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The Basics of Floor Trading
 

The Basics of Floor Trading

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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

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

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    The Basics of Floor Trading The Basics of Floor Trading Presentation Transcript

    • 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.
    • 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.
    • 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.
    • 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.
    • 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.
    • Market Forecasting
      • 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
    • Technical Analysis
      • 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.
    • Mechanics of pit trading
      • 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
    • Hand signals for Quantity
    • Recording Trades
      • 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
    • 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