The Basics of Floor Trading

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Information about The Basics of Floor Trading

Published on March 16, 2008

Author: caroy

Source: slideshare.net

Description

This pp presentation seeks to explain the basics of floor trading on commodity exchanges. It also explores the various roles in the industry and how different trading decisions are made

The Basics of Trading Understanding how trading decisions are made and how the mechanics of the pit works

Futures vs. Stocks Held for short term Pit traders often hold positions for seconds or minutes Can easily go short or long Most go long stocks. In commodities you can sell before you ever own. Margin provides leverage Margin is typically a small percentage of value 2-3% this gives incredible profit or loss potential Price Swings are Volatile Commodity prices swing violently or can stagnate as well.

Held for short term

Pit traders often hold positions for seconds or minutes

Can easily go short or long

Most go long stocks. In commodities you can sell before you ever own.

Margin provides leverage

Margin is typically a small percentage of value 2-3% this gives incredible profit or loss potential

Price Swings are Volatile

Commodity prices swing violently or can stagnate as well.

Understanding Minimum Tick Minimum fluctuation or minimum tick Contracts trade with the minimum tick. For example soybeans are quoted as price per bushel or say $10.40 ¼ The minimum tick is ¼ cent on 5,000 contracts or $12.50. If I buy a contract of beans at $10.40 ¼ and then sell it ten minutes later at $10.41 I’ve made ¾ of a cent or 3 X 12.50 or $37.50 in profits.

Minimum fluctuation or minimum tick

Contracts trade with the minimum tick. For example soybeans are quoted as price per bushel or say $10.40 ¼

The minimum tick is ¼ cent on 5,000 contracts or $12.50.

If I buy a contract of beans at $10.40 ¼ and then sell it ten minutes later at $10.41 I’ve made ¾ of a cent or 3 X 12.50 or $37.50 in profits.

Margin: the power of leverage Nominal value of contract With corn at $5.56 a bushel a contract’s nominal value is (5.56 * 5,000 contract size or = $28,000) Margin required to trade Margin is 3% of this or $840 One need only post the margin amount to control the contract Margin calls and forced liquidation To maintain the position you must always have enough money or you face a margin call.

Nominal value of contract

With corn at $5.56 a bushel a contract’s nominal value is (5.56 * 5,000 contract size or = $28,000)

Margin required to trade

Margin is 3% of this or $840

One need only post the margin amount to control the contract

Margin calls and forced liquidation

To maintain the position you must always have enough money or you face a margin call.

Futures vs. Stocks $10,000 in futures $10,000 in stock With $1,000 margin per contract I can buy or sell 10 contracts With a 10% increase in the price of corn $5.00 to $5.50 Profit = .50 * 5000 *10 or a net gain of $25,000 That is a 250% return on my investment. I can buy 1,000 shares of a stock valued at $10. With a 10% increase in the value of the stock $10 a share to $11 a share. Profit = 1,000 * $1 or a net gain of $1,000 That is a 10% return on my investment.

$10,000 in futures

$10,000 in stock

With $1,000 margin per contract I can buy or sell 10 contracts

With a 10% increase in the price of corn $5.00 to $5.50

Profit = .50 * 5000 *10 or a net gain of $25,000

That is a 250% return on my investment.

I can buy 1,000 shares of a stock valued at $10.

With a 10% increase in the value of the stock $10 a share to $11 a share.

Profit = 1,000 * $1 or a net gain of $1,000

That is a 10% return on my investment.

Trading Styles Scalping Seek to make the minimum tick and hold as short as possible. A large percentage of floor traders. Position trading Make bets on the way the market will go Spread Trading Trade the difference between one month and the other Option Markets Using puts and calls and trading the right but not the obligation to buy or sell Arbitrage Exploit differences between two markets of like products.

Scalping

Seek to make the minimum tick and hold as short as possible. A large percentage of floor traders.

Position trading

Make bets on the way the market will go

Spread Trading

Trade the difference between one month and the other

Option Markets

Using puts and calls and trading the right but not the obligation to buy or sell

Arbitrage

Exploit differences between two markets of like products.

Market Forecasting Fundamental Analysis Technical Analysis Quantitative

Fundamental Analysis

Technical Analysis

Quantitative

Fundamental Analysis Looks at supply and demand information Market fundamentals constantly shift Weather for many crops Political situations as well

Looks at supply and demand information

Market fundamentals constantly shift

Weather for many crops

Political situations as well

Technical Analysis Looks at trying to recognize patterns on price charts. Example on next slide.

Looks at trying to recognize patterns on price charts.

Example on next slide.

March Coffee

Quantitative Analysis Complex mathematical formulas to identify trends and to profit from them. For those talented in math firms are demanding quantitative analysts and paying huge sums to those who have the background. Many different systems to trade. Reality is that market conditions are always changing. Example Volcanic eruptions lead to an 11% increase in the price of wheat.

Complex mathematical formulas to identify trends and to profit from them.

For those talented in math firms are demanding quantitative analysts and paying huge sums to those who have the background.

Many different systems to trade.

Reality is that market conditions are always changing.

Example

Volcanic eruptions lead to an 11% increase in the price of wheat.

Mechanics of pit trading Every exchange a little different but most agree on generals of buy and sell. Hands out = selling Hands in = buying

Every exchange a little different but most agree on generals of buy and sell.

Hands out = selling

Hands in = buying

Voice formula To sell the quantity is offered first then the price 100 at 3 To buy the price is first and then quantity 3 bid for 100

To sell the quantity is offered first then the price

100 at 3

To buy the price is first and then quantity

3 bid for 100

Hand signals for Quantity

Recording Trades Badges, Jackets, and Card

Badges, Jackets, and Card

Jobs on the Floor With Brokerage Company Service Representative Broker Independent Local trader Local broker With exchange Pit reporter Educational PR and financial

With Brokerage Company

Service Representative

Broker

Independent

Local trader

Local broker

With exchange

Pit reporter

Educational

PR and financial

Jobs off the floor Independent speculator Commodity Fund Manage or trade for a fund Analyst Share thoughts on the market Programmer Design programs and trading systems and do research CTAs Commodity Trading Advisor manage customer money Jobs in Actual industry Numerous

Independent

speculator

Commodity Fund

Manage or trade for a fund

Analyst

Share thoughts on the market

Programmer

Design programs and trading systems and do research

CTAs

Commodity Trading Advisor manage customer money

Jobs in Actual industry

Numerous

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