The Futures market is the most liquid market in the world for equities and within this market, you have access to 4 different equity futures, based on indexes. The S&P500 (ES), The Nasdaq 100 (NQ), The Rusell 2000 (RTY) and the Dow Jones (YM).

 

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Although the S&P500 futures are the most liquid out of the four, in recent months and even years, the Nasdaq has risen to popularity based the movement and opportunity on a day to day session.

For example the ATR(14) or average true range for the Nasdaq Futures is approximately 250 points Q1 2024, on the S&P500 Futures it’s approximately 45 points. To give you an understanding of what that means, 250 points x $20/point is $5,000 per contract of movement.
The S&P500 Futures: 45 points x $50/point is $2,250 per contract of movement.

Meaning the Nasdaq has much larger possibilities. There are large swings, and when the Nasdaq starts it’s move, it REALLY starts moving, which has gotten a lot of traders into the asset.

However, with great movement comes great risk, and generally a harder asset to learn than the S&P500 Futures. The Nasdaq is a large and more volatile market that can move tens of points at a time, don’t be fooled by the small dollar denomination per point.

However there is a way that this can be your most profitable asset and there is a way to trade it, first you have to understand the market itself nad the risks involved trading this market.

Then we can go about how to trade it with EDGE, with the knowledge basis of the market.

Here is a Nasdaq trade taken in Februrary 2024 with our community. Short 17,730 to 17,570, this is a 160 point move or $3,200 move per contract.

Compared to a similar move in the S&P500 Futures, bottoms to top (second picture) Long 4942 up to 4970, 28 point move or $1,400 per contract.

S&P500 Futures

Understanding Nasdaq Futures & Risk

 

Understanding Nasdaq Futures & Risk

The first thing that traders have to understand in the value of a true Nasdaq contract, the notional value because that allows people to put into perspective the true value of a contract and how much leverage they are actually privy too with brokers.

The notional value of a Nasdaq Futures Contract is 20 times the index, based on the denomination of dollar per point.

The Index is currently around 17,700, times 20 is $354,000 per contract of notional value, meaning each time you enter into a position you control more than $350,000 of value.

To put it in perspective, the general brokerage offers you around $1,000 of margin per contract, this is 354x leverage on this asset. Non-discount brokerages like Interactive Brokers or others usually require upwards of $15,000 of margin per contract, which makes a lot more sense, dropping the margin to around 23x which is still highly leveraged.

This should tell traders the sheer size they’re operating with when trading this asset, suggesting that traders should operate with a large account when trading this asset, especially considering that it’s so volatile so you cannot have a small stop.

The Nasdaq futures like other equities have a Micro futures counterpart, which is 1/10th of the size.

The Nasdaq 100 E-mini Futures (NQ) are $20 per point, there are 4 ticks in a point, meaning each tick is $5 of movement. Prices move in 0.25 point denominations. For example 17,700.00 to 17,700.25 is 1 tick movement or $5 per contract of movement.

The Nasdaq 100 E-mini MICRO futures (MNQ) are 1/10th of the Mini size, meaning that they’re $2 per point, $0.50 per tick. This allows traders to use a much smaller account to get access to this market.

 

Nasdaq Futures stops, and take profits, account size and funding options.

Nasdaq Futures are volatile, quick moving instruments, and in this trade strategy, and general trade system, we trade with requires a hard stop. Meaning when I get into a trade, I have my stop automatically set.

The stop used on an intraday DAY trade is 20-25 points on average for the Nasdaq futures.

Meaning for the E-minis, risk is capped at $400-$500 per contract, on the E-mini MICROs risk is capped at $40-$50 per contract. However with the Micros, I give price a little more leeway because of potential slippage, so generally can use a 25-30 point stop, which is $50-$60 risk per contract.

This is a substantial amount of risk per contract, especially understanding that the stop can be hit in seconds.

However, the risk is taken with profit in mind generally, the profits that I am looking for to begin with are 2:1, meaning I am looking for a 40+ point move which is $800+ of profit, with multiple contracts, generally 50-60 points is fairly regular on the Nasdaq Futures.

 

How much do you need to trade Nasdaq Futures?

To trade Nasdaq futures, realistically you would need a large account size. General guidelines are CME maintenance margins for NQ which is $17,700 per contract, a very sizable amount no doubt. However this is a highly risky asset with a huge notional value.

Would use it as a “guideline”, I wouldn’t go as far as NEEDING to have $17,700 in your account per Nasdaq contract you trade, however around $10,000 is a good precaution.

Which would mean that trading the Micro Nasdaq contract MNQ, would recommend having around $1,000 to $2,000 of margin per contract. Regardless if discount brokers offer you less.

This is a risk management trick and precautionary as these are volatile assets that require having a larger stop loss.

 

You can see the margins based on CME below.

margins based CME

margins based on CME

Based on some guidelines.

If you want to trade 3-4 MNQ (Micro Nasdaq contracts) would suggest you have between $3,000 and $4,000 in your account minimum.

To trade 3-4 NQ (E-mini Nasdaq) would suggest you have between $30,000 and $40,000 in your account minimum.

Seems like a large amount of money, so what are other options?

 

What about other funding?

The rise of online proprietary firms has taken the world of trading by storm. With certain proprietary firms offering traders up to 20 accounts with them, where they can mirror their trades to spread across all of the accounts.

The premise of this path is that traders can sign up for a monthly fee, generally between $30 and $200 to get access to capital.

These prop firms make you do an evaluation to make sure that you can handle the risk, where you are tested and have to pass the test (make $X in Y time).

Then you are granted a funded account where you can trade, ranging from $25,000 to $300,000 generally, depending on which you select.

If you pass multiple accounts at the same place, you can hold up to 20 funded accounts and use a trade mirror software to take the same trade across all accounts at the same time.

This is very popular, and when you pass a certain threshold, you have the ability to withdraw funds and proceed. There are caveats like the high water mark and trailing loss based on the peak of your account equity and so on. They have daily max losses as well.

However for a small fee you can get access to 3-4 E-mini Nasdaq without having 10s of thousands in your account. Keep in mind there is risk here, but it’s smaller, if you hit max loss on the account, you will have to pay a reset fee and so forth.

 

Some of the more popular firms are as follows:

1. APEX
2. TopStep
3. BluSky

 

Trading Nasdaq Futures using Volume Profiles & Auction Market Theory

First, we as traders have to understand what Auction Market Theory and volume profiles are.

Volume is the single most important thing that dictates the direction of price and where price wants to trade. If we can deep dive into those concepts and how they shape the market, we can to a certain degree predict price movements.

Volume profiles allow us as traders to see the volume that trades at each level on the market, either heavy or small. This leads into the theory of Auction and distribution that moves prices.

The market is a two way auction, deciding where the fair value of price sits, whether it’s overextended to the upside or to the downside.

AMT or Auction Market Theory: Market movement based on imbalances between buyers and sellers until price discovers balance where volume builds out, or fair value. This is the understanding that markets move from balance to imbalance to balance.

Markets use balance as fair value and compressive periods, where they spend about 70-80% of their time, they use imbalances are expansive periods or unfair value, where new information enters the market. These are known as trend moves.


Consider these images from TradingRiot below.

TradingRiot

images from TradingRiot

Auction Market Theory is simply understanding how volume profiles work and using them to identify where markets are balanced and imbalance, which can help us identify levels to trade as well as direction in the market.

We can use distributions on the volume profile, or areas where multiple high volume nodes come together to identify balance, and the levels outside, imbalance.

One of hte most efficient ways to find these balances and imbalances is to use a cumulative volume profile. Only using the shape of it for now, effectively pushing aside all the nuances like POCs, VAH, VAL. For now that is.

Take a look at the image below, the white extended rectangles are the most obvious “distributions” on the Nasdaq futures. There are others on the chart, but for simplicity sake, let’s use these.

A distribution is a volume profile area that looks like a belly, the extremes are drop offs in heavy volume into low volume. The first step to understanding auction market theory is identifying these bellies, or “balances”.

understanding auction market theory

This is one of the most efficient ways to trade the Nasdaq futures.

For this we’re going to use a cumulative profile, 50-day cumulative profile (right hand side) as well individual session profiles (coloured profiles). We’re using Sierra Charts for the platform.

cumulative profile

Distributions have little ledge levels within, and some distributions are a lot larger than others.

The first thing we want to understand is: price inside or outside of the balance? This tells us the direction and what to expect in terms of movement when trading Nasdaq Futures.

The general rules of Distribution theory (Auction Market Theory):

  1. If price is within a balance, the expectations are that price remains within the balance (no new information enters price and compression occurs)
  2. If price moves towards the extremes or ledges of balance, those extremes are expected to hold price within. This is where strong handed market participants get active.
  3. If price escapes a balance, an expansionary period is expected to begin. Price in an area of imbaalnce is expected to trend in that direciton. Price is now imbalanced and expected to hold as such, this is the understanding that new information has entered the market.
  4. A ledge is an extreme of a distribution or an area within a distribution where volume drops off from heavy to light.
  5. Price that escapes balance, now imbalanced is expected to be directional in the escape. If price escapes balance and moves above the balance, the extrmes of that balance top should act as support to push price continusouly higher. The opposite holds true for the escape of balance to the downside.
  6. Should price go from imbalance to balance, there is a lot of volume that creates that push and price would want to stay in that balance, this also dictates the next directional move. Meaning if price drops into a balance from an imbalance above, this would mean that there is a bearish lean in price. The opposite holds true if price moves into a balance from an imbalance below.
  7. If price moves outside of a balance temporarily just to close or reopen within that balance in the same session, that is considered a fake out break and price remains in balance.

 

To better understand how to trade this and how to trade the Nasdaq, we want to study the 50-day cumulative profile to begin with. This allows us to see where the largest balances are in an extended period of time.

We can section off this current price action below in the following distributions.

In the image below we have one general large distribution (white) and within key levels that can be minor distributions (green).

cumulative profile

From here we can identify if we are within a balance, or not?  Are we at or near an extreme of price or not? How did we get into this balance or this imbalanced area?

We can use the overnight (extended hours trading session) and prior sessions to get more information of the most recent movement in the Market.

In this instance, Nasdaq Futures make a move outside of the top of the balance through 17,730 temporarily, and revert back into the area on the following regular trading hour session, this confirms that the escape outside of balance was a fake out. Which puts bearish pressure in the market. (Feb06th).

The next day, we open above our pivot level of 17,730, and this becomes an area where the longs should show up. (Feb07th).

pivot levelTrading Nasdaq Futures

Where traders would do well to sell the top of the distribution lower to target the ledges within the larger distribution as well as the other extreme of the distribution.

The following areas are expected targets and support.

When we combine the individual session volume profiles we get more information of where the movement might stop, where support/resistance is and where auctions get complete if incomplete.

 

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The use of individual session profiles and Trading Nasdaq Futures.

The individual sessions as you see them here are divided by overnight session and US day session, in otherwords the ETH and RTH.

The ETH is visible through the green market profile available, the RTH the blue market profile attached to the volume profile.

Using individual profiles with these colour distinction, you can identify visually where volume gets heavy or light.

  • Red: 0-20% of the max volume of the session
  • Orange & Yellow: 20-60% of the max volume of the session
  • Green: 60-80% of the max volume of the session
  • Blue: 80-100% of the max volume of the session

max volume of the session

The session profiles also let us see where there are value area highs and lows, along with points of control, however I only put emphasis on these if they’re “naked” Meaning levels that were created and haven’t traded yet, those can be seen as support and resistance regions.
(Covering this later).

Using the individual session volume is really hepful to see where price has key supprort/resistance and where it can move. The confluence between these sessions and the larger distribution ledges is really important.

We can divide the key areas of interest between:

  1. Heavy volume
  2. Light volume

Heavy volume is denoted by the green and blue colouring of volume. This is really important when it is NOT at the POC. The POC or point of control is going to naturally have a lot of volume surround it, this is the highest level of volume in the day, so it’ll be surround by blue colouring. We care about heavy volume that is away from the POC and ideally outside of the value area.

This suggests that volume is very thick at an extreme of the session, where traders are getting trapped and are about to get stopped out.

Take a look at the examples below. You can see there is a cluster of thick volume either at highs of sessions or at bottoms of session, indicating the potential of a reversal.

indicating the potential of a reversal

The other instance we want to notice is thin volume and areas of thin volume, ideally really extended levels of red volume. This is known as an unfinished auction where the extrmes act as support or resistance.

I’ve numbered the thin volume areas, 1 & 2. These are the examples we’re going to break down.

These thin volume areas as mentioned before are considered “unfinished auctions”. Meaning it would be healthy for price to clean the area up before it starts to go. Meaning to pullback though the area that created this move. The start and end of these thin volume areas are generally great areas to find support resistance.

Let’s look at the examples.

  1. We have a long extended day to the upside. Where at the end of the day price rips through a large distribution and closes near the highs. The low volume area starts around 17,500, while the price closes closer to the 17,630 area. Suggesting that if the upside is going to hold strong and well, we’re going to want to pullback towards the 17,500 area full the low volume auction and then we can continue.
  2. There is another long extension to the upside in this scenario where volume gets thin above the 17,660 region on the Nasdaq futures, however in this case, prices dropped from the high and the volume that is thin is actually selling. We are about to close prices under this region and would be looking for the price to fill the auction to the upside on the next session as long as we can hold 17,630 or 17,660. When that is filled, then can price attempt to drop down from that peak high to see if markets want to accept the sell that happened the prior day. To an extent this occurred.

long extension to the upside in this scenario

 

Nasdaq Futures Trade Example & Breakdown.

Let’s use example 2. From above to generate a trade plan for the ETH (extended hours trading session) and one for the regular trading hours session (RTH) based on the information we have.

We are going to go about this as follows:

  1. Where is the largest 50-day distribution, the levels around and where we find ourselves directionally?
  2. What does the prior session volume tell us about heavy market participants?

In this figure we have the overall larger distribution in white. The minor distribution in green and a key level in orange.

The sessions are split up in numbers 1 through 3.

  1. This is the RTH session for February 6th, where price closed outside of a minor distribution but still within the larger distribution. The bullish warrant would be above the start of the green box bottom and to hold the orange area.
  2. The overnight session closes at the top of the large distribution and holds the green and orange supports. Meaning there would most likely be a sell from the top of the distribution and we would do well to hold out the top of the green box. Where heavy individual volume on the overnight (green) shapes up.

The day session starts off with a pullback to the green box top before we run above the white distribution with thinner volume, this is acceptance and expected to hold on pullbacks. We have lift off and direction.

distribution with thinner volume

Below are the trades based on the levels and colours above.
We are looking for longs off the green area after accepting higher, and more longs off the white area after the continued move through the distribution.

ontinued move through the distribution

Conclusion

Nasdaq futures are very opportunistic trading asset, however they are high risk and require larger capital commitments, these are things that traders need to understand well before getting into the market.

One of the most effective ways to trade NQ futures is based on Auction Market Theory and the understanding of volume profiles that were broken down throughout this article.

We have a lot of information about Volume Profiles throughout our website, blogs and social media.