On the seminar (or more precisely: “marketing seminar”), the guy who sell the program tell you and show you how easy it is to make money from the market from Day Trading. Although generally is quite true that everybody that can click a mouse could possibly make profit on this most volatile type of trading, at the end the key to success is not the “how” but the “why”… And below is some of them…

Three Possible Reasons Why Day Trading or E-minis Might NOT Be For You

What mention below are actually in general also valid to all kind of sharetrading/stocktrading on the market. But due to the nature of day trading (fast, real time, high leverage) all of the factors below become much more hurdle for this trading scheme.

1. If you a macho man or macho girl who never let anybody beat you – this is not for you.

Why did I do that, nooo...

What will you do if someone beat you and take the money from you ? The chance is you will re-consolidate, get another weapon or ammunition, and get even – this is exactly why day trading is not for you.

In a live and continuous environment, although receiving a valid and good buy signal, you can still be losing. And as you want to get even, you will just get back to the trade, ignoring your own system, as if the market is scare of you and willing to do whatever you say. If the result is still bad, you will have even triple motivation to get even. But if the result is now as you expect, then it become even very very dangerous situation as you think that you can beat the market when you want to.

The fact is, all the trade are basically random. Yes, with good system, in long term the number of losing trade will be outnumber by profitable trade  -or- your profitable trade give you much more profit percentage than losing percentage (e.g: every trade  has average profit of 20% but every loss only a mere 10% loss – then even it’s 50-50, you are still ahead)

So, if you really want to do successful Day Trading / E-minis / similar (actually share trading in general – but much-much worst in day trading), you need to be just cool even somebody take your money out right….

2. If You Cannot Lose Your Trading Account – this is not for you

Most of the trader probably will start maybe $5000 trading account. If this trading account is your mortgage for next month that you cannot lose it – then just forget it. When you start, whatever you deposit on the trading account, although you would prefer it, but you should be able to lose it all without a blink in your eyes.

"Why..why..me?"

Losing money should be a normal event. Yes, we don;t want it more than getting money, but losing money should not be a biggie for you when you want to do day trading. This is really different say if you invest in diversity portfolio and loss $20,000 due to market crash because of Global Financial Crisis, at least you can reason that everybody experience it and it’s not really your fault.

The feeling is quite different.  Losing $1000 in 10 minutes under your very eyes will give you some wondering: why did you take the trade? whether the system is good or not? (maybe you get ripped off), why you are so unlucky, why other people so lucky, etc, etc… This wild imagination will turn you into total failure in very short term if you cannot stand it – especially with the money that you cannot afford to lose.

If you are prepared to lose the whole trading account, having lost $1000, will just make you say to yourself “bad result, but don’t worry still got $4000 – tomorrow would be better” – at least on more positive spirit. And yes, if the trading system is really good on longer term, it will give distinctive result.

3. If you are not a discipline person or impatient – this is not for you

Day trading, even the time frame is  just a matters or minutes, need a lot of discipline and patience. Discipline to not or to take the trade according the trading plan and stick to it until the end. Patience to not just exit the profitable trade before hitting the profit target, or not exist a loss trade before hit stop loss target.

Some time you plan to target $200 profit, the trade has gone your way and now at $100 profit. Impatience people will just take $100 – you cannot get poor with any amount of profit they say. But remember the profit target is part of the system. For example the system is expected to have 4 x$200 profitable trade and 3 x $150 losing trade on average, giving you $350 profit in a day. But if your profit is only $100, $100,$100, $50, then the net result is minus $100 although you win more than lose.  If this happen, then you start have doubt on the system or your “luckyness” or something else where the real root cause is your lack of discipline and patience.

Well, that’s a start before you embrace your day trading career….

Trading Computer is Not Gaming Computer

While it’s natural that everybody wants the best , but one thing to remember that the requirement for trading computer is not that high compare to the computer for playing games.

Computer for games have to do a lot simultaneous 3D simulation (hence calculation) while producing detail audio effect and special efffect on the background with someone hitting the mouse or keyboard at 100km per hour (read: very fast). This is even harder requirement for those 3D technical computing for engineering, i.e: Autocad, or Mathematics.

Trading computer while still need to display real time data, it only does 2D graphics display and without the sound effect and the user only give execution maybe once every minute tops. So much much lower requirement of those gamers.

So, if you are a gamers and want to do trading as well, your computer is already twice as good. But if your son is a gamer, do NOT borrow the computer because you don’t know other stuff running behind. Get yourself a decent trading computer describe below.

The Ingredients of Trading Computer

Multi Monitor for Trading

Below is the guidelines that you might use for your trading need. Remember that I don’t know the specific requirement of your trading platform, so always refer to their user manual for final check. But here is the mainstream:

1. You need Multi Monitor: minimum 2 (two) of 19″ monitor. Widescreen monitor is better as the graph is usualy follow the aspect ratio of wide screen. Three (3) monitor is a little bit excessive as you only want to run: your trading execution platform, your charting software and internet browser (for checking news). Recommended: 2 LCD monitors of 22-24 inch display (widescreen). You don’t need the fastest one either (the one with lowest refresh rate). 3 computer? maybe no. You will find bracket for 3 monitors probably more expensive than the monitor itself. Just buy 2 and place it side by side on your table. No bracket necessary.
2. You need a lot of memory/RAM: while some recommending 2GB or better, I would say go broke and get the maximum. For 32-bit operating system: Windows XP, Vista 32-bit, Windows 7 32bit and similar the maximum is 4GB of memory (usually the system can use less than this). So aim for this. If you are with 64-bit operating system, go for at least 6GB. If you need some powerful item, memory is the one. Trading computer will have a lot of real time data that need to be stored somewhere. RAM is the best place rather than slower hard drive.
3. The CPU and its speed is not crucial: go for multiple core: core duo, quad core, I5 core or I7 core depends on your budget.
4. Hard disk: 500GB will last for good few years, so any additional just extra for your downloaded movie or song (nothing to do with trading)
5. Graphics Card: you don’t need the fastest high end graphics card. A cheap card that support dual monitor with at least 512MB memory will be more than enough.
6. You HAVE TO have backup broadband connection. Your main connection should be at least ADSL or cable broadband, but additionally you need to have backup connection ready to connect within 30 seconds. While internet connection is getting robust these days, some fault is still possible, so if it’s gone, you need to be able to re-connect to internet within 30s and just hope nothing really significant happened. Recommended: those mobile 3G broadband connection: even 1 GB plan per month should be enough.
7. Do not use wireless router for your network connection. Repeat: DO NOT use wireless network connection between your computer and your router/modem. I cannot stress enough. Ask for good CAT6 Ethernet cable. Using wireless connection not only give you additional delay as the computer and the router need to do hand shacking in encryption environment, but also make you prone to disturbance from your environment. For example if your geek neighbor decided to experiment with new wi-fi equipment, you are prone for any disturbance. Using cable eliminate this risk very very significantly.
8. Do not use wireless keyboard nor mouse. While it’s fancy, using wireless keyboard/mouse add to your latency time (your realtime-ness) and put additional burden for your computer to maintain the connection. Recommended: wired keyboard and wired laser optical mouse.
9. Invest on Uninterrupted Power Supply(UPS). This days this item you can get less than $100. Even the cheapest is enough. Connect your router and computer and monitor on UPS, if there is power interruption, at least you can immediately exit from the trade before the battery run out a few minutes later.
10. Backup Computer: a small netbook/laptop or even old computer will do. The idea is just to have your execution platform there (the charting program is not necessary). Always have it on and ready when you are trading. So if your main computer for some reason decide to crash, your old computer will be your savior, at least you can exit straight away. You need to just 1 click from login to your execution platform on your old computer.
11. Do not run any unnecessary program: your Yahoo Messenger, Twitter client or open Facebook account. Windows Update, Antivirus Update and other automatic update need to be pause during your trading. This is not only a distraction to your trading, it can occupy some of the bandwidth of your internet connection. If you want some gentle music, play it with your CD player/ipod, don’t let your computer play it – it require decompressing the data coding that require a lot of computing power.

I am hoping the guidelines above can save you thousands of dollar that you probably better use it for trading capital. Tell your computer shop that you know what you one. Check at least Ebay to see the current rough price. I would say fulfilling criteria above, you can get a decent trading computer with 2 monitor at below A$1500. Yes, not that expensive, really.

Nov 2009 price: $199 each for monitor (AOC 24″), 1.5TB HDD+Windows7 $229 , intel i5 750 cpu+gigabyte p55-ud3+4gb corsair for i5 1600c9+logitech mx revolution $590,800VA UPS $85, Powercolor HD4650 1GB Graphics card dual monitor $53 and plus casing+keyboard+cd. (All price is in Australian dollar, price from http://fluidtek.com.au.)

(I am sorry, I am not that familiar with Mac computer. But you can hopefully still get some kind of picture about it. As far as I know, only some popular trading software fully support Mac – check your software provider first)

Should you have any question , feel free to ask on comment section below.

How About Laptop for Trading Computer?

While technically a good laptop is also suitable for trading, but you will get the bank for your buck if you aim for desktop computer. Beside laptop suffers the scalability problem (you cannot or very difficult to upgrade in later day). And one big non technical problem: since laptop is portable, user tend to stuff everything that can be install and save into the laptop render it stuffed and sluggish for excellent trading computer.

Until then, Happy Day Trading ! See you in a trading room !

Margin: a distance from the edge

In printing/word processor, you can see the similar resemblances in understanding “margin”. Margin is a vacant space left as a ‘border’ between the edge of the paper and the content. That is also somehow similar to “margin” in trading, it’s a space between the end of your account and the real profit.

Margin Lending / Margin Loan

Margin Lending or Margin Loan is the most popular form for of borrowing money to invest. It’s one of the easiest loan to be granted by a lender. Hence, it’s also the easiest for trader to get a leverage on his/her account. Usually margin lending / margin loan is only available for stock / share.

The way it works is simple. For every stock, the lender will define a percentage that they want to lend money on. For example: say for BHP stock you can get 75% lending (different percentage for different stock), means if the stock price is $30 and you want to buy 1000 of them (total 1000x$30 = $30k), they will lend you 75% of 30k = $22.5k, and you need to come up with the rest ($7.5k).

Margin Loan Illustration

This 75% is the maximum percentage. So if the day after you buy, the stock go down to $28, then the total value is only $28k. You have borrowed $22.5k, hence your equity is $28k – $22k = $5.5k. Then from the original $30k, your 5.5k is only 18%, means they lend you $81.7% which is bigger than 75% maximum. Unfortunately in this situation you will get “margin call” to ask you to deposit at least another $2k to make the ratio back to 75%.

Furthermore, you need to pay the interest of this loan. If the interest rate is 8% p.a, then the total interest you need to pay is 8% x $22k = 1.76k per year or $147 per month

To illustrate (see picture above), imagine a margin loan is like a bucket. Based on the percentage, the lender put their money into the bucket, and you put your money in the bucket. The rule is that the bucket need to be full all the time. Hence if the price go down (the red tap above opens), your part of the money will be drained to the market and you have to keep the bucket full by deposit more money. If the price go up, the market will pour the money into the bucket and the money will drip into your ‘profit’ bucket.

Margin Trading

The other form of lending for trading is what we call “margin trading”. This is the lending where the lender will lend you 100% of the amount. But they will ask some percentage as collateral or security deposit or “margin”. This kind of trading usually available on high leverage trading such index trading / e-minis or forex trading or commodity trading.

Let’s use the same example above. You want to buy 100 share of BHP with $30 each. And say, the lender ask you to provide 25% margin. Then the lender come up with full $30k, and you put 7.5k in the account as collateral.

Margin Trading Illustration

So if the price again goes down $2 the next day, you need to top up your account by $2k just exactly like the margin lending.

The difference is on the interest. Since you borrow the whole amount, then you will pay 8% x $30k = $2.4k per year or $200 per month

To illustrate (see picture on the right), also imagine a margin trading is like a bucket. Based on the percentage, you will be asked to provide your money as collateral and the lender just sit on it. Then the lender put their money to fill the whole bucket. Again, the rule is that the bucket need to be full all the time. Hence if the price go down (the red tap opens), you need to replace the lender money straight away and maintain the bucket full. If the price go up, the market will pour the money into the bucket and the money will also drip into your ‘profit’ bucket.

Usually if the account is used for day trading (buy and sell within the same day – no overnight position), the trader does not need to pay interest, just the collateral. This is one of the factor why this kind of trading such as e-minis trading become very popular (Got high leverage without have to pay the interest).

Conclusion

On both margin loan and margin trading, the borrower (you) have to come up with additional money if the price go down to maintain the ratio. If the price go up, the excess money become the profit.

The only difference between margin lending and margin trading is that the borrower (you) will have to pay more interest on margin trading since the lender lent the whole amount (100%)

What is ‘instrument for trading’ ? For example: a car dealer buys cars from car company and sells to retail customer at  higher price for their profit. Hence the instrument for this trading is car. So, “instrument” is just something that will be sold our bought during the trading activity.

The most common instrument in today’s financial market will include:

Some trading Instruments

1. Stock / Share
   ‘Stock’ or ‘Share’ is a piece of a company. If a company has issued a total of 10,000 shares, then if you own 1000 shares, you own 10% of that company. If the company is very profitable and growing very strong, then the value of the company will go up, therefore the share or stock of the company will go higher in price as well.

   Of course, there are also other external factors that will contribute the price movement, for example: market sentiment, economic condition, extraordinary event, announcement, etc.For public company, you can buy and sell a stock via the stock-exchange.

   Read “How Stock/Share Produces Profit for Trader” for more detail.

2. Bond
   ‘Bond’ is certificate of a debt. For example: If you buy a bond from government, basically you lend your money to government for certain period of time. In return the government will pay interest regularly and at the end of the period will return the total amount. If the interest rate is going down, the value of the bond  will go up, if the interest rate is going up, the value of the bond go down.

   A company can also issue a bond to borrow money from public. But when we are talking about bond, most of the time it will refer to government bond.

   Read “How Bond Produces Profit for Trader” (to be released) for more detail.

3. Derivative
   “Derivative” is basically a financial contract over an asset. So the one being traded is not the asset itself, but a contract related to the asset.
   1. Option
      Option is a contract that give the buyer a right to buy an asset (this option named “Call Option”) -or- the right to sell an asset (this option named “put option”) at certain price (called ‘strike price’). It’s a right but not obligation. The right will cease after certain period (usually a few months).
      General public and buy and sell option via the stock exchange.

      Read “How Option Produces Profit for Trader” for more detail.

   2. CFD (Contract For Difference) - Not available inside US
      CFD is a contract between trader and CFD provider to buy or sell a stock and only pay as low as 5% of the price as collateral or margin. The rest of the price will be covered by the CFD provider in a form of lending and the trader will need to pay some interest.

      For example: Microsoft share is at $25. to buy 10,000 share will require $250,000. But with CFD, we only need as low as $12,500 to buy 10,000 contract (1 contract=1 share). With 6.5% p.a interest rate, the trader need to pay 6.5% x $250,000 = $16,250 p.a or $1,354 monthly.

      If within 3 months the share increase by $4, then the profit will be $4 x 10,000 share = $40,000. The interest cost is 3months x $1354 = $4062. Net profit = $35,938. The total capital required is $12,500 (margin) + $4062 interest = $16,562. Hence the proceed is $35,938/$16,562=217% gain.

      The comparable product for US Citizen is what is called “Portfolio Margining” where just by buying the put option, the lender will lend 100% of the value of the stock.

      Read “How CFD Produces Profit for Trader” (to be released) for more detail.

   3. Warrant, LEAPS , LEPO
      Warrant is similar to option, only the maturity date is very long (up to 5 years) and the one can issue a warrant is only a company or a bank.

      LEAPS (Long-Term Equity Anticipations Securities) and LEPO (Low Exercise Price Option) is a variation of options:
      LEAPS: the period is very long (up to 2-3 years – similar to warrant)
      LEPO: similar to call option with very low strike price (e.g: 1 cent) and both the buyer and writer are paying only small fraction of the price.

4. Futures
   Technically, “future contract” is a derivative because it does not trade directly the asset.
   1. Commodity Future
      “Commodity Future” is a contract that give the buyer a right to buy a real-tangible goods (e.g: gold, oil, silver, soy bean, iron ore, etc) at certain price in the date in the future.
      For example: a food company that require soy bean as one of their ingredient will know that by December they need 5 ton of soy bean. Let assume today is still July. Does the company just do nothing and wait until near December? How if there is a shortage and they cannot get the ingredient by December? Of course that’s not acceptable. Hence the company can buy 5 future contract where each of the contract allow the company to buy 1 ton of soy bean at certain price  to be delivered in December. So, at this stage no soy bean is exchange hand, just the right.

      On the other hand, for the seller of the contract (i.e: the farmer), they know how much they can produce (their capacity) and also know that the product have to be sold before it got rotten. Hence selling future contract is one way to make sure that they will have certain assurance that the product already has a buyer.

      Read “How Commodity Future Produces Profit for Trader” (to be released) for more detail.

   2. Index Future
      “Index” is a sum of stock price from a number of companies. For example: Dow Jones Industrial Index is combination of stock price from 30 big US companies. S&P500 index on the other hand is combination of price of stock from 500 companies.For example: let say we are now in July and the S&P500 is now at 900 point and every point of future contract “Mini S&P500″ for December is $70. Then if a trader expect the S&P500 will go up before December, he/she will buy this index future contract for $63,000 per contract (900 x $70). If the index in December become 1100, then he will received $70 x 1100 = $77,000 and pocketed $14,000 profit.

      Furthermore, the trader did not actually need the whole $63,000 to start with. The trader only need to put a collateral or margin as low as $5,000 in order to execute the trade in example above which make it very attractive.

      Read “How Index Future Produces Profit for Trader” (to be released) for more detail.

5. Foreign Exchange (Forex)
   Foreign Exchange (Forex) is a conversion between a currency to other currency. For example: 1 Australian Dollar converts to 80c US Dollar. If you want A$10,000 then you need US$8,000 to buy it. If a few week later the the Australian Dollar get stronger and A$1 can buy 90c US Dollar, then the A$10,000 can be converted back to US$9,000 -or- US$1000 profit (less commission)The exchange rate is always between 2 currencies (pair) and it is heavily depended to the macro economy condition of the 2 countries as well as the supply and demand of each currency

   Read “How Foreign Exchange Produces Profit for Trader” (to be released) for more detail.

Each instrument above has unique characteristics. The reason we need to know all of them is not because you want to trade all of them, but mainly for you to choose which instrument is suitable for you.

Next read suggestion: “How The Price Move in Market“