Stock index futures: ES, YM and NQ
An index moves two to three times as far in a day as any currency pair in the previous lesson. Everything downstream of that changes: the stop, the range setting, and what a single point is worth.
Lesson 11 of 12. Three contracts, three deviation ladders, and one place where his own specification sheet contradicts itself.
What a stock index is
A stock index measures the overall performance of a collection of stocks — the market, or a specific segment of it. It is formed by combining the prices of selected company stocks, and how those companies are weighted decides what the number actually means.
Three weighting methods, and the difference between them is not academic:
- Market-cap weighted — larger companies have a greater influence. The S&P 500 and the NASDAQ work this way.
- Price weighted — stocks with a higher share price have a greater impact, regardless of company size. The Dow Jones Industrial Average works this way.
- Equal weighted — every stock counts the same.
- Calculation, in his terms: the total price is the sum of the selected companies' stock prices divided by a specific number, the divisor — and the weighting depends on which of the three methods the index uses.
What an index is for, and what moves it
He lists the purposes first — benchmark for market performance, a comparison for your own portfolio, the thing an ETF tracks, a guide to identifying trends, an overview of market condition, an analytical tool, and a basis for forecasting.
Then the news. He divides it into six main categories, each affecting the market differently:
- Economic — interest rate changes by central banks, inflation through CPI and PPI, GDP, unemployment, non-farm payrolls, the consumer confidence index and the PMI.
- Corporate — quarterly earnings and profitability, mergers and acquisitions, changes in company leadership, and announcements of bankruptcy or expansion.
- Monetary and fiscal policy — expansionary or contractionary central bank decisions, and money printing or quantitative easing with its effect on liquidity.
- Industrial — changes in supply and demand for specific goods, technological advances, regulatory changes on environment, tax or production, and the state of supply chains.
- Global — health events such as pandemics, currency fluctuations, and changes in the prices of oil, gold and other essential commodities.
- Political — fiscal policy such as tax changes, trade and investment regulation, wars and sanctions, elections, and trade agreements or tariffs. This is the category he flags as having widespread and unexpected effects.
Three contracts, and they are not the pairs
Put the three side by side against the seven pairs and the first thing that appears is the scale. The widest currency pair moved 1.19 per cent a day. Every one of these moves more than double that.
ES — ATR 2.53%, 20 to 47 points a day, 1.5 to 3 points on a one-minute bar, 4 ticks to a point, $50 a point, minimum 6 ranges.
YM — ATR 2.37%, 128 to 340 points a day, 22 to 40 points on a five-minute bar, 1 tick to a point, $5 a point, minimum 15 ranges.
NQ — ATR 2.92%, 36 to 390 points a day, 30 to 50 points on a five-minute bar, 4 ticks to a point, minimum 20 ranges.
Two structural things they share. All three run on a quarterly cycle — H for March, M for June, U for September, Z for December — expiring on the third Friday of the expiration month, exactly as lesson nine described. And all three trade the CME US Index Futures sessions, ETH for the open session and RTH for the US session.
All three also move in the same direction as the equivalent CFD — none of the mirror problem from the currency pairs.
Three deviation ladders, one reversal column
The previous lesson established that the seven currency pairs all share one deviation table, with only the pip column scaling. The indices do not join it — and they do not agree with each other either.
Three different ladders of "percentage of daily range":
- Currencies — 66.67, 83.32, 100.00, 116.36, 133.33 per cent. Deviation 3 is exactly the daily range.
- ES — 70, 90, 110, 130, 150 per cent. Deviation 3 is 110 per cent of the range: 51.7 points against a 47-point day.
- YM and NQ — 60, 70, 90, 130, 150 per cent. Deviation 3 is 90 per cent: 306 points on the Dow's 340, and 351 on the Nasdaq's 390.
- And the column that does not move: the probability of price reversal is 56.62, 63.06, 69.15, 74.75 and 79.77 per cent on every sheet in the deck, currencies and indices alike.
- Which means the probabilities are worth learning once and the distances have to be read off the instrument in front of you. Carrying a currency-pair distance onto an index would put the level in the wrong place.
Points, ticks, and what your broker calls them
In the contract the structure is fixed: four ticks to a point in ES and NQ, one tick to a point in YM. ES prices in quarters — .00, .25, .50, .75 — while the Dow carries no decimals at all.
In a CFD it is not fixed at all, and this is the part he warns about. The division of ticks varies by broker: some divide a point into 10, others into 100. And the money is just as inconsistent — some brokers match the futures value one to one, some offer double, and some a tenth or a fifth of it.
His instruction, kept as he gives it:
- Focus on the point value or the full number, because all stops are defined based on points.
- Set stop-loss and target levels in points, not ticks. He repeats this on all three contracts.
- And know your own broker's figure before sizing anything — the same 30-point stop is a different amount of money at each of them, which is what makes the lesson-seven arithmetic land somewhere different.
- For reference, his futures figures: ES 1 point (4 ticks) equals 100 pip in a CFD and is worth $50 in the contract against about $10 in a CFD. YM 1 point (1 tick) equals 1 point in a CFD and is worth $5 against about $1.
The stop and the range setting
Three contracts, three sets of numbers, and none of them transfers.
- Stop above the candlestick high, plus the distance to the entry — 3 points on ES, 25 on YM, 30 on NQ.
- Session stop — 3 to 5 points on ES over a one-minute bar; 25 to 40 on YM and 30 to 50 on NQ, both over five minutes.
- Range bar stop — 2 ticks beyond the candlestick on ES, 5 ticks on YM and NQ.
- And the floor beneath it: never less than 8 ticks on ES, 15 on YM, 20 on NQ.
- Range selection — 5 per cent of daily volatility as everywhere else, but with a minimum of 6 ranges on ES, 15 on YM and 20 on NQ.
- His worked entries: 12 ticks or a 3-point stop on ES, 25 ticks or 25 points on YM, and 120 ticks or 30 points on NQ.
- And an instruction he attaches to two of the three: trading the Dow, and trading the Nasdaq, is best conducted using a 5-minute block with a 2-tick per row.
ES — the E-mini S&P 500
The Standard & Poor's 500 tracks 500 large publicly traded United States companies across technology, healthcare, energy, finance and consumer goods. It is market-capitalisation weighted, so the larger companies move it more, and it covers about 80 per cent of the total market capitalisation of US equities.
Why he treats it as the benchmark: it reflects the health of the US economy, it is what investors, mutual funds and pension funds compare themselves against, and ETFs and futures contracts worldwide are built on it. Companies also use S&P 500 futures to hedge against market fluctuations, which is part of why the contract is liquid.
As an instrument it is the tightest of the three — 20 to 47 points a day, and 1.5 to 3 points on a one-minute bar. It is the only one of the three he sizes off a one-minute chart rather than a five-minute one, which is what a 3-point stop is for. Four ticks to a point, $50 a point in the contract against about $10 in a CFD — and one point equals 100 pip in the CFD quotation.
YM — the E-mini Dow
The Dow Jones Industrial Average is one of the oldest indices in the world, created in 1896 by Charles Dow and Edward Jones, and tracks just 30 major United States companies across technology, energy, banking and consumer goods.
The thing that makes it different is the weighting. Unlike indices that are market-cap weighted, the DJIA is price weighted — companies with higher stock prices have a greater impact on its movements, regardless of how large the company is. Thirty companies sounds narrow, but he notes they represent the key industries of the US economy, which is what makes it a critical indicator despite the count.
As an instrument it is the odd one mechanically too: one tick equals one point, and the contract carries no decimals at all — 42970, flat. That makes it the cheapest point of the three at $5 in the contract against about $1 in a CFD, and it moves 128 to 340 points a day with a 22 to 40 point five-minute bar.
And his own instruction for it, in a red box on the slide: trading the Dow Jones is best conducted using a 5-minute block with a 2-tick per row.
Composite or 100?
He devotes a slide to each, and they are not the same index — which matters, because the contract only tracks one of them.
The Nasdaq Composite, established in 1971, tracks over 3,000 companies listed on the Nasdaq exchange — large, medium and small. It reflects the entire Nasdaq market, with a significant weighting towards technology, biotechnology, internet services and innovative companies.
The Nasdaq-100, introduced in 1985, tracks the 100 largest non-financial companies on the exchange. Banks are deliberately excluded. It is the index of Apple, Microsoft, Amazon and Tesla, focused on information technology, communications and biotechnology.
Both are market-cap weighted, so in both the largest names lead. But NQ is the E-mini Nasdaq-100 — the second of the two — and that is the one whose range and point value the next section describes.
NQ — the E-mini Nasdaq-100
The widest of the three at 2.92 per cent, against 2.53 for the S&P and 2.37 for the Dow — 36 to 390 points a day and a 30 to 50 point five-minute bar. Which is why it carries the largest stop, the largest minimum tick stop at 20, and the largest minimum range count at 20.
Being technology-heavy is the reason. It is regarded as a representative of innovation and technological growth, and with many of its companies international it also serves as an indicator of the global technology sector.
One note about the specification sheet itself, because the numbers on it do not all belong to it. The tick-value sentence on the Nasdaq sheet reads "every 1 ticks in YM equals one point", and quotes the Dow's $5 and $1; the range annotations beside it say 340 and 170 points, which is the Dow's daily range rather than the Nasdaq's 390. Those are the Dow's figures pasted across.
What the Nasdaq's own structure is, stated three separate times in his material: four ticks to a point. It is printed on the same slide as "4 tick = 1 Point", repeated on the following slide as "in Nasdaq futures, each point is divided into four ticks", and confirmed by his worked entry of "120 ticks or 30 point stop", which only reconciles at four ticks per point. He does not give a dollar figure for the Nasdaq point anywhere else, so none is stated here.
And the same instruction as the Dow: trading the Nasdaq is best conducted using a 5-minute block with a 2-tick per row.
What to take from this one
Three things, in the order they matter:
- An index is a bigger instrument. Two to three times the daily movement of any currency pair, which changes the stop, the range setting and the position size together. Nothing from lesson ten transfers by copying — every number has to be re-read off the sheet for the contract you are on.
- The weighting tells you what will move it. The Dow is price weighted, so an expensive share leads it regardless of company size; the S&P 500 and the Nasdaq-100 are market-cap weighted, so the biggest companies do. Which also tells you which earnings report to care about.
- Set everything in points. The contract's tick structure is fixed — four to a point on ES and NQ, one on YM — but a CFD broker may split that point ten or a hundred ways and price it anywhere from a fifth to double the futures. Points are the only unit that survives the move between them.
Next: what actually moves an index, and when
This lesson said the largest companies lead a market-cap index. The last lesson is about how few of them that really means — and about the hours, because the edges of the trading day do not behave like the middle.