Trading Basics Don’t Forget About The Big Picture

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Trading Basics: Don’t Forget About The Big Picture

I have been speaking with a buddy I grew up with — he is now a Captain, piloting for a major airline back and forth between the US and Asia a few times a week. He sent me a few snaps from his travels, a long with some comments, below:

“Hey there. I finally got a moment to catch up. I’m in South Korea. Its 11:30 am sunday, 10:30 pm sat to NYC. It’s been a busy month. All China Flights have been cancelled. We are still flying to ICN from DTW.

First pic is of ICN airport outside baggage claim with the virus testing tents for inbound passenger. All inbound passengers to Korea have their temperature taken. Others are required to get additional screening.”

Immigration line at the ICN airport. Everyone wears a mask, sick or not. They are also very polite and don’t complain while waiting (not like us in USA whining)

Koreans have seen this type of virus before. They handle it better in the sense they don’t run scared. Wear your mask, stay away from the elderly, social distance. (Maybe this explains the bowing at the hip, head nodding instead of shaking hands in all of Asia).

Next picture of check in desk at Sheraton. All employees wearing a mask.

My ride home from DTW to BNA (Nashville). 7 passengers in first class, all commuting airline employees. 8 paying passengers in the back on a Sunday at 11am

How Does Stock Trading Work?

Towfiqu Photography / Getty Images

Don’t take the phrase “Trading Stock,” in a literal manner. You don’t trade stocks like you trade baseball cards. For example; I’ll trade you 100 IBMs for 100 Intels. No, that’s not how it works. To “trade” in the jargon of the financial markets means to buy and sell.

The workings of a system that can accommodate trading of one billion shares in a single day are a mystery to most people. No doubt, our financial markets are marvels of technological efficiency.

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Traders and markets must handle an order for 100 shares of Acme Kumquats with the same care and documentation as an order of 100,000 shares of MegaCorp.

You don’t need to know all of the technical details of how to buy and sell stocks, but having a basic understanding of how the markets work is important for an investor.

Two Basic Methods

There are two basic ways exchanges execute a trade: On the exchange floor or electronically.

There is a strong push as of December 2020 to move more trading to the networks and off the trading floors, but this push has been met with some resistance. Most markets, most notably the NASDAQ, trade stocks electronically. However, the futures markets trade in person on the floor of several exchanges, but that’s a different topic.

Exchange Floor Trades

Trading on the floor of the New York Stock Exchange (NYSE) is the image most people have, thanks to television and movie depictions of how the market works. When the market is open, you see hundreds of people rushing about shouting and gesturing to one another, talking on phones, watching monitors, and entering data into terminals. It looks like chaos.

At the end of the trading day, the floor calms down, but it can take up to three more trading days for a trade to settle, depending on the type of trade. Here is a step-by-step walk-through of the execution of a simple trade on the NYSE.

  1. You tell your broker to buy 100 shares of Acme Kumquats at market.
  2. Your broker’s order department sends the order to its floor clerk on the exchange.
  3. The floor clerk alerts one of the firm’s floor traders, who finds another floor trader willing to sell 100 shares of Acme Kumquats. This is easier than it sounds because the floor trader knows which floor traders make markets in particular stocks.
  4. The two agree on a price and complete the deal. The notification process goes back up the line, and your broker calls you back with the final price. The process may take a few minutes or longer depending on the stock and the market. A few days later, you will receive the confirmation notice in the mail.

Of course, this example was a simple trade; complex trades and large blocks of stocks involve considerably more detail.

Electronic Trades

In this fast-moving world, some people are wondering how long a human-based system like the NYSE can continue to provide the level of service necessary. The NYSE handles a small percentage of its volume electronically, while its rival NASDAQ is completely electronic.

The electronic markets use vast computer networks to match buyers and sellers, rather than human brokers. While this system lacks the romantic and exciting images of the NYSE floor, it is efficient and fast. Many large institutional traders, such as pension funds, mutual funds, and so forth, prefer this method of trading.

For the individual investor, you frequently can get almost instant confirmations on your trades, if that is important to you. It also facilitates further control of online investing by putting you one step closer to the market.

That said, you still need a broker to handle your trades, as individuals don’t have access to the electronic markets. Your broker accesses the exchange network, and the system finds a buyer or seller depending on your order.

What does this all mean to you? If the system works, and it does most of the time, all of this will be hidden from you. However, if something goes wrong, it’s important to have an idea of what’s going on behind the scenes.

What Else You Need to Know

If you’re planning on managing your investments and making your own trading decisions, you should learn some more about how stock prices are set, how to understand stock quotes, bid & ask prices, and stock orders. It’s important also to understand how to use trailing stops to protect stock profits to avoid losing all your gains.

You’ll also need to learn how to avoid mistakes like buying high and selling low or getting caught up in an investment scam.

How to Start Day Trading in Gold

Andrzej Barabsz / Getty Images

The value of gold fluctuates from moment to moment, as it trades on public exchanges where it has a price that is determined by supply and demand. While you don’t eat it or drink it, people are attracted to gold. It’s been used as a currency because it doesn’t corrode, and the material allows for some absorption of light creating that yellow glow.

The reasons people buy or sell gold–creating the demand and supply flow–can be pure speculation, to acquire or distribute physical gold, and as a hedge for commercial application. For day traders, the purpose of trading gold is to profit from its daily price movements.

Futures Markets

Day trading gold is speculating on its short-term price movements. Physical gold is not actually handled or taken possession of, rather the transactions take place electronically and only profits or losses are reflected in the trading account.

There are a number of ways to trade gold. The main way is through a futures contract. A futures contract is an agreement to buy or sell something–like gold–at a future date. Buying a gold futures contract doesn’t mean you actually have to take possession of the physical commodity.

Day traders close out all contracts (trades) each day and make a profit based on the difference between the price they bought the contract and the price they sold it at. Gold futures trade on the Chicago Mercantile Exchange (CME). There is a standard gold future (GC) which represents 100 troy ounces of gold, and a micro gold future (MGC), which represents 10 troy ounces.

On the futures exchange, gold moves in $0.10 increments only. This increment is called a “tick”–it is the smallest movement a futures contract can make. If you buy or sell a futures contract, how many ticks the price moves away from your entry price determines your profit or loss. To calculate your profit or loss (your trading platform will also show you, but it is good to understand how it works) you’ll first need to know the tick value of the contract you are trading.

  • For a standard contract, the tick value is $10. This is because the contract represents 100 ounces of gold, and 100 ounces multiplied by the $0.10 tick size results in $10. That means for each contract, a one tick movement will result in a profit or loss of $10. If it moves 10 ticks, you win or loss $100. If it moves 10 ticks and you are holding 3 contracts, your profit or loss is $300.
  • For a micro contract, the tick value is $1. This is because the contract represents 10 ounces of gold, and 10 ounces multiplied by the $0.10 tick size results in $1. That means for each contract, a one tick movement will result in a profit or loss of $1. If it moves 10 ticks, you win or loss $10. If it moves 10 ticks and you are holding 3 contracts, your profit or loss is $30.

Gold Futures

The amount you need in your account to day trade a gold futures contract will depend on your futures broker. NinjaTrader for examples requires you have $500 in your account to open a position for one E-Micro Gold Futures (MGC) contract. You also need enough in the account to accommodate for potential losses (need much more than $500).

For a day trade of a standard Gold Futures (GC) contract, you need $1000 in your account, plus additional funds to accommodate losses. The amount required by your broker to open a day trading position is called Intra-day margin; it varies by the broker and is subject to change.

These figures assume you are day trading and closing out positions before the market closes each day. If you hold positions overnight, you are subject to Initial Margin and Maintenance Margin requirements, which will require you have more money in your account.

Day Trading Gold, ETFs and/or Stock Market

Another way to day trade gold is through a fund which trades on a stock exchange, like the SPDR Gold Trust (GLD). If you have a stock trading account, you can trade the price movements in gold.

The trust holds gold in reserve, and therefore, its value is reflective of the price of gold. The price of the SPDR Gold Trust is approximately 1/10 of the price of gold. So if gold futures are trading at $1500, then the Gold Trust will trade at approximately $150.

The trust trades like any stock. The minimum price movement is $0.01, therefore you make or lose $0.01 for each share you own each time the price changes by a penny. Stocks and ETFs are typically traded in 100 share blocks (called lots) so if the price moves a penny and you are holding 100 shares, you make or lose $1.

If the price moves $1, from $120 to $121, you make or lose $100 on your 100 share position. If you are holding 500 shares, you make or lose $500 on that same price move. The amount you need in your account to day trade a gold ETF depends on the price of the ETF, your leverage, and position size.

For a day trade of stocks or ETFs in the US, you’re required to have a $25,000 minimum balance in your account. Depending on how much income you want to generate and your leverage, you may wish to have more than $25,000 available to you.

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