The natural tendency of people to apply physics to finance explains why successful traders are so rare and why they are so immensely rewarded for their skills.

There is no such thing as a “born trader,” because people are born — or learn very early — to respect the laws of physics. This respect is so strong that they apply these laws even in inappropriate situations. Most people who follow the market closely act as if the market is a physical force aimed at their heads. Buying during rallies and selling during declines is akin to ducking when a rock is hurtling toward you.

Successful traders learn to do something that almost no one else can do. They sell near the emotional extreme of a rally and buy near the emotional extreme of a decline. The mental discipline that a successful trader shows in buying low and selling high is akin to that of a person who sees a rock thrown at his head and refuses to duck. He thinks, I’m betting that the rock will veer away at the last moment, of its own accord. In this endeavor, he must ignore the laws of physics to which his mind naturally defaults. In the physical world, this would be insane behavior; in finance, it makes him rich.

Unfortunately, sometimes the rock does not veer. It hits the trader in the head. All he has to rely upon is percentages. He knows from long study that most of the time, the rock coming at him will veer away, but he also must take the consequences when it doesn’t.

The emotional fortitude required to stand in the way of a hurtling stone when you might get hurt is immense, and few people possess it. It is, of course, a great paradox that people who can’t perform this feat get hurt over and over in financial markets and endure a serious stoning, sometimes to death. Many great truths about life are paradoxical, and so is this one.

The natural tendency of people to apply physics to finance explains why successful traders are so rare and why they are so immensely rewarded for their skills.

There is no such thing as a “born trader,” because people are born — or learn very early — to respect the laws of physics. This respect is so strong that they apply these laws even in inappropriate situations. Most people who follow the market closely act as if the market is a physical force aimed at their heads. Buying during rallies and selling during declines is akin to ducking when a rock is hurtling toward you.

Successful traders learn to do something that almost no one else can do. They sell near the emotional extreme of a rally and buy near the emotional extreme of a decline. The mental discipline that a successful trader shows in buying low and selling high is akin to that of a person who sees a rock thrown at his head and refuses to duck. He thinks, I’m betting that the rock will veer away at the last moment, of its own accord. In this endeavor, he must ignore the laws of physics to which his mind naturally defaults. In the physical world, this would be insane behavior; in finance, it makes him rich.

Unfortunately, sometimes the rock does not veer. It hits the trader in the head. All he has to rely upon is percentages. He knows from long study that most of the time, the rock coming at him will veer away, but he also must take the consequences when it doesn’t.

The emotional fortitude required to stand in the way of a hurtling stone when you might get hurt is immense, and few people possess it. It is, of course, a great paradox that people who can’t perform this feat get hurt over and over in financial markets and endure a serious stoning, sometimes to death. Many great truths about life are paradoxical, and so is this one.

You’ve heard about them in the news, you’ve heard they’re easy to trade, but what exactly are index products?

First, let’s define an index. Simply put, an index represents a “basket” or portfolio of stocks or commodities, grouped in a particular way (e.g., the S&P 500 Index is made up of large-capitalization stocks; the Russell 2000® Index is based on small-capitalization stocks). How a particular stock or commodity index tracks the market depends on its composition – the stocks or commodities included in the index, the percentage weight of each component, and the method of calculating each index. The index comprising these stocks or commodities is typically called the “underlying” or “cash.”

Index futures and options closely follow the price movement of these underlying indexes. Index futures are a type of forward contract, which means they are agreements to buy or sell their underlying product at a specific price on a specific date in the future.

For Example:
E-mini S&P 500 and E-mini Nasdaq-100 stock index futures are electronically traded, smaller versions of the stock index futures contracts used by the big financial institutions. (The “E” stands for electronic, and the “mini” refers to the smaller size of these investment tools.) At one-fifth the size of their institutional counterparts (also traded at CME), they can be easily used by individual investors. They provide a highly liquid way to trade stock indexes.

From a practical standpoint, they trade similarly to stocks. You can go long (buy) and then close out your trade by selling. It’s also just as easy for an individual investor to sell first then buy back at a hopefully lower price.  That’s called shorting and it is important that you know that by buying your losses can go no lower than zero, but if you are shorting your downside is unlimited.   You can  buy an E-mini stock index contract – an advantage over trading stocks. As futures contracts on stock indexes, these E-minis trade at a price that is closely related to the underlying stock market index on a day-to-day basis. Like other futures, these products are a type of forward contract. This means they are agreements to buy or sell their underlying product at a specific price on a specific date in the future.

When you trade these products, you are trading on the future direction of the underlying stock indexes. E-mini stock index prices fluctuate as the stock markets move – almost constantly. As a result, these contracts offer virtually endless trading opportunities. Similar to the stock market, you execute these trades via a registered broker over the phone or with electronic order management software on your PC.