

$SPY (also ten spots out the money and same expiration date of Feb 5th) 389 calls cost $700

If you have this money to spend, do what you please. I am a conservative trader, so I would take cheaper traders and buy more contracts to sell as I hit 20%, 50%, etc., instead of holding one contract for $7,000.

A few other pros

Day trade scalping

I use $ES $MES $SPX all accordingly.

$SPX (weeklies) or $MES are my starter positions. Why? I can take profit quickly if $SPX premiums are great, then put my $MES swings stop loss near the entry to prevent a green to red trade.

My second scenario is instead of using $MES when trading in large support or resistance areas, I would use $ES. Since $ES is more costly, my goal for $ES isn't to open a swing position. I aim to take 10 points off a bounce or rejection.

With that being said, do you have to trade all three? No, I do day trade and swing trade, so I keep a blend. If you are a majority swing trader that day trades occasionally, I expect to swing $SPY, day trade $MES, and use cheap $SPX calls (less than .50) as lottos.

My goal is not to give you one tactic that will solve all of your tradings but to show you various tactics grounded around that same index/etc. Please remember that most new traders need to understand that you do not need to trade daily to make money; therefore, if you don't place a trade on a given day, think of it as preserving capital for something better, not as you miss out.