Day Trading

admin — Fri, 12 Dec 2008 19:48:17 +0000

Investing as a day trader

These investors are buying and selling the instrument within a day and at the end of the day they usually close their positions. A day traders daily executed trades depends on his trading strategy. It is possible that a day trader executes only one trade a day, but he can make dozens of trades, too. A day trader usually uses a leverage, so the daily movements of the instruments can generate huge losses and gains for them. Trading as a day trader is difficult, because the news have a great impact on the instruments price. Several statistical analyses determined that about 80-90% of day traders loose their money or do not generate enough profit to pay the transaction costs.

Scalpers are those day traders, who do a lot of trades a day to get profit from the bid-ask spread. Scalpers usually hold their instruments for a very short time, sometimes only for minutes or for seconds. The scalper executes the trades very quickly, sometimes it takes only milliseconds to open or close a position. These investors realize their small profit because of risk decreasing (closed positions does not have any risk). Their gains are very small, but the end of the day these small gains together can add up to a large gain.

Market maker companies are doing the same thing as scalpers. They do benefit from the spread. For example, the market maker company offers a price of eurodollar at 1,5684-89 to their clients. The company gets a price of eurodollar at the same time at 1,5686,5-87,5. So when te client buys eurodollar at this time he must pay 1,5689 and the company can buy at this time for 1,56875. So the market maker earns at this transaction 2,5 points when he can pass the seleced instrument.

News trading is another type of day trading. The basic strategy is that the investor buys the stock when good news appear and the investor short sells the stock when bad news appear. The problem with this trading srategy is that many investors estimates and forecasts influence the price of the stock. Before the news the stocks price move strongly in one directon, because of the heavy buying (or selling) of the stock. When the news appear, the price of the stock does not move so much when estimates are correct. So the day trader can not split profit (or not enough to cover the transaction costs) from the movement of the price of the stock. When estimates are incorrect then the trend of the price of the equity can change direction or go on the same direction hardly. In this situation when the investor is “on the right side” of the market he can gain money.

Market maker or an ECN?

admin — Fri, 12 Dec 2008 19:33:08 +0000

Investing online through a
Market maker or an ECN

Online investment can be made through two different types of brokers: market makers and ECNs (Electronic Communicating Network). Before starting to trade, the investor must determine which type of broker is the best for him. Both of these type of brokers have several advantages and disadvantages.

Trading through an ECN

First of all, the beginner investor must understand what is an Electronic Communicating Network. ECNs are the connection between market participants (for example: individual investors, banks or other market makers). The ECN displays the incoming offers and bids of the market participants for other market participants. Because of this the market is determined by them, so there is no fixed spread (spread is the difference between bid and ask price).

ECNs charge commission for each trade made through their trading platform. The commissions depend on the ECN. Mostly the charges are dipping when the traded amount is more at a fixed time period.

ECNs usually have better bid/ask prices, because the incoming offers come from more market participants. The prices are more volatile, because they are influenced by more trader. This can be an advantage for scalpers. ECNs pass all of the orders for someone else, so they are not motivated to trade against the market participant.

On the other hand, electronic communicating networks usually do not have a user-friendly trading platform (developing a user friendly trading platform has got huge costs). The price of the instruments are more volatile, so to determine a stop-loss is more difficult. The ECN charges for all of the exercised transaction.

Trading through a market maker

Market makers have got own trading platforms, too. But they set their instruments prices, which are mostly following the prices of the instrument. The market maker company must make a deal with the market participant on his quoted price. These companies stay on both side of the market, so when the investor is buying an instrument, the market maker must sell it and when the investor is selling an instrument, the market maker must buy it. These companies offer a larger spread for the investors and they benefit from the spread.

Market makers have usually a very user-friendly tradnig platform. The quoted prices of the instruments are less volatile, which is more confident for beginner investors. A market maker company is more often used for long time investments, not for active day trading.

Market makers must exercise a trade on their quoted price of an instrument, so there is a clear conflict of interest in order execution between the trader and the market maker company. So they may trade against the market participant. Their quoted price can be different from other market makers or ECNs. When the investor is using stop-loss, the market maker company can move the price of the instrument to run out the investors position. So the market participants trade generates loss for himself and the market maker generates profit for himself. An other typical feature of a market maker company is the so called “freezing”. When news are released, the prices of the instruments are going to be extremly volatile. During this time the investor can not trade.