Let me start by letting you know what when we refer to an “instrument”, we are referring to a indice like, NQ, or MNQ, or ES, or MES. In the following examples, I will refer to NQ as the instrument we are measuring.
When trading, we measure the value of a given instrument, (like NQ), in points. Much like we determine the value of the US economy by the Dollar.
When we refer to a “Tick”, it further breaks down the value of a Point. Let’s use NQ as an example: 4 Ticks make up 1 Point. Just like the paper dollar has the same value as 4 quarters, when trading NQ, 1 point has the same value as 4 ticks.
The common language used in the trading community refers to the value of a an instrument (NQ for example), in points, not ticks. For example, if someone were to ask you, “How much does that Burger King Whopper Meal cost?”, you would not say, “48 quarters”. Instead, you would say, “12 dollars”. In the same way, although 48 ticks is technically 12 points, we simply say, “12 points” when referring to the value of a given instrument.
So, 1 Point = 4 Ticks, 2 Points = 8 Ticks, etc., etc.
Now, let’s talk about Contracts. I’m going make it super simple, but I’m going to give an example to bring clarification.
For a moment, imagine you are a farmer who grows apples. You want to make sure you can sell your apples at a good price when they’re ready to harvest, but you’re worried the price might drop by then. So, you make a deal with a grocery store to sell your apples at a set price in the future, let’s say $1 per pound.
This deal you make with the grocery store is like a contract. It’s an agreement between you and the store that says you’ll sell them a certain amount of apples at a specific price at a later date. This helps you because even if the price of apples drops, you know you’ll still get $1 per pound for yours.
Now, let’s say when it’s time to harvest, the price of apples has actually gone up to $2 per pound. Since you made the contract with the grocery store, you have to sell them the apples at $1 per pound, even though you could have made more money selling them at the higher price.
That’s how a contract works in trading futures. It’s like making a deal now to buy or sell something in the future at a set price, which helps both parties manage their risks and plan ahead.
The difference is, that whether you buy or sell contracts, you are out of them (closed them out), by 4:00pm. You never carry a trade overnight to the next day. You are in the business of getting into a contract, hoping for a better price, then getting out of that contract at a better price, usually within minutes, if not seconds.
Now that we have thoroughly explained what a contract is, and how it works, I now want talk about how to trade contracts when trading futures, specifically NQ.
We know that NQ is worth $20 per point. So, if we were to trade 1 contract and make 5 points, we would have made $100. Why? Because $20 (1 Contract) x 5 Points = $100.
Now, lets say that we were to trade NQ, trading 2 Contracts, going for 5 points. If the trade went in our favor and gave us the 5 points, we would have made $200. Why? Because we know that each point for NQ is worth $20, and therefore, each Contract is worth $20. So, if I trade 2 Contracts, each point is then worth $40, and if we were to make 5 points, we would have earned $200 (5 points x 2 Contracts).
Now, to exhaust the point, let’s say that we were to trade NQ, trading 5 Contracts, going for 5 points. If the trade went in our favor and gave us the 5 points, we would have made $1000. Why? Because we know that each point for NQ is worth $20, and therefore, each Contract is worth $20. So, if I trade 5 Contracts, each point is then worth $100, and if we were to make 5 points, we would have earned $500 (5 points x 5 Contracts).
Now, the same concept applies to trading MNQ, and as you know, MNQ is worth 1/10 the value of NQ, which means that if each point in NQ is worth $20, when trading in MNQ, each point is worth $2.
So, if we were to trade 1 contract and make 5 points, we would have made $10. Why? Because $2 (1 Contract) x 5 Points = $10.
Now, lets say that we were to trade MNQ, trading 2 Contracts, going for 5 points. If the trade went in our favor and gave us the 5 points, we would have made $20. Why? Because we know that each point for MNQ is worth $2, and therefore, each Contract is worth $2. So, if I trade 2 Contracts, each point is then worth $4, and if we were to make 5 points, we would have earned $20 (5 points x 2 Contracts).
Now, to exhaust the point, let’s say that we were to trade MNQ, trading 5 Contracts, going for 5 points. If the trade went in our favor and gave us the 5 points, we would have made $50. Why? Because we know that each point for MNQ is worth $2, and therefore, each Contract is worth $2. So, if I trade 5 Contracts, each point is then worth $10, and if we were to make 5 points, we would have earned $50 (5 points x 5 Contracts).
Finally, I HIGHLY encourage you to read the very short article I wrote, titled, “How to Determine How Many Points You Made on a Given Day”, as this article helps you accurately determine how many points you have made in a given day.
