The world of trading has many parts that seem a little foreign to new traders and the trading language is certainly one of them. There are plenty of catch phrases, symbols, and other banter that can be confusing or even intimidating at first. One of the biggest sources of confusion includes the shorthand that you see for many markets. Understanding what you are reading is important, and learning the basic lingo can come in handy.
Everything has a specified time and place
All futures contracts (be it for commodities or financial instruments) have very specific parts, quantities, and dates associated with them – and that’s not even considering the price! Not all contracts are created equal. The value of the S&P 500 contract is five times the value of the e-mini S&P 500 contract. It is extremely important not to confuse these two symbols! If there are markets you want to trade, visit the exchange’s website and learn about the key parts for each contract, hence the trading language.
These will include:
• The contract size,
• The futures months for the contract,
• The format for the price quote,
• The smallest amount by which the price of the contract can move (whole points or fractions of a point, also known as minimum tick),
• Any daily trading limits for price movements,
• Trading symbols for the contract.
Memorizing all of the trading language might seem like a bit of overkill, but in modern electronic markets making a mistake can happen in seconds and cost an unlimited amount of loss and confusion. Just remember that ”fat finger” trade and the trouble it caused!
Here is an example of traded contract…Let’s take a look at a contract traded on the e-mini S&P 500. This futures market trades electronically (hence the “e”) on the CME Group’s Globex platform. On their website, you can go to Contract Specifications and learn from the trading language that:
The symbol for this market is ES. You can use this code to find price quotes on many tickers.
The contract size is $50 x the e-mini S&P 500 futures price. You can use this value to calculate the dollar risk/gain per point in the market. Basically, if each point is worth $50, a 3 point movement would be $150. If you want to calculate the total dollar value of a single contract, you just need to multiply the current price by $50. If the market is trading at 1,280.00 that means it is worth 1280 x $50 = $64,000.
The minimum price fluctuation is 0.25. That means that if you are making an offer or trying to quote a price, you will know that there are quarter point increments so you can’t offer a price like 1265.30 in this market. It would have to be 1265.25 or 1265.50.
The contract details also list the trading times so that you know when a session begins and ends, and also the trading contract months. This market has contracts for March, June, September and December (the quarterly cycle) – these months will be written with their own symbols (their own trading language) as well – H, M, U, Z. The full list of monthly symbols is:
Each contract will expire at some point, and that date is relative to the contract month.
If you can understand the trade talk, you can avoid costly mistakes!
Some of this might seem very simple; after all, a lot of trading programs will give you the information with a single keystroke so you don’t have to memorize all the trading language. The reason that it is still relevant to know this is because taking the time to learn and understand how the markets work and what the lingo means can save you potential trouble.
For Example:- What would happen if you are long ESU11 and you try to close the position by selling ESZ11? This is not possible – you would know that the ES U11 is the e-mini S&P 500 for September (U) 2011 and the ES Z11 is the e-mini S&P 500 for December (Z) 2011.