Futures Trading Strategies (6 lessons)
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How to Trade Nasdaq Futures on the Close

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Nasdaq Futures (NQ) offers traders the opportunity to trade the technology heavy stock index listed on the Nasdaq stock exchange, which tracks 100 stocks. The exchange is a well known listing especially for technology and biotechnology sectors although you can find more common stocks listed on the exchange as well.

There are in fact 107 companies listed on the Nasdaq100 stock index. The index is a market capitalization based index with some criteria which limits the influence of the larger components. The Nasdaq100 index is relatively new compared to the Dow Jones. The index started tracking the companies since 1985 starting with a base price of 250. The Nasdaq100 is also referred to as the Nasdaq Composite Index.

The Nasdaq futures are traded on the Chicago Mercantile Exchange (CME) which is the clearing house and all trades a conducted electronically via the Globex platform, although there are a few transactions that are still conducted via the open outcry method in the trading pits.

There are many trading strategies that one can deploy with the stock index futures. But the unique characteristics of the composition of the Nasdaq100 stock index as well as the trading hours, especially towards the close can offer some trading opportunities that are ideally suited for day traders as well as traders who do not have the time to babysit their trades.

To be able to understand and take advantage of the volatility that comes during the last hour of trading on the Nasdaq futures, it is essential to understand the margin requirements, the contract specifications as well as the tick details in order to be better prepared.

Nasdaq100 Futures Terms and Expirations

The NASDAQ futures come in two versions, the standard Nasdaq futures and the mini-sized e-mini Nasdaq 100. Both these futures contracts track the largest 100 non-financial stocks listed on the Nasdaq exchange. Between the two types of contracts, the e-mini Nasdaq futures are the more popular among the retail futures traders as it offers the benefits of lower costs of trade and also marked by high volume or activity.

The large contract types of the Nasdaq futures typically comes with a $25 tick value. These large futures contracts also require higher initial margin to be set up and can be expensive and perhaps out of reach for many retail futures day traders.

Compared to the standard Nasdaq futures, the e-mini futures are very liquid with around 400,000 contracts changing hands each day, electronically. The e-mini Nasdaq futures are also more affordable in terms of margin requirements and it is one of the most favorite, if not popular of the Nasdaq futures contracts. The liquidity from the e-mini Nasdaq futures offers active day traders and speculators opportunities to both day trade and swing trade the Nasdaq futures contracts.

Nasdaq Futures, CME Group Trading Volume - Source CME Group

Nasdaq Futures, CME Group Trading Volume - Source CME Group

Among the most popular trader category, speculators which are made up of retail day traders, hedge funds and managed money are the most popular. The relative ease with which one can trade the Nasdaq futures (mini-sized) makes it an attractive alternative to other stock index futures such as the mini-sized Dow and the e-mini S&P500 futures contracts.

Due to the fact that the Nasdaq 100 stock index excludes financials, the pricing behavior is quite different compared to the Dow Jones futures or the S&P500 futures which has a good amount of financial sector stocks. The Nasdaq100, due to its preference for technology and biotechnology stocks, which are high growth sectors can often show different characteristics compared to the more traditional stock futures.

As with any futures contracts, the Nasdaq 100 futures comes with a contract month or the expiry date, which usually falls on the third Friday of the contract month. Retail futures traders usually close out their positions before the expiry and re-establish positions into the upcoming contract month or the front month futures.

Traders can see high activity in the front month expiry contracts. For example, a Nasdaq futures contract month for June takes place during April and after the June contract expires traders automatically shift to the new month, which is the September contracts.

Nasdaq100 (E-mini) – Contract Specifications

The Naasdaq100 futures (E-mini) come with four standard contract months, which are March, June, September and December. The table below summarizes the Nasdaq 100 futures contract details:

Ticker NQ
Contract Months Mar (H), June (M), Sep (U), Dec (Z)
Contract Size $20 x Nasdaq100 Index
Min. Tick 0.25
Tick Size $5.00
Initial margin (CME Group) $4,400
Day Trading Margin $500

 

The Nasdaq100 futures trade from Sunday through Friday. Below is a summary of the Nasdaq100 futures trading sessions in GMT and Central time.

  • Sunday: 23:00 - 00:00 (5PM - 6PM CT)
  • Monday - Thursday: 00:00 - 21:15, 21:30 - 22:00, 23:00 - 24:00 (5PM - 3:15PM, 3:30PM - 4PM)
  • Friday: 00:00 - 21:15, 21:30 - 22:00 (5PM - 3:15PM, 3:30PM - 4PM)

With the mini-sized Nasdaq100 futures, the tick size is $5 for a 0.25 point move. Therefore, a full point move which is 4 ticks amounts to $20.

Why trade Nasdaq Futures?

The main reasons why traders are drawn to the Nasdaq futures are summarized below:

Exposure to the index: The Nasdaq futures offers investors and traders exposure to the U.S. equity markets listed on the Nasdaq 100 index. It is one of the most actively traded and liquid instruments among the futures products.

Affordability: The mini-sized Nasdaq futures appeals to the day trader due to the lower costs for entry. Thus it isn't just investors but also retail traders who can now access the Nasdaq index at a fraction of the cost compared to other trading instruments such as the ETF's or CFD's.

Opportunity: The Nasdaq 100 futures offer many trading opportunities on an intraday basis. Investors also prefer to trade the Nasdaq futures as it allows them to hedge their exposure from the equity portfolio, thus making it possible to trade both on the long and the short side of the markets.

Transparency: As a standardized futures contract, the Nasdaq100 is subject to the rules governed by the exchange, which ensures trade transparency while also maintaining the integrity of the market participants.

Trading Nasdaq Futures on volatility

The official trading hours for the Nasdaq exchange ends at 3pm CT. As equity traders start winding up their trades towards the end of the day, the last hour of trading session which is between 2PM – 3PM CT can offer potential trading set ups as volatility picks up. This is around 8PM – 9PM GMT. The tone of the trade is often set earlier on with the release of the economic reports.

The general U.S. economic data is released around 1PM GMT. Some of the more important economic reports such as the payrolls, inflation are released between 1PM – 2PM GMT, which generally sets the tone for the remainder of the trading session.

Nasdaq Futures Chart Showing the Volatility Picking up from the start of the U.S. data releases in closing hours

Nasdaq Futures Chart Showing the Volatility Picking up from the start of the U.S. data releases in closing hours

The above chart shows a few days of sample data, where volatility picks up from the start of the 1PM GMT, which is 7AM CT. The economic releases tend to set the tone as volatility picks up for a few hours before price settle towards the closing hours of the trading session.

This pattern offers different trading opportunities as a result which can be used by short term day traders to exploit the volatility.

One of the simplest ways to trade this volatility, especially between the 7AM and 3PM CT is to trade the ranges that are established.

The chart below shows the horizontal lines that are plotted. These are the high or the low of the range that was formed prior to the 7AM start. Upon the high or the low being breached, traders can go long or short in the direction of the break out, targeting 1 - 2 full points, which comes to about $20 - $40 per trade.

NQ Trading set ups from U.S. data release into closing hours

NQ Trading set ups from U.S. data release into closing hours

This very short term trading strategy can yield decent results especially when combined with strong economic releases. For example on the very left side of the above chart, the upside breakout came on a strong GDP revision while the downside breakout on the extreme right came on larger than expected increase in the weekly unemployment claims.

This rather simple trade set up can also be further enhanced by using indicators such as an oscillator (MACD or Stochastics) and utilizing moving averages to ascertain the trend. With most of the price action during the breakout coming on higher volumes and volatility, the trends that are established tend to last for an hour or two thus the futures trader can find potential trade opportunities when focusing during these specific periods of time.

However, ensure that you trade in the direction of the trade. In many cases, despite an upbeat economic data release often results in an opposite reaction in the Nasdaq markets. For example, the chart below shows a downside breakout in the Nasdaq futures despite the U.S. durable goods orders rising stronger than expected.

NQ Futures, bearish breakout on positive U.S. data

NQ Futures, bearish breakout on positive U.S. data

Volatility in the Nasdaq futures can also increase during key events such as Federal Reserve announcements which are released at 6PM GMT or 12PM CT. Trading volume, which usually picks up after 7AM CT can be an important indicator to help in your trading. Following up with the above set up of trading the breakout, when you add the volume to the 30-minute Nasdaq futures chart, the trade set ups can be more validated.

Breakouts validated by volume

Breakouts validated by volume

The above chart shows two instances where the breakout on high volume resulted in a strong continuation of the trend after the 7AM CT time period. On the right side, you can see a false set up where despite strong volume, price failed to break out from the range high and the actual breakout candle was on low volume, which was an early indication of a weak trend. Later on, towards the close, price remained largely flat making no subsequent higher highs.

Benefits of trading Nasdaq futures in the short term

The Nasdaq futures offer a fairly decent configuration as far as the technical aspects of the trade are concerned. Being highly liquid instruments, traders can capitalize on the short term volatility led price movements and capture a few ticks. If done with discipline and patience, day traders can look at turning this into a profitable venture. However, greed often plays the biggest spoilsport as many traders find it difficult to close out after making their daily profits.

With enough practice however, day traders can look at the Nasdaq futures, specifically trading within the specified times based on the short term price action.

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