Emini NQ Average Ranges

One of the measurements traders use to determine opportunity in a market is the average range. A stock or index with a higher average range will offer traders more opportunities to profit. Traders are also concerned with the liquidity of any given product for the simple reason that wealth is built by trading with larger sizes.
A close examination the Emini Nasdaq 100 Futures contract indicates that opportunities continue to erode, while risk continues to expand. Average Ranges in the Nasdaq have been in a steady downtrend for some time and have most recently ranged between $520 and $760 per day. This compares to an average daily range of $1230-$1550 in the Emini Dow and $1310 and $1575 in the Emini S&P500. Unfortunately for those who trade the NQ, this reduction in average range has not co-incided with a reduction of stop sizes (risk) on the average trade. Stops on most trades remains between 6 and 12 points, some of this because of the Nasdaq's tendency to "overshoot" support and resistance levels. This means that on an individual trade one must risk between 15% and 30% of the average daily range on a single daytrade. Given that a very good trader will look for profits of 20 to 30% of the daily range on a DAILY basis the risk of trading the NQ is steadily reaching a point of not being justified by the potential gains. Finally, in addition to the diminished daily range liquidity is also constricting. This can be seen by looking at average daily volume vs. the average # of trades on any given day. On the surface volume is up 20% over the last several months in the NQ, while in the same period of time the total number of trades has gone up 35%. This shows us that transaction sizes are slowly eroding over time, even while volume is expanding. The constricting of the range is driving a lot of traders out of the NQ. This is resulting in more "air pockets" , or price areas in which it is very difficult to transact with size.
Overall then a careful analysis suggests that traders who primarily transact in the NQ and or the QQQ would be well advised, as a general rule, to look towards other markets to meet their goals. Obviously there are specific cases were this is not the case, but as a general rule there is starting to be more risk then potential for benefit in the NQ for a daytrader.
As alternatives traders might want to start looking more at the Emini S&P500 and the Chicago Board of Trades new Emini Dow contract. The S&P500 has held steady and maintains its position as the leading contract for professional traders world wide. Recently the CBOTs has launched their Emini Dow contract. Already it is doing nearly 20,000 contracts per day, which is the rough equivalent of 10 Million shares of the Diamonds (DIA). Very quickly it has become one of the worlds leading futures contracts. I have found that traders can easily trade 5 to 10 contracts, so though you really can not trade huge size, you can still make a decent living in the DOW because of its volatility.

Brandon

 

I thought the mini Dow was hurting for biz, thus the decrease in commission by the CBOT et al.

 

I suspect that it was, however the volume is now picking up nicely. It is definatly suitable for a trader who wants to trade 1 to 5 lots, and near the open 10's or so. It certainly is a much more viable contract now then it was just several months ago. The Board of Trade has done a good job of bringing attention and liquidity into the mini Dow.

Brandon

 

Can't say that I agree with your analysis. I don't think it's effective to define the daily range in terms of dollar potential. I think it's important to understand that the contract size of the NQ is smaller than the contracts you compared it to, thus accounting for the dollar difference in expectation. To make the NQ comparable to the other contracts that you mentioned (ES and YM), simply multiply it by 2.5. Now the dollar ranges are more or less equal.

Based on the definition you used in terms of a dollar range, perhaps we would all be better off NOT trading the electronic contracts, but trading the pit version. The dollar range there is even higher since the contract size is higher.

I happen to trade the ES most of the time. But there are times when I will trade the NQ. Obviously if I have reason to believe it will outperform the ES, then I will trade it. And clearly, if I want the same dollar impact, I need to trade more contracts.

The one contract I have not traded is the Dow future. Not sure what your point was here. Yes, the dollar range exceeds the NQ, because it is a bigger contract. The volume however isn't even close. 20000 contract versus 200000 in the NQ. Not even close. And if you feel there is a liquidity issue in the NQ, my guess is you'll really have a liquidity issue in the YM.a I wouldn't even think of trading the YM at this time, because of volume consideration alone. If they can successfully build volume there, then I would reconsider. But my guess is that they will fail in their efforts.

I agree with you that volatility will make active trading more possible. I just don't agree with the idea that you define volatility in terms of dollar range. In fact, if you looked at the volatility measures expressed by VIX, versus the volatility measure for NDX (Nasdaq 100) which is VXN, you will find that the market on Friday expressed VIX at about 36, whereas VXN was around 50. Clearly the market believes that the nasdaq is more volatile as well. I might add that this has always been the case.

Again, if you want the same dollar exposure in NQ, simply trade 2.5 times as many contracts.

OldTrader

 

Yeah good stuff Brandon, I need to either read or write a book on atr. You say 20 to 30% profit of the daily, why then is the profit target so much greater for the scalper? I'm usually looking for 100% of the 28 min atr in es. And lately thats been about 1.86.

Also, if you convert it all to percentages, you would expect a tighter daily range down here.

 

I'm in complete agreement. In fact greater volatility on both a pct. and an absolute basis is why the CME created the ND at a lower multiple than ES to the corresponding indices. How wide a stop one wants to place is a personal preference, but I don't believe my R/R is an iota different when switching back and forth between the two contracts.

 

LOL!!!!

trade the YM? what the hell for??? the liquidity sucks compared to the ES and the NQ.............even with half the commission it still sucks......

it's become one of the world's leading futures contracts??? LOL!!! you're pushing the dow minis kinda hard there.......are ya getting a cut from the cbot???

 

If you read my entire post, you will see that I said it is something that is best traded near the open when there is liquidity, and that I would not trade more then 5/10 contracts for the time being. Beyond that you will have a hard time with your executions. All that being said, it is a good contract to trade. It moves quiet nicely, and yes, as far as volume goes it is now one of the worlds top contracts. I also did not say to completely stop trading the NQ, I simply said that there seems to be less opportunity in it now then there was. There are still situations when trading the NQ is the obvious best choice.

Brandon


Brandon

 

Brandonf: “Unfortunately for those who trade the NQ, this reduction in average range has not co-incided with a reduction of stop sizes (risk) on the average trade.”

I believe that this varies from one trader to another, depending upon the types of setups used. Different setups demand or allow for different types of trade management. Many of the setups I use have seen a reduction in the average dollars at risk on a “per contract” basis in approximate proportion to the decreased average range in dollars/points or more specifically average reward.

Unless my numbers are incorrect, though, the current average range, on a percentage basis, appears to be higher than it was back in mid 1999 through the beginning of 2000. After 2000 there was an increase but since that time we’ve gradually been fluctuating back toward the levels that we began at.

OldTrader: “I don't think it's effective to define the daily range in terms of dollar potential.”

I agree.

 

All you have to do is look at the performance bond(margin) for the NQ to see that the range is getting to untradeable levels for trend traders. A few years ago the performance bond was $9400 and now it's $2200 for the NQ. I had a trend system that I was using and had to stop trading it because the range is gone. You would get whipsawed from time to time but you knew you would catch at least one 20-35 point move before the day was over. Not any more.

The Dow contract is not the answer though. In my opinion the Dow contract has design flaws from the start. One reason the CME emini's are popular is because the spread on the contracts are only 1 tick, which is $12.50 for the ES and $10 for the NQ, and the prices move sequentially. But with the YM contract, the spread is 3-10 ticks, and change constantly. This makes the YM harder to trade using limit and stop orders. I don't care how many contracts the YM eventually trades, I doubt the spread will ever get to only 1 tick(1 Dow point).

What the CBOT should have done is design the contract so the spread would be 1 tick and the prices move sequentially. They should have made each point equal to $2 but the minimum tick would be 5 Dow points. That would make each tick worth $10. The price would move in 5 point increments, and only in round numbers of 5. For example, the bid would be 8430 and ask 8435. If the contract is moving up it would be 8435/8440 then 8440/8445 then 8445/8450, etc. This would be a lot better than the spread constantly bouncing around like a pogo stick.

If the CBOT would have only 1 emini contract (instead of the current 3) and designed it after my example, I'll bet it would be one of the most traded contract in the world.