Showing posts with label tradingview. Show all posts
Showing posts with label tradingview. Show all posts

THE NEW TRADING OF A LIVING- OTHER STOCK MARKET INDICATORS

THE NEW TRADING OF A LIVING



OTHER STOCK MARKET INDICATORS

Only a handful of general market indicators have stood the harsh test of time. Many that used to be popular in previous decades have been swept away by the flood of new trading vehicles. The New High–New Low Index and Stocks Above 50-day MA, reviewed above, continue to work because of their clear logic. Several other indicators are listed below. Whatever tools you choose, be sure to understand how they work and what exactly they measure. Select a few and track them on a regular basis, until you come to trust their signals.

Advance/Decline

The Advance/Decline line tracks the degree of mass participation in rallies and declines. Each day it adds up the number of stocks that closed higher and subtracts the number of stocks that closed lower.

While the Dow Jones Industrials track the behavior of the generals and the New High–New Low Index focuses on the officers, the A/D line shows whether soldiers are following their leaders. A rally is more likely to persist when the A/D line rises to a new high, while a decline is likely to deepen if A/D falls to a new low in step with the Dow.

The A/D line is based on the day’s closing prices for each stock at any exchange: take the number of advancing stocks, subtract the number of declining stocks, and ignore unchanged stocks. The result will be positive or negative, depending on whether more stocks advanced or declined during the day. For example, if 4,000 stocks were traded, 2,600 advanced, 900 declined, and 500 were unchanged, then Advance/Decline equals +1,700 (2,600−900). Add each day’s Advance/Decline figures to the previous day’s total to create a cumulative A/D line.

FIGURE  S&P 500 daily and the Advance/Decline line.

Traders should watch for new peaks and valleys in the A/D line rather than its absolute levels, which depend on its starting date. If a new high in the stock market is accompanied by a new high of the A/D line, it shows that the rally has broad support and is likely to continue. Broadly based rallies and declines have greater staying power. 

If the stock market reaches a new peak, but the A/D line reaches a lower peak than during the previous rally, it shows that fewer stocks are participating, and the rally may be near its end. When the market falls to a new low but the A/D line traces a shallower bottom than during the previous decline, it shows that the decline is narrowing down and the bear move is nearing an end. These signals tend to precede reversals by weeks if not months.

The Most Active Stocks indicator (MAS) is an Advance/Decline line of the 15 most active stocks on the New York Stock Exchange. It used to be listed daily in many newspapers. Stocks appeared on this list when they caught the public’s eye. MAS was a big money indicator—it showed whether big money was bullish or bearish. When the trend of MAS diverged from the price trends, the market was especially likely to reverse.

Hardly anyone today uses an indicator called TRIN, which was important enough to have its own chapter in the original Trading for a Living. Very few people track another formerly popular indicator called TICK. Old stock market books are full of fascinating indicators, but you have to be very careful using them today. Changes in the market over the years have killed many indicators.

Indicators based on the volume of low-priced stocks lost their usefulness when the average volume of the U.S. stock market soared and the Dow rose tenfold. The Member Short Sale Ratio and the Specialist Short Sale Ratio stopped working after options became popular. Member and specialist short sales are now tied up in the intermarket arbitrage. Odd-lot statistics lost value when conservative odd-lotters bought mutual funds. The Odd-lot Short Sale Ratio stopped working when gamblers discovered puts.

Consensus and Commitment Indicators

Most private traders keep their opinions to themselves, but financial journalists, letter writers, and bloggers spew them forth like open hydrants. Some writers may be very bright, but the financial press as a whole has a poor record of market timing. Financial journalists and letter writers tend to overstay trends and miss turning points. When these groups become intensely bullish or bearish, it pays to trade against them.

It’s “monkey see, monkey do” in the publishing business, where a journalist’s or an advisor’s job may be endangered by expressing an opinion that differs too sharply from his group. Standing alone feels scary, and most of us like to huddle. When financial journalists and letter writers reach a high degree of bullish or bearish consensus, it’s a sign that the trend has been going on for so long that a reversal is near.

Consensus indicators, also called contrary opinion indicators, are not suitable for precision timing, but they draw attention to the fact that a trend is near its exhaustion level. When you see that message, switch to technical indicators for more precise timing of a trend reversal.

A trend can continue as long as bulls and bears remain in conflict. A high degree of consensus precedes reversals. When the crowd becomes highly bullish, get ready to sell, and when it becomes strongly bearish, get ready to buy. This is the contrary opinion theory, whose foundations were laid by Charles Mackay, a Scottish barrister. His classic book, Extraordinary Popular Delusions and the Madness of Crowds (1841) describes the infamous Dutch Tulip Mania and the South Seas Bubble in England. Humphrey B. 

Neill in the United States applied the theory of contrary opinion to stocks and other financial markets. In his book, The Art of Contrary Thinking, he made it clear why the majority must be wrong at the market’s turning points: prices are established by crowds, and by the time the majority turns bullish, there aren’t enough new buyers to support a bull market.

Abraham W. Cohen, an old New York lawyer whom I met in the early 1980s, came up with the idea of polling market advisors and using their responses as a proxy for the entire body of traders. Cohen was a skeptic who spent many years on Wall Street and saw that advisors as a group performed no better than the market crowd. In 1963, he established a service called Investors Intelligence for tracking letter writers. When the majority of them became bearish, Cohen identified a buying opportunity. Selling opportunities were marked by strong bullishness among letter writers. Another writer, James H. Sibbet, applied this theory to commodities, setting up an advisory service called Market Vane.

Tracking Advisory Opinion

Letter writers follow trends out of fear of losing subscribers by missing major moves. In addition, bullishness helps sell subscriptions, while bearish comments turn off subscribers. Even in a bear market, we rarely see more bears than bulls among advisors for more than a few weeks at a time.

The longer a trend continues, the louder the letter writers proclaim it. They are most bullish at market tops and most bearish at market bottoms. When the mass of letter writers turns strongly bullish or bearish, it’s a good idea to look for trades in the opposite direction.

Some advisors are very skilled at doubletalk. The man who speaks from both sides of his mouth can claim that he was right regardless of what the market did, but editors of tracking services have plenty of experience pinning down such lizards.

When the original Trading for a Living came out, only two services tracked advisory opinions: Investors Intelligence and Market Vane. In recent years, there has been an explosion of interest in behavioral economics, and today many services track advisors. Jason Goepfert, its publisher, does a solid job of tracking mass market sentiment.

Signals from the Press

To understand any group of people, you must know what its members crave and what they fear. Financial journalists want to appear serious, intelligent, and informed; they are afraid of appearing ignorant or flaky. That’s why it’s normal for them to straddle the fence and present several sides of every issue. A journalist is safe as long as he writes something like “monetary policy is about to push the market up, unless unforeseen factors push it down.”

Internal contradiction is the normal state of affairs in financial journalism2. Most financial editors are even more cowardly than their writers. They print contradictory articles and call this “presenting a balanced picture.”

For example, an issue of a major business magazine had an article headlined “The Winds of Inflation Are Blowing a Little Harder” on page 19. Another article on page 32 of the same issue was headlined “Why the Inflation Scare Is Just That.” It takes a powerful and lasting trend to lure journalists and editors down from their fences. This happens only when a tide of optimism or pessimism sweeps up the market near the end of a major trend. When journalists start expressing strongly bullish or bearish views, the trend is ripe for a reversal.

This is why the front covers of major business magazines serve as contrarian indicators. When a leading business magazine puts a bull on its cover, it’s usually a good time to take profits on long positions, and when a bear graces the front cover, a bottom cannot be too far away.

Signals from Advertisers

A group of three or more ads touting the same “opportunity” in a major newspaper or magazine warns of an imminent top. This is because only a well-established uptrend can break through the inertia of several brokerage firms. By the time all of them recognize a trend, come up with trading recommendations, produce ads, and place them in a newspaper, that trend is very old indeed.

The ads on the commodities page of The Wall Street Journal appeal to the bullish appetites of the least-informed traders. Those ads almost never recommend selling; it is hard to get amateurs excited about going short. You’ll never see an ad for an investment when its price is low. When three or more ads on the same day tout gold or silver, it is time to look at technical indicators for shorting signals.

FIGURE  Monthly total dollar value of OTC stocks. 

A more malignant breed of promoters appeared on the scene in the past decade: thanks to the Internet, “pump and dump” operators have migrated online. The scammers touting penny stocks know that they need to wait for an uptrend to hook their victims. Whenever a higher than usual number of promo pitches starts showing up in my spam filter, the top can’t be too far away.

Commitments of Futures Traders

Government agencies and exchanges collect data on buying and selling by various groups of traders and publish summary reports of their positions. It pays to trade with the groups that have a track record of success and against those with track records of persistent failure.

For example, the Commodity Futures Trading Commission reports long and short positions of hedgers and big speculators. Hedgers—the commercial producers and consumers of commodities—are the most successful market participants. The Securities and Exchange Commission (SEC) reports purchases and sales by corporate insiders. Officers of publicly traded companies know when to buy or sell their shares.

Positions of large futures traders, including hedge funds, are reported to the CFTC when their sizes reach the so-called reporting levels. At the time of this writing, if you are long or short 250 contracts of corn or 200 contracts of gold, the CFTC classifies you as a big speculator.

The CFTC also sets up the maximum number of contracts a speculator is allowed to hold in any given market— these are called position limits. Those limits are set to prevent very large speculators from accumulating positions that are big enough to bully the markets.

The CFTC divides all market participants into three groups: commercials, large speculators, and small speculators. Commercials, also known as hedgers, are firms or individuals who deal in actual commodities in the normal course of their business. In theory, they trade futures to hedge business risks. For example, a bank trades interest rate futures to hedge its loan portfolio, while a food processing company trades wheat futures to offset the risks of buying grain. Hedgers post smaller margins and are exempt from speculative position limits.

Large speculators are those whose positions have reached reporting levels. The CFTC reports buying and selling by commercials and large speculators. To find the positions of small traders, you need to take the open interest and subtract from it the holdings of the first two groups.

The divisions between hedgers, big speculators, and small speculators are somewhat artificial. Smart small traders grow into big traders, dumb big traders become small traders, and many hedgers speculate. Some market participants play games that distort the CFTC reports. For example, an acquaintance who owns a brokerage firm sometimes registers his wealthy speculator clients as hedgers, claiming they trade stock index and bond futures to hedge their stock and bond portfolios.

The commercials can legally speculate in the futures markets using inside information. Some of them are big enough to play futures markets against cash markets. For example, an oil firm may buy crude oil futures, divert several tankers, and hold them offshore in order to tighten supplies and push up futures prices. They can take profits on long positions, go short, and then deliver several tankers at once to refiners in order to push crude futures down a bit and cover shorts. Such manipulation is illegal, and most firms hotly deny that it takes place.

As a group, commercials have the best track record in the futures markets. They have inside information and are well-capitalized. It pays to follow them because they are successful in the long run. Big speculators used to be successful wealthy individuals who took careful risks with their own money. That has changed, and today most big traders are commodity funds. These trend-following behemoths do poorly as a group. The masses of small traders are the proverbial “wrong-way Corrigans” of the markets.

It is not enough to know whether a certain group is short or long. Commercials often short futures because many of them own physical commodities. Small traders are usually long, reflecting their perennial optimism. To draw valid conclusions from the CFTC reports, you need to compare current positions to their historical norms.

Legal Insider Trading

Officers and investors who hold more than 5 percent of the shares in a publicly traded company must report their buying and selling to the Securities and Exchange Commission. The SEC tabulates insider purchases and sales, and releases this data to the public.

Corporate insiders have a long record of buying stocks when they’re cheap and selling them high. Insider buying emerges after severe market drops, and insider selling accelerates when the market rallies and becomes overpriced.

Buying or selling by a single insider matters little: an executive may sell shares to meet major personal expenses or he may buy them to exercise stock options. Analysts who researched legal insider trading found that insider buying or selling was meaningful only if more than three executives or large stockholders bought or sold within a month. These actions reveal that something very positive or negative is about to happen. A stock is likely to rise if three insiders buy in one month and to fall if three insiders sell within a month.

Clusters of insider buying tend to have a better predictive value than clusters of selling. That’s because insiders are willing to sell a stock for many reasons but they are willing to buy for one main reason—they expect their company’s stock to go up.

Short Interest

While the numbers of futures and options contracts held long and short is equal by definition, in the stock market there is always a huge disparity between the two camps. Most people, including professional fund managers, buy stocks, but very few sell them short.

Among the data reported by exchanges is the number of shares being held short for any stock. Since the absolute numbers vary a great deal, it pays to put them into a perspective by comparing the number of shares held short to that stock’s float. This number, “Short Percent of Float,” tends to run about one or two percent. Another useful way to look at short interest is by comparing it to the average daily volume.

By doing this, we ask a hypothetical question: if all shorts decided to cover, while all other buyers stood aside and daily volume remained unchanged, how many days would it take for them to cover and bring short interest down to zero? This “Days to Cover” number normally oscillates between one and two days.

When planning to buy or short a stock, it pays to check its Short Percent of Float and Days to Cover. If those are high, they show that the bearish side is overcrowded. A rally may scare those bears into panicky covering, and send the stock sharply higher. That would be good for bulls but bad for bears.

FIGURE  AAPL and GMCR shorting data.

Fear is a stronger emotion than greed. Bulls may look for bargains but try not to overpay, while squeezed bears, facing unlimited losses, will pay any price to cover. That’s why short-covering rallies tend to be especially sharp.

Whenever you look for a stock to buy, check its Short Percent of Float and Days to Cover. The usual, normal readings don’t provide any great information, but the deviations from the norm often deliver useful insights.

High shorting numbers mark any stock as a dangerous short. By extension, if your indicators suggest buying a stock, its high short interest becomes an additional positive factor—there is more fuel for a rally. It makes sense for swing traders to include the data on shorting when selecting which of several stocks to buy or sell short. I always review these numbers when working up a potential trade.

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SETTING UP YOUR ACCOUNTS AND OFFICE

SETTING UP YOUR ACCOUNTS AND OFFICE


Day trading is possible only because technology costs have come down dramatically over the years. That makes it feasible to set up shop in the comfort of your home. But remember: This is a home business, so you do need to set up for it.

Sure, some days you can sit and trade from your laptop in a coffee shop, but to end up doing that well, you first need to commit to the space and the equipment at home. If you skimp on your Internet connection, for example, you can’t be upset if it’s unable to handle the data on a big market day. If your PC goes down, you’d better have a way to get it back up fast if you have open positions. And if the responsibility seems overwhelming, maybe you should look for a trading arcade — an office space for traders — and move your operation there.

I list different brokers that handle day traders, go over the basics of your office setup, and give you some advice on finding a trading arcade.

Choosing a Brokerage

If you are going to trade, you need a brokerage account. Some of the basics of different types of securities and where they trade. That’s the first place to start.

If you’re going to trade stocks, you need a full-service broker that belongs to NASDAQ, the New York Stock Exchange, and other major exchanges.

If you’d rather trade the stock market through the Chicago Mercantile Exchange’s E-Mini index futures, then you need a futures trading account with a broker holding a seat on the  Chicago Mercantile Exchange.

Many day traders pursue two or three strategies, which may require holding different brokerage accounts. That’s not unusual. If you are going to trade grain futures and tech stocks both, you might want one account with a futures brokerage that belongs to the Chicago Board of Trade and another account with a stock brokerage that offers fast execution.

Direct access to pricing and trading

All brokerage firms offer price quotes: a summary of the current bid and offer prices for selling or buying the security in question. But not all of these price quotes are the same. Some are offered in real time — meaning that you see the prices as soon as your modem can transmit the change to you. Others are delayed, sometimes by seconds, sometimes by minutes. If you are buying a bond with plans to hold it for ten years, then the difference in price between now and fifteen minutes ago probably isn’t material. But if you are looking to day trade in the bond market using short-term changes in treasury futures, then a delay of even 30 seconds might be the difference between your strategy succeeding or failing.

Direct access brokers allow you to see the price quotes in real time so that you can act on them immediately, and they allow you to work through different electronic communications networks rather than going through the firm’s own traders. Almost all day trading strategies need direct access in order to maximize profitability.

A traditional retail brokerage, by contrast, offers customers more research and advice and may even improve order execution by waiting until market conditions are more favorable. That’s fine for investors, but not so good for day traders.

In addition to different levels of market access, brokerage firms offer different types of price quotes with different amounts of detail. Read on for descriptions and pictures to see what you need for your strategy.

Faster, detailed price quotes are valuable to traders, so brokerage firms usually charge more them. Don’t skimp on price services at the expense of your trading profitability.

Level I quotes

Level I quotes give you the current bid and ask, or bid and offer, prices for a given security. The bid, of course, is the price at which the broker buys the security from you, and the ask, also called offer in some markets, is the price at which the broker offers to sell the security to you. A Level I quote also shows the size of the most recent buy and sell orders.

Most brokerage firms offer real-time Level I quotes for free, but these numbers do not have enough detail for day trading.

Level II quotes

Level II quotes not only tell you what the current bid and offer prices are, but they also tell you who the market makers are — the brokerage firm traders who are buying and selling the security — and what size orders they have at different prices. This information can help you gauge the volatility and direction of trading in the market, and that can help you make more profitable trades. Most brokerage firms that specialize in day trading offer Level II quotes in most markets.

TotalView quotes

TotalView quotes show all orders in the market for a given security, both attributed to market makers and anonymous. This gives traders the most detailed information about what’s happening in the market. It may be overkill for some trading strategies, but vital to the success of most. You’ll have a better idea of how much information your trading strategies need after you test them using the advice.

Type of platform

When you have an account with a brokerage firm, you have a way to get information about the markets and place your orders. The conduit is the Internet, but there has to be a way to get your orders to it. Some brokerage firms have their own software that you can use; others allow you to log in through a Web site.

Software-based platforms

With a software-based platform, you have to download and install the brokerage firm’s proprietary system onto your computer. When you are ready to start your trading day, you connect to the Internet first, launch the software to see what’s happening, and place your trades. Software systems generally offer more features and analytical tools, but you can only trade on a machine that has the software loaded on it.

Web-based platforms

With a Web-based trading platform, you go to the broker’s Web site and log into trade. This means you can trade from any computer that has Internet access, which is a boon if you travel or work from several different locations. In exchange, you may give up some of the analytic and backtesting tools offered through software-based platforms.

Note that Web-based platforms may be designed to work on specific Web browsers. Given the importance of having a stable connection and full functionality in a fast-moving market, if the firm recommends using Internet Explorer, accept that. Don’t cling to a preferred alternative.

What about mobile platforms? Some brokerage firms allow you to get price quotes and place trades through a mobile phone. This may be useful to some people, but it’s a bad idea for most day traders. Day trading is a business, and that means you need some discipline about setting regular hours and working from a regular workspace. You will probably need more information to work a trade than will fit on your phone’s screen. Finally, you need to take a break from the market in order to maintain balance in your life. If you’re making trades at your cousin’s wedding, you’re probably a little out of balance.

How to open an account

When you open a brokerage account, you have a lot of paperwork to fill out in order to comply with government and exchange regulations. I explain all the laws behind these in Chapter 5. The firm needs to ensure that you are suitable for day trading; that you understand the risks of options, futures, and margin strategies; and that your trading money did not come from illgotten gains.

After you fill out and sign the paperwork, you need to transfer funds. Most brokers require a minimum investment of $25,000 to open a day trading account (some set this lower and some higher). Write a check or set up a wire or Internet transfer from an existing bank, brokerage, or mutual fund account.

Brokers Offering Day Trading Services

Following is a list of brokerage firms with services for day traders. It’s arranged by specialty (stocks and general trading, options and futures, foreign exchange) and then alphabetically within each category. It’s not exhaustive. Keep in mind that every year, new firms are formed, and existing firms are acquired or merged away, so be sure to do your own research. Also, this list does not imply an endorsement of anyone’s services.

Barron’s (www.barrons.com), the weekly financial newspaper, has a regular column discussing electronic trading firm issues and concerns, many of which are of interest to day traders. Each winter, Barron’s conducts a survey of online brokerage firms with updates on the latest features and rankings based on such criteria as technology, usability, additional features, customer service, and trading costs. Check it out when you’re ready to research.

Brokers for stocks and a bit of the rest

Day traders almost always work through online brokerage accounts. Many firms offering these accounts handle trading in almost all securities. The firms usually belong to all the exchanges, so you can trade almost anything anywhere in the world through them. They often offer a range of news and charting services to help you plan your trading. In some cases, their offerings may be overkill — you not only might not need all their services, you might find them distracting. Some may not handle your security of choice well.

Brokerage firms don’t make money just on the commission charged per trade. Other sources of revenue include monthly service charges, fees for real-time quotes, interest on margin loans to customers, and the spread, which is the difference between what you pay for a security and what the firm paid to get it. Don’t let the commission be the critical factor in deciding among brokerage firms. Think about the services you will need and the relative cost to you of different account offerings.

Charles Schwab Active Trader
   
   www.schwabat.com

Charles Schwab was one of the first discount retail brokerage firms, and it now offers just about every financial service one could want: financial planning, banking, and mutual funds. The Schwab Active Trader account includes trading demonstrations and education services that are particularly useful for active stock traders. It works directly through an Internet browser.

Many day traders, especially those working in other securities besides stocks prefer Schwab’s CyberTrader service.

ChoiceTrade

   www.choicetrade.com

ChoiceTrade offers software-based equity stock and option trading services to individuals and small trading firms. Customers can opt for a basic platform or pay a monthly fee for additional charting, analytic, and money management services.

CyberTrader

   www.cybertrader.com

CyberTrader is owned by Charles Schwab and offers trading in stocks, options, and futures during market hours and after. Its software includes lots of charting, backtesting, and simulation features that can help you plan your trades and evaluate their effectiveness.

E*TRADE

   www.etrade.com

E*TRADE offers trading in stocks, options, and futures as well as services for active traders through its Web-based trading platform. It also offers a software-based platform, Power E*TRADE Pro, with direct access trading and customization abilities.

Fidelity Active Trader Pro

   http://personal.fidelity.com/accounts/activetrader/

Fidelity started life as a mutual fund company and continues to dominate that business. It’s also branched out into offering a wide range of financial services, including online trading. Its Fidelity Active Trader Pro is a software-based system with lots of bells and whistles, including systems for analyzing and testing options strategies.

Fimat PreferredTrade

   www.fimatpreferred.com

Fimat PreferredTrade is a software-based trading system that can handle stock trading as well as a range of options and futures strategies, during and after market hours. Users can perform lots of analytic tricks using realtime data.

Interactive Brokers

   www.interactivebrokers.com

Interactive Brokers offers software-based direct access trading, including trading in international markets. It has options, futures, and foreign exchange trading services as well as trading in stocks. Traders can use a range of order types and order-management features to work complicated strategies.

Just2Trade
   
   www.just2trade.com

Just2Trade targets equity day traders with low commissions. The company’s goal is to provide fast execution through its Web-based platform, which is useful to day traders who are looking to move quickly. Its services include real-time Level I and Level II quotes at no extra fee.

Mastertrader.com

   www.mastertrader.com

Mastertrader.com gives day traders and small firms Web-based direct access trading services, especially in equities. Customers can choose different levels of services (at different fees, of course) to get what they need. It has some education services, including a partnership with Pristine.com, a day trading training company.

ScottradeELITE

   www.scottradeelite.com

Scottrade is an online stock broker that offers additional services for those customers with more than $25,000 in their accounts. Under the name ScottradeELITE, it gives these customers Web-based access to NASDAQ Level II and detailed NASDAQ TotalView quotes as long as they do 15 trades a month.

TD AMERITRADE

   www.tdameritrade.com

TD AMERITRADE is a Web-based online broker that offers full investing services. Day traders get access to Level I quotes for free, and they can subscribe to Level II quotes. Customers can also test and analyze trading strategies and set up signals and screens to identify changing market trends.

Terra Nova Financial

   www.tnfg.com

Terra Nova provides brokerage services to individual and institutional traders. It enjoys a particular advantage in trading international securities and has trading in equities, options, futures, and foreign exchange. Terra Nova has a range of services with different fee levels so that traders can choose what they need. Customers can receive commission rebates for the cost of enrolling in trading courses offered by MarketWise, www.marketwise.com.

TradeKing

   www.tradeking.com

TradeKing has a range of basic trading services in stocks, bonds, and options. The company’s most unique feature is the community offerings on its site. Customers can create blogs, track each other’s trades (if they want), share commentary, and send messages to each other in hopes that they all make better, smarter trades.

TradeStation

   www.tradestation.com

TradeStation offers a huge range of services for people who are day trading stocks, options, futures, and foreign exchange. It’s a software-based system that includes a rich set of features, especially for developing and testing trading strategies. Traders who have strong systems will like the automatic trading features that signal — and can even act — when appropriate trading opportunities occur.

Zecco

   www.zecco.com

Zecco is a relatively new brokerage firm offering trading in stocks and options. Your first 10 trades per day (up to 40 trades a month) are free; after that, you pay $3.50 per trade. Zecco has few services for traders other than message boards where customers can discuss news and share trading tips.

Brokers for options and futures

To effectively day trade options and futures, you need an account with a broker that has direct access to the exchanges’ electronic communications networks. Several of the full-service firms listed above offer that service, as do the brokers listed here, which specialize in these markets.

Infinity Brokerage

   www.infinitybrokerage.com

Infinity Brokerage offers software-based trading in the options, futures, and foreign exchange markets. Customers can choose from several platforms, depending on trading needs. The firm particularly supports traders working in the stock index futures offered by the Chicago Mercantile Exchange.

Man Futures

   www.manfutures.com

Man Financial is a multinational company that works with hedge funds and major institutional investors, but it makes many of its services available to larger day traders. It has a lot of expertise in agricultural commodities as well as financial futures. Traders can choose from several trading platforms, with free simulated trading for those who want to check out futures trading first.

MB Trading

   www.mbtrading.com

MB Trading handles stocks as well as derivatives, but it has lots of services for traders of the latter. It doesn’t have a lot of frills, as the company seems to assume its customers either don’t want them or will build them in house. And, in fact, MB Trading has a lot of support for developers who want to build software around its platform.

OptionsHouse

   www.optionshouse.com

OptionsHouse was founded by a major options trading firm and has its offices on the original Chicago Board of Trade trading floor. Between that pedigree and the company’s name, it’s no surprise that it offers direct access Web-based trading in options and their underlying stocks. Its software tools are designed to help you identify profitable opportunities in the options market.

optionsXpress

   www.optionsxpress.com

The company optionsXpress is designed for people trading options and the stocks underlying them. One of its nifty features is an automatic execution service for subscribers of participating research services.

thinkorswim

   www.thinkorswim.com

Providing its customers with a software-based trading platform used mostly to trade options strategies, thinkorswim also offers a full range of products, including mutual funds. In addition to an auto-execute feature for subscribers of select newsletters, it has a paper-trading feature that lets you practice your trades before you commit real dollars.

Brokers for foreign exchange

The foreign exchange, or forex, market is the largest trading market in the world. It has lots of opportunities for day traders to make (or lose) money. Most forex trades take place between banks, corporations, and hedge funds directly, without the use of a broker. If you want to trade this directly, you need to use a trading firm that is tied in to these networks. Many of the brokers listed above offer forex, and here are a few that do little else.

CMC Markets

   www.cmcmarkets.com

CMC Markets was the first firm to allow individual investors to trade in foreign exchange. The company has a software-based platform that offers trading in 65 different currency pairs. It also has research and education services  for its customers.

Gain Capital Group’s FOREX.com

   www.forex.com

Gain Capital Group deals mostly with institutional investors and money managers, but it makes its platform available to individual day traders through its FOREX.com site. There, you can download software that lets you analyze markets and place trades. The company offers a lot of educational programs for those interested in foreign exchange.

GTForex
  
   www.gtforex.com

GTForex lets day traders work with 21 different currency pairs through the forex, futures, and contracts for difference (CFD, where the parties exchange only the value of the price change on the currency), as well as spot gold and spot silver. Trades take place through the company’s software-based trading platform, and prospective customers can try it through a demo version.

InterbankFX

   www.interbankfx.com

Want to try your hand at trading forex? In addition to demo accounts, InterbankFX allows customers to start trading with as little as $250, making it an option for day traders who want to trade currency along with other typesof securities. It also offers charting and automatic trading services to help customers design and adhere to their strategies.

MG Financial Group

   www.mgforex.com

MG Financial gives forex day traders a software platform that allows them to trade several popular currency pairs. Other features include research, charting, and trading via mobile phone. Interested folks can open a demo account to try their hands at forex trading before making a commitment.

Equipping Your Trading Laboratory

Twenty years ago, you would have had to pay millions of dollars for the equipment and telecommunications networks that you can now have in your own home for just a few thousand bucks or so.

You may be thinking, I can do it for free! I have a PC in a corner of the family room, I have Internet access, what else do I need? Ah, but you need plenty.  Remember, successful day traders approach trading as a professional activity. That means starting off with an adequate work space and dedicated equipment. If you can’t give up an entire room in your house, find a corner or hallway where you can put a desk and a computer just for day trading. It will clear your mind so that you can focus on the work at hand.

Where to sit, where to work

You need a table and a chair. Don’t borrow a chair from the dining room, but instead get a good desk chair that will swivel around and adjust to you as you work. You’ll need a shelf and a cabinet of some sort to hold your files and documents, too.

Want to get more comfort for the dollar in a desk chair? Consider shopping for used chairs at office equipment dealers. They may come with a few scuffs, but they will probably have more ergonomic settings than chairs at office supply superstores.

There’s no rule on the layout of your equipment, but the more you can see and do without getting up from your chair, the better off you’ll be. If you find yourself getting sore at the end of the day, investigate ergonomic products such as special keyboards, contoured mice, wrist pads, and foot rests, all of which are readily available at office supply stores.

Counting on your computer

You can’t day trade without one computer, and you might want two or three: one to trade from, one for everything else (such as spreadsheets, email, instant messaging), plus a spare in case the trading computer goes down.

Almost every personal computer on the market today has the power to handle day trading activities, so you don’t need to sweat over the details. In general, faster processing speeds are better than slower ones, and more memory and storage are preferable to less.

What about the manufacturer? Well, you probably don’t want an Apple Macintosh for day trading, because it’s possible that not all the software packages you’ll need will be Mac-compatible. If you are one of those die-hard Mac heads, though, be sure to ask brokers and software vendors about compatibility. Other than that, it doesn’t matter much.

See it on the big screen

Do yourself a favor and spend money on a big flat-screen monitor, at least 19 inches on the diagonal, so that you can see what’s happening in the markets. If you need to look at more than one window at once, say to see charts and Level II quotes at the same time, consider using two or more monitors hooked to the same PC. That way, you’ll have a clear view of necessary data. (Most traders work with at least two monitors, because the information they need is too valuable.)

Connecting to the Internet

If you are day trading, you should hook up to the Internet with as much bandwidth as possible — at least a 1.5/256 DSL line. This means that you can download data at 1500 kilobits per second while uploading at 256 kilobits per second. Your Internet service provider might charge more for faster performance, and most day traders will find the price to be worth it. If prices are changing quickly, a delay of half a second can be costly.

A great source of information about the performance of different broadband Internet providers is Broadband Reports, www.broadbandreports.com.

Invest in a firewall and virus protection for your trading PC, but be careful how you do it. Some software will protect your system at the expense of a slow data feed, which will hurt your trading execution. If you decide to go naked — operate without a firewall or virus scanner in order to maintain optimal speed — be sure to have a second computer at the ready. When you set your virus scanner, be sure that any automatic downloads or background scans take place after market hours, so that they can’t slow you down.

Strangely enough, a phone is optional these days. You will rarely if ever need to place a trading-related call.

The department of redundancy department

When you’re day trading, you are intentionally looking at volatile markets and fast-moving securities, because that’s where you’ll have the most opportunity to make money in a short time. You may very well be leveraged, either through the use of borrowed money or by trading securities with built-in leverage, such as futures. If you’re in a position that moves against you and you can’t get out, you’re sunk.

It’s bad enough if you can’t get out because the markets are melting down because of some kind of global catastrophe. But suppose you can’t get out because the batteries in your wireless mouse have died and you can’t find new ones? What if you spill pop and short out your keyboard — or your PC? What if the developer building a McMansion next door accidentally knocks out your phone line and your DSL service? At a minimum, have a cellular phone charged and ready to go so that you can execute trades by phone. All these little workaday calamities have happened to me — and trust me, they are downright annoying if you aren’t trading. If you are, they can be ruinous. If you are serious about making money as a day trader, build in redundant systems as much as possible:
  • If it’s available in your area, subscribe to two Internet service providers, one cable and one DSL. When one goes out, you can switch.
  • Have two computers that are duplicates of each other, so that you can swap them out if one goes down.
  • Keep extra supplies on hand: extra batteries, extra keyboard, and extra mouse. You want to be able to react quickly when things go wrong. These are all cheap to keep in inventory, too, because the computer makers give keyboards and mice away with every new PC.
  • Consider investing in an uninterruptible power supply (UPS) backup for your PC, so that if the power goes down, your computer will stay up. You don’t need a backup generator, though — unless you think that you’d still want to trade after your town was devastated by an earthquake or a hurricane. (Of course, it’s those crises that create opportunities!)
  • Finally, back up your computer regularly. You can do it online through Mozy (www.mozy.com) or through a backup drive connected to your PC. Most backup systems can be set up to work automatically, but don’t do it during trading hours or it will slow you down.

Taking a Trip to a Trading Arcade

Don’t want to set up your own office? Not ready to commit to two Internet lines, three PCs, and four monitors? Worried you’ll be bored and lonely working alone at home? Consider trying a trading arcade. These are offices where day traders rent desk space to trade. Some provide additional services along with the real estate, such as training, coaching, and even loans of trading capital. Some charge a flat weekly or monthly fee, some offer services on an a lacarte basis, and others take a share of your trading profits.

Although trading arcades are less popular than they were a decade ago, they still exist in many major cities. To find them, you can do an Internet search on trading arcade or trading room and your town’s name. You are more likely to find one if you live near a city with major exchanges that are phasing out floor trading — namely, New York and Chicago.

Before choosing an arcade, find out about its fees and services. Talk to other traders to see what they like and dislike about the operation. And keep in mind that the firm may want to check you out.

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