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For getting precise back testing results, traders need to use tick data to test different ideas. When using directional trading strategy, trades are done in the direction of the current trend of the market. Traders look for a pull back to a certain price level when using mean reversion strategy. There happens to be a wide degree of variation in Emini trading strategies but they are all based on traders gaining a profitable edge by using some kind of information to their advantage. That information could be solely based on the behaviors of previous prices or could be based on non-price data like sentiment measures. In order to create and test Emini trading systems, traders should be able to obtain ideas and stay up to date with market events. No matter what the underlying principles of a trader’s strategies, the best route that can be taken to get the most precise back testing results is to use tick data to test different ideas. The fine granularity needed so that trading ideas can be tested, especially intraday or short strategies, can be provided by tick data. Directional Trading Mean Reversion and Trend Following are the two basic kinds of directional trading strategies. When an Emini trend following system is used, trades are entered in the direction of the current trend of the market looking out for whether the trend is continuing or not. When a mean reversion strategy is used, traders look for a pull back to a certain price level while trading against the current trend. Indicators such as chart patterns, moving averages, resistance/support or simply tick by tick price can be used, but regardless of which one is used, the system eventually boils down to mean reversion or trend following. Knowing when to use each is the key since both of them work at certain times. On intraday time frames it has been found that the system that works best is mean reversion. On the other hand, when trading time frames longer than a day, the system that works best is trend following. Whatever Emini trading system is used to trade, the underlying principal of the strategy should be understood. The market conditions most suitable for trading an idea effectively can be determined this way. In fact, an Emini trading system can be created that builds on the best of both mean reversion and trend following philosophy and switches between the two based on the analysis of current market conditions. Arbitrage Trading Traders use arbitrage strategies on similar financial instruments that have currently mismatched prices. For instance, For instance, one Emini S&P 500 contract is equal to 500 shares of SPY. If there is no alignment between the prices of the two, say the Emini S&P 500 is a bit overpriced and the SPY is a bit underpriced, one contract of the Emini could be sold and 500 shares of SPY could be purchased at the same time. Eventually, a convergence between the prices of the two should return them back to fair value and a profit on the mispricing can be captured then. Arbitrage is used by market making firms to buy at the bid and to sell at the ask so that the spread can be captured for a profit over and over. While there are plenty of other Emini trading strategies that an Emini trader can take advantage of, the above two are ones are meant to help them gain a profitable edge. Author of this article enjoys listening to the CFRN Emini Futures Live Market Commentary each day and also watching the CFRN Professional Emini Traders place live trades in their Live Emini Trading Room.
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