Imagine a market that is open 24 hours a day, where you can buy and sell ownership in the world's largest companies, gamble on the future price of raw materials you may never see or use, or move millions of dollars between countries for international commerce. Welcome to the intriguing and often mysterious world of the global financial market.
Once the private domain of a select group of corporations, a number of innovative companies are using the phenominal growth in personal computing power and the Internet to provide direct access to this market for a new breed of investor, the do-it- yourself on-line trader. Some experts claim that people trading in cyberspace with the click of a mouse from the comfort of home signals the advent of the financial markets of the 21st century. Maybe, maybe not. Just like any other job or hobby, only a small percentage of people have the right stuff to be a successful trader. For those who do, trading can be very exciting and rewarding.
Stephanie Clark is 30-something former secretary with Oppenheimer & Co. who grew tired of watching men make the money while she answered the phones. She quit and became a full-time self-employed NASDAQ SOES trader. In September of 1996, she cleared $25,000; in October, $60,000. She is, of course, the exception rather than the rule. Nevertheless, there are other Stephanie Clarks out there with such undiscovered talent. You might be one of them!
Traders, like all other merchants, "buy low, sell high" to make money. They buy and sell a wide variety of financial products such as stocks, commodities and currencies. For example, suppose you buy 1 lot of 62,500 British Pounds for US$1.6950 per Pound because you believe the price will rise. If the price does indeed rise to, say, $1.6990 a few hours later, you can then sell your lot for a $250 profit. If, however, the price falls to $1.6910 and you decide to sell your lot because you believe the price will not recover soon, you lose $250.
Unlike other merchants, the trader can make money when prices are falling as well as rising. Suppose that, in our previous example, you anticipated the price decline from $1.6950 to $1.6910 per Pound. You can borrow 1 lot of British Pounds from your broker and sell them for $1.6950 each. You now owe your broker 62,500 Pounds. If price does indeed decline to $1.6910 a few hours later, you then buy Pounds at the lower price to pay your broker back and pocket $250.
The trick, of course, is to predict correctly, more often than not, which direction price is headed to yield a profit. Most traders use the art and science of technical analysis to predict price movement. There are no holy grails, secret elixirs or magic bullets. From Japanese candlestick charts to Elliott waves, your trading system will often be wrong. That's OK, as long as you make more money when your trading system is right than you lose when your trading system is wrong.
For your trading system to be profitable, it must be consistent and personal. For example, system "A" may yield higher long- term profit than system "B", but "A" may run up uncomfortably large short-term losses to attain that long-term profit; losses that could wipe out your trading account if you do not have an adequate cash reserve.
Beware of trading systems that claim spectacular profits! The author tested one system that predicted $23,630 in profit over 55 trading days in standard 20/20 hindsight testing. After including our broker's 10 point buy-sell margin and setting a 50 point maximum loss limit, profit plummeted to under $5,000. We then traded 20 days into the future and lost 10% of our money. Past performance does not always predict future performance. Test before you invest!
Patience, discipline, self-confidence and self-control are as important as your trading system. Successful traders have mastered the psychology of overcoming adversity, fighting negative impulses and controlling debilitating emotions. In the first 2 days of October, for example, Clark made $14,000; during the next 3 days she lost $12,500. She took some time off and went shopping. On her next day back, she made $9,000. Be sure you can handle the daily emotional swings between agony and ecstasy.
Your trading lifestyle can be as intense or as relaxed as you want. Clark spends each day constantly looking for small movements in stock prices from which she can profit, and executes 1,000 share trades as often as 30 times an hour for hours on end. Sometimes she wants to take a bathroom break but does not in case the market moves against her while she is gone. She works hard for her money! The currency markets move at a more leisurely pace. There are only four major foreign currencies to watch, and positions are often held for several hours to yield maximum profit. While waiting, you can do other things, such as read, write, talk on the phone, or relax and listen to music. Just stay within earshot of your computer because it could signal you to buy or sell at any time.
Trading is a job whose hours vary with the financial product you prefer to trade and the time zone in which you live. The NASDAQ stock exchange opens at 9:30AM and closes at 4:00 PM EST; if you live on the west coast, you must be wide awake from 6:30 AM to 1:00 PM. With 24 time zones, stock and commodity trading is always going on somewhere in the world. Foreign currency also trades 24 hours a day, but the market is most active between 2:00 AM and 2:00 PM EST, ideal hours for night owls and people who want to keep their day job (for a little while, anyway, just in case).
On-line traders can live and work just about anywhere, in large cities or small towns, in the mountains or on the beach. Clark drives to Block Trading, her broker, every day to work. But you can also work from home; all you need is a radio receiver or satellite dish to obtain continuous real-time market quotations, a personal computer and modem, and a telephone line to your broker. With the magic of Internet, your broker in New York, London, Tokyo, or Frankfurt is just a local phone call away.
Traders, like many merchants, must buy and sell through brokers at the best possible price to maximize their odds of making money. There are 4 types of brokers: full-service, discount, deep discount, and flat-fee. Traditional full-service brokers, who spend lots of time researching investment opportunities and helping clients develop their long-term financial goals, must charge a relatively high fee for their services, typically $385 for 500 shares of a $40 stock, increasing your "round-trip" (buy & sell) stock price $1.54 per share. At the other end of the spectrum, the flat-fee broker who simply executes your order typically charges $25 for each trade, increasing your round- trip stock price just $0.10 per share. If the stock's price is only fluctuating $1.00 per share, the broker's fee in this example means the difference between protential profit and guaranteed loss. For obvious reasons, most traders choose flat-fee brokers.
In addition to a flat-fee commission, traders also look for the smallest buy-sell price difference. Brokers who advertise a low commission may be masking a high buy-sell price difference that can kill your odds of profitable trading.
To buy and sell stocks, most traders choose brokers who use the NASDAQ Small-Order Excution System (SOES). Created in 1984 to ensure better access for small investors, SOES forces the established market makers to trade up to 1,000 shares at their quoted bid prices. SOES essentially puts you in direct competition with the pros for stocks, and many pros don't like the competition. "SOES Bandit" is the epithet conferred by the establishment who want to protect their turf and their profits.
To buy and sell currencies, most traders choose brokers who are plugged into the Gobal Interbank Currency Market, a network of computers linking banks and other financial institutions together. Unlike NASDAQ, the Interbank network operates virtually around the clock in what is by far the single largest financial market in the world. On a typical day, roughly $1 trillion change hands around the world. You get direct access to bank rates. Some brokers do not charge a commission; they make their money from a cut of the bank's buy-sell price spread, typically 10 points. Trading one lot (62,500) of British Pounds, for example, will cost you $62.50 ($6.25 per point).
In addition to broker fees, speed of order execution can also mean the difference between profit and loss because prices are always on the move, but not necessarily in your favor. Both NASDAQ and Interbank execute your orders in about 2 seconds. All other exchanges are open outcry auctions, where people instead of computers negotiate each deal. Even though you may use your PC to send your order to your broker's representative on the trading floor, it will take several minutes for that person to execute your order, during which time the price could change dramatically.
Finally, you must consider your cash resources in planning your debut as a trader. You can open a stock trading account for as little as $25,000. Your broker only requires 50% down to buy or sell, doubling your trading power to $50,000. Stocks are traded in 200, 500, or 1,000 share blocks. Clark has a $300,000 war chest, borrowed from a friend at 15% interest per year, that enables her to trade up to twelve 1,000 share blocks of stock worth $600,000 at any one time.
Commodity trading typically requires just 10% down. If wheat is $3.50 a bushel, for example, a contract to buy 5,000 bushes is $17,500 but the deposit is only $1,750. While you don't need to invest much, you do need nerve - and luck - to ride this financial rollercoaster. If a flood or drought damages the wheat crop and drives the price up $0.30 per bushel, your account will be credited $1,500. If, on the other hand, Russia announces a bumper crop and price falls $0.30 per bushel, you will have to fork over $1,500 immediately to cover the loss.
Aspiring traders of modest means can open a foreign currency trading account for as little as $5,000. It takes only $1,000 down to buy or sell one lot of British Pounds, Swiss Francs, German Marks, or Japanese Yen worth $100,000 or more.
A word of caution. While trading on margin with your broker multipies your buying power 2X to 100X, it also multiplies your liability by the same factor. You are responsible for the FULL FACE VALUE of your contracts at all times. Politics (war, embargoes, etc.) and weather (rain, drought, etc.) make commodity prices most unpredicable. The price of Microsoft stock or the British Pound is not likely to collapse suddenly, but if it does, you could owe your broker A LOT OF MONEY.
Money, education, daring and tenacity alone are not are not enough to assure your success as a trader. Only practice makes perfect. Unfortunately, trading is one endeavor where mistakes cost money... until now. For under $200, you can purchase a complete trading simulation system for your PC. One such system is Forex Trader, a foreign currency exchange simulator for your Windows 3.1 or Windows 95 PC. By using an extensive library of actual second-by-second price quotes on CD-ROM, Forex Trader provides you with essential hands-on trading experience without risking real money. Study past market behavior, test various technical analysis techniques and trading systems, buy and sell at realistic broker prices, and refine your money management strategy. Experience the thrill of sudden wealth and the agony of financial ruin. Make sure you have the right stuff to join the ranks of rich and famous traders.