Chapter 1-1 Introduction to Trading
Equity and debt securities, commodities, currencies and their derivative products are all traded on a highway of information that has no speed limit. Faster order routing and data transmission to a much larger cast of players are facilitated through the continually improving communications technologies. This electronic execution of order flow has produced efficiencies in markets that has increased competition and reduced transaction costs all the while providing anonymity for its participants. These participants meet every day in an arena created on electronic trading platforms. The largest of these trading platforms are known as ECNs, or electronic communications networks, and typically automate the execution of buy and sell orders at various prices. Large market centers with antiquated techniques of execution still do exist. However, trading on these ECN platforms has become a necessity rather than a luxury.
Technological trends favor the further adoption of electronic trading systems. These systems may never fully replicate the functions that humans perform on the various market centers, but their role for the future has been firmly cast. It would be impossible to trade any product with a firm whose infrastructure does not support high speed communication with any or all of these platforms, and in the coming years as the major public stock exchanges continue to merge we will eventually have a global market exchange creating an evolving liquid marketplace.
Start with very basic rules
First and foremost, remember to adhere to the basic fundamentals. Putting one self in high probability trades time and time again is the key to finding consistent success. Try to always get into stocks with good charts and always go with the trend of the stock, as well as the market. Furthermore, always practice solid money management skills, as this is the key to surviving the learning curve.
Following basic fundamental rules is the underlying key to becoming a successful trader.
“The first rule is not to lose. The second rule is not to forget the first rule.”
The term “intraday trading” is a widely misused and misunderstood term. Intraday trading means not holding on to your stock positions beyond the current trading day; in other words, not holding any position overnight. This is really the safest way to trade because you are not exposed to the potential losses that can occur when the stock market is closed due to news that can affect the prices of your stocks.
You must limit your losses in trading
Limit your losses! This is one of the most important lessons that a trader must learn. There is no rule of thumb as to how a trader should limit his or her losses, but there are basic steps that can be followed. One of the main reasons people lose money trading is because they do not limit their losses. For example, a person that claims to be “trading” buys a stock and when the stock starts move against him, he thinks “I am going to wait because the stock will go back up.” The stock continues to drop and he realizes that he should have sold when his loss was manageable. When the traditional closing time (4:00 pm EST) of the stock market is near, he decides that he is going to hold the stock until the next day, when it will surely recover. News is released overnight that is negative for the entire market. At the open the next morning, all stocks are lower, including the stock of our alleged “trader.” At this point, the “trader” is much more nervous and much less wealthy. His denial reaches such gigantic proportions, that he convinces himself that he is really not a ” trader”, but an “investor” and he is thus going to hold the stock as long as it takes to make up what he has lost. As the stock plummets into oblivion, he loses sleep and becomes severely disheartened. He become convinced that trading does not work and looks for someone, rather than himself, to blame for his pain and suffering. Do not let this happen to you. Limit your losses!
Trading requires proper training and practice
Equity trading is just like working for any other investment firm; it requires hard work and dedication on your part. A lot of people mistake the act of sending an order to buy or sell a stock in the market as trading. Sending an order to the market is very easy, trading can become easy as well, but only after you have had the proper practice. You have to be dedicated to do it. But dedication without the proper tools or coaching is not enough. Having the right tools, such as a live trading simulator and learning from someone with experience can accelerate your learning curve. There is no skilled profession where you become successful overnight. Trading, just like every other skill in life, takes practice!
The time it takes to learn trading varies
The learning curve for trading varies from person to person. One factor is the person’s investing and trading experience and knowledge. Some people can get started trading in about one month, while for others it takes anywhere from six to a year. It is important to note that some people will never learn to trade correctly. This can be because of a series of different factors, like the lack of discipline, the uncontrollable fear of losing money, etc.
Daily money goals are useless in trading
Whoever says that you can “consistently make X amount of dollars” a day, week, month, etc., day trading is not telling the truth. In trading everyone has wins and losses. The amount you make or lose will depend on the discipline to limit your losses and apply what you learn. Your goal is to take from the market whatever is available on a particular day. Each trading day will be different.
The market is most volatile from 9:30 am to 10:45 am. That is when most moves are dramatic and sharp. However, even though the market slows down from that point on until around 3:00 pm when typically volatility picks up again, there are opportunities for great trades. Bear in mind that these times are an approximation, and during different months of the year market activity will historically increase/decrease causing changes in these times. You must learn to develop a scrupulous eye though in order to prevent churning your account (pointless, non-lucrative trades that simply rack up commissions without gains).
Ultimately, to learn to trade, we first need to discuss the basics of trading and investing. What are “the basics”? Things like, “What is a stock and how does it work?“, “What is a ticker symbol?“, “What are the differences between the New York Stock Exchange (NYSE) and the NASDAQ?“, “What does selling short’ mean”, etc. What is even more important to a trader is to understand the meaning of the bid and ask and the different types of orders that can be placed when you buy or sell a stock. We’ve briefly highlighted these points below.
What are the “bid” and the “ask”?
If you have ever typed the ticker symbol in any financial website on the Internet to get the price quote for a stock, you would have obtained something like this:
|Intel Corporation (Ticker: INTC)|
|Bid Size||1000||Ask Size||200|
This is what is called Level I information. Level I will give you the best available prices for a stock at a given time along with volume information and some other basic details. In this example, we are looking at the stock of Intel Corporation, which has a four-letter ticker symbol INTC. Below is a description of what the rest of the information means.
Last – the last transaction for the stock took place at $34.25 a share.
Change – how much has the stock has moved up or down from the closing price (price at about 4:00 pm EST) of the previous trading day. This means that the previous day’s closing price for Intel was $33.00 ($34.25 – 1.25 = $33.00).
Bid – the best open order to buy the stock (also known as the “best bid”). Someone is trying to buy INTC at $34.25 a share or lower.
Ask – the best open order to sell the stock (also known as the “best ask” or “best offer”). Someone is trying to sell INTC at $34.26 a share or lower.
Bid Size – the amount of shares that investors are trying to buy at the Bid price.
Ask Size – the amount of shares that investors are trying to sell at the Ask price.
Hi – the transaction with the highest price of the day. INTC has been as high as $34.45 per share.
Low – the transaction with the lowest price of the day. INTC has been as low as $33.10 per share.
Volume – the total number of shares that have been bought and sold during the current trading day (remember, for every buyer there has to be a seller). In this example, INTC has traded 24,014,000 shares on the day.
Last Trade – the size of the last transaction in the stock. In this example, someone bought 500 shares of INTC stock from someone else who sold 500 shares of INTC stock.
Every trader should know this information inside out without even having to think about it. You must be able to recall this information automatically without taking time to think. Furthermore, you have to know how your order will interact with the current Bid or Ask if you place an order to buy or sell a stock. We will address this greater detail in another section.