Hi guys, hi from Andrea Unger! Today, I’d like to talk about the Index Futures Market. More in particular, I’ll focus on those indexes that allow for a systematic approach.
The Index Futures Market include a large number of indexes. Since I am Italian and live in Europe, the first that comes into my mind is the DAX Future. It can have GX or FDAX as a symbol, is quoted on Eurex (Germany) and is very liquid and active.
It used to respond well to a number of inputs and models. However, over the last few years it has become a bit choppier, in the sense that it is more difficult to find inputs it responds well to. So, finding good strategies on the DAX has become less easy. Anyway, trend-following strategies are the ones that work best on it.
A good intraday strategy should be developed with a stop loss of, at least, 50 points, but better in the direction of 100 points. This means you should use stops from €1,250 to €2,500 (the DAX is quoted in Euros).
Such stops prove that this is a very heavy market. So, consider it only if your trading capital is large enough.
DAX can be traded both intraday and overnight, but if you feel it’s too expensive for you, you might consider the Mini DAX. The value of the Mini DAX is one-fifth of that of the DAX Future and moves in a way that is similar to it. The main difference is that the DAX moves of half a point, whereas the Mini DAX of a full point.
If you develop strategies, you’d better develop on DAX data and then apply the strategy to the Mini DAX. As the Mini DAX is very young (it was born in 2015), you wouldn’t have a dataset that is long enough to develop your systems on.
In Eurex there is also the Eurostoxx. However, I suggest that you don’t focus on it, as it’s very difficult to find good models that work on it. It might work well with long-term trend-following strategies, but it’s very difficult to find intraday or short-term overnight strategies that work well.
In spite of its close correlation to the DAX, the Eurostoxx is not an easy market. This might be due to the weight of its tick value compared to the tick move, which doesn’t allow you to enter and exit the market easily. At least, this is my experience. So, I think you’d better trade the DAX or, if you want a less expensive market, the Mini DAX.
The most important index in the US Index Futures Market is the e-Mini S&P 500 (its symbol is ES). The e-Mini S&P 500 is probably the most liquid market in the world. It’s an electronic market; it was born in 1998 and changed the US index market completely.
If you look at the S&P 500, you can see that, after the creation of the e-Mini S&P 500, the models that work on the S&P 500 changed completely. In fact, the efficiency level the e-Mini S&P 500 reached overturned the US trading world.
Today, the e-Mini S&P 500 responds very well to mean-reverting strategies. On the other hand, it’s very difficult to find a trend-following strategy that works well on it. This means that, if you want to develop on the e-Mini S&P 500, you’d better look for counter-trend, rather than trend-following, strategies.
Also keep in mind that long entry counter-trend systems work much better than short entry ones. Even in those periods when the market dropped dramatically (e.g. 2002 and 2008), long entry counter-trend models worked and made money, whereas finding good short entries was very difficult. I got some models, but it was quite difficult to find them.
As short moves are very hectic, it’s difficult to find a clean way to trade them. Trading systems need to be developed in a clean way, so it’s very hard to adapt them to crazy markets.
The US futures market also includes the e-Mini Nasdaq. However, I suggest that you don’t consider it too much for automated trading. Maybe it’s a limit of mine, but I’ve never been able to find something that works properly on it. And this isn’t just my experience. My students and colleagues, too, had trouble in developing stuff on the e-Mini Nasdaq.
So, I don’t suggest that you focus on it. If you want to do it, okay, I hope you’ll have a high success rate. But keep in mind it might be difficult.
There’s also another interesting market in the US: the e-Mini Russell. It can be used with trend-following strategies, but since it’s on ICE today, its data require an additional fee (over $100/month and no possibility to waive the fee, even if you are a “non professional”).
The e-Mini Dow is a strict cousin of the e-Mini S&P 500, so you can leave it aside, as the e-Mini S&P is certainly more than enough.
There are many other indexes in the world: the Australian index, the Korean index, the Nikkei, and so on and so forth.
However, I think it’s useless to trade tens of indexes, as that wouldn’t be real diversification. Instead of limiting yourself to trading the index futures market, you should prefer horizontal diversification and explore other markets, such as energies, bonds, different commodities, currencies, and so on. As for this market, I think the DAX and the e-Mini S&P 500 can be enough.
As for other markets, you can find many posts in our blog. Moreover, we are creating more of them, so, stay tuned!
Ciao from Andrea Unger!