—not only to enter your orders but also to do your analysis. There are severalaspects of a platform to consider.
Type of PlatformDoes the firm offer a downloadable version that highlights speed and accuracy?Does the firm have a browser-based platform as well? The Internet is still a ratherfragile network and may not be the most reliable means of conveying your orders,especially when it comes to critical periods when timing is most important orwhen you must be able to count on your orders being transmitted and executed.If there is some disruption in your online connection to the brokerage firm, istechnical support readily available to assist you with any questions? If you cannotuse the trading platform for some reason, is a trading desk available by phone totake care of your orders 24 hours a day during the trading week?Can the trading platform handle wireless trading? Finally, are there anycharges for using the platform or some of its features?
Ease of UseThe platform should be simple to understand and operate to facilitate the transmission of orders quickly. For the active trader, the firm’s platform should offermarket depth, which is the listing of a market’s most recent bids and offers.Check to see if you can place an order from the market depth screen. Customization is another important feature. What data do you want to see when you’retrading? Figure 6.1 illustrates the flexibility that Lind Xpress, a downloadableplatform, offers you as a trader.If you are looking at a chart or price quote, a platform may formulate the orderfor you so all you have to do is click “Buy” or “Sell.” Procedures to enter an ordershould be clear and easy, yet should have enough safeguards to reduce yourchances of making mistakes as you make your trades.
Market AccessTo which markets do the platforms provide access? Some platforms trade only selected electronic markets such as stock index futures or offer trading on only alimited number of exchanges. They may not take trades for open-outcry marketsor may not have the capability to trade options on futures.You want a trading platform that has the most flexibility to trade any marketyou want. You never know which markets you may want to trade next week, so
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FIGURE 6.1 Lind Xpress lets you customize screens to meet your unique trading needs.(Source: Lind-Waldock)
find out to which global exchanges the firm is connected. New, attractive contracts are being established all the time all around the world. If you see a tradingopportunity on an overseas exchange, your broker should be able to accommodate you and be there 24 hours a day during the trading week to facilitate tradingin those markets.
Simulated TradingOne of the most useful training tools to learn how to trade, how to use a tradingplatform, or how to test a trading system is simulated trading. Everything aboutthe trading is real except that you use so-called virtual money instead of realmoney.Although it cannot match the emotional involvement that characterizes realtrading, simulated trading helps you learn the mechanics of trading and becomefamiliar with the trading platform before you have to deal with the pressure oftrading real money in real trading situations. Depending on your knowledge oftrading and your skill level, it is like using a simulator to learn how to fly an airplane or drive a car before being placed in real—and possibly dangerous—situations. You enter trades, get fills, receive account statements, and so on just as anactive trader does and can learn from your mistakes without having to pay realmoney to gain the experience. Bear in mind, however, that when you first starttrading your knowledge level isn’t where it will be after a few years of experience.
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So don’t let a few successes or failures on the simulator be the sole determinant asto how you proceed. You may want to seek help or advice from the team of professional market strategists Lind-Waldock has on staff.
TRADING SUPPORT TOOLSYou might expect that a brokerage firm’s trading platform would have to be ableto handle your orders and provide you with a report of what you have done.That might be all you get from some limited-service firms. But when you paybrokerage commissions, you should expect more than just a trade executionand an accurate statement. Here are some other resources the brokerage firmshould provide.
Price QuotesTo keep up with the current status of the market, self-directed traders will probably need some type of price quotes updated on a regular basis. How much data youneed and how often you get it will depend on the type of trader you are and theamount of money you are willing to spend.Real-time streaming quotes are up-to-the-second prices updated continuouslyas prices change. Quote services usually report the last trade price, but some services also report bids and offers. Based on your level of trading activity, thesequotes usually involve exchange fees of $30 to $65 per month per exchange. If youwant to be an active intraday trader, you will probably need real-time quotes forthose markets you trade. In some cases, exchanges offer real-time quotes at nocharge to encourage trading in a market, typically for a new contract or for an areathat the exchange is promoting.Real-time delayed quotes provide the same information as real-time quotesbut are delayed by 10 to 30 minutes. Obviously, this time lag will not be suitable forthe active day trader. However, for the trader whose approach is not so close tothe market, delayed quotes may be sufficient, and currently they do not have exchange fees as the real-time quotes do.Snapshot quotes are live quotes but are available on a refresh basis; they donot stream. Like delayed quotes, snapshot quotes may be all you need.End-of-day quotes provide the open, high, low, and close prices for each day, afunction that used to be much simpler when markets only had regular tradinghours during a day session and did not trade almost around the clock as manymarkets do now. This is a basic quote service used for some trading systems thatprovide only one signal based on a day’s trading activity.A brokerage service should offer current price quotes for a trade you are contemplating or for a market in which you have a position. In some cases, you receive a specific number of free quotes during a month and then pay on a per-quote
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basis after that. Active traders may receive quotes on a sliding fee basis, depending on their level of activity. Check with your broker for details on quote availability and pricing.A broker may provide all of the futures price quotes you need, but sometraders prefer to subscribe to services from data vendors because they can get equities quotes as well as futures quotes or because the vendor package includesmore sophisticated or specialized charting or analytical capabilities. These datapackages may be quite expensive, and you need to weigh their cost versus theirpotential benefit to you in your trading.
ChartsMany traders use charts of some type to show them the price history of a market,whether on a short-term basis for the day trader or on a long-term basis for the position trader. Traders need charts to study what the market has done in the past insimilar situations so they can attempt to discover trading signals and projectedtargets based on what their analysis of the past suggests for the future.In the past, weekly printed charts were sufficient, but in today’s fast-movingmarkets, most charting services are offered online in a variety of formats. Theymay allow the user to produce monthly, weekly, daily, or intraday charts of different types for many different time frames with a click or two on a computer.Your firm should be able to offer you various levels of charting that will fit yourneeds.
Analytical SoftwareAnalytical software provides a wide array of charts as well as a number of studiesand technical indicators and perhaps even some means to test the performance ofa trading method you develop. The studies generally range from simple moving averages to a series of momentum indicators such as stochastics or relative strength.Many are based on the same input—price—so there is a danger of putting toomuch weight on signals that are similar.The system-testing capability, like simulated trading, gives you an opportunity to try out ideas in market situations without having to use real money totest a theory. You can test a variety of parameters to arrive at the best set foryour risk/reward profile, but you have to be wary about overoptimizing, whichcan result in excellent performance on past data but then may not hold up inforward trading.
News, Reports, StatisticsAlthough prices respond to technical signals on charts, the underlying drivingforce for any significant market movement comes from fundamentals such as
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supply and demand. Often, these are revealed in government reports and statistics that have scheduled release dates. You need to be aware of these key datesand the numbers that traders expect to see in the reports, so you should havea source for a calendar of reports, last trading days, contract expirations, andthe like.In addition, an unexpected event can also cause extreme price fluctuations,especially in the short term, and you need to have a news source that can keep youapprised of these events in a timely manner so you can analyze how you mightwant to position yourself—or perhaps more important, not position yourself—in amarket in a volatile environment. By the time you read about a market-movingevent in the newspaper, it may be too late, and television news reports may be toobrief and shallow to help you as a trader, assuming the event has caught the newsdepartment’s attention to even be mentioned.News services that can provide all of this information are available online andmay be provided by a broker or as an add-on service for a fee. Like price quotes,the cost usually depends on whether you receive the news reports real-time or delayed and whether you need a specialized service that covers a particular marketin depth.
Research Reports, Background InformationBrokerage firms offer research information of all types, from one-paragraph market summaries to white paper types of reports that include more details than mosttraders will ever want. If you are making your own trading decisions, you willwant to have access to a variety of research sources, ranging from the end-of-dayreports to the institutional-quality research that can give you insights into a market that may not be widely known.A brokerage firm should give you reports not only on current market situations but also on trading strategies, how to analyze a market, how to trade, andother educational topics that will be helpful to traders of all skill levels.
Trading RecommendationsAs a self-directed trader, you may not need anyone else’s advice on what or how totrade. Even if you don’t plan to use the recommendations, it can be helpful to listen to what a broker or analyst is suggesting for several reasons:• Understand what other traders are thinking and how they might be reacting tothe same type of market developments you are watching.• Compare someone else’s trading decisions with your own.• Maybe even take a recommended trade because the analyst who presented ithas probably done more research and considered more inputs than you haveand has formed a good case for making the recommendation.
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MATCH RESOURCES TO YOUR NEEDSAn essential resource for one trader may be impractical for another. As the opening statements in this chapter stress, the key point is not to accumulate resourcesbut to find those that can help you most as a trader. That will depend on your trading style.In most cases, the first place you should check for resources is your brokeragefirm. If the firm doesn’t have what you need or if your trading needs grow as yougain experience, then you may want to take a look at some of the many other resources now available.
CHAPTER 7
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elf-directed traders obviously should know the market they are trading andhow to develop their own trading approach to analyze it to make a tradingdecision. But that’s not the complete picture. They also should have a thorough understanding of two important concepts related to the mechanics of trading: margin requirements and order terminology.
TRADING ON MARGINTrading on margin in stocks is considered to be somewhat risky, especially for beginning traders. But every trader in the futures market is trading on margin. Thedifference is that the term margin has a different meaning in these two investment arenas, as the previous chapters suggest.In stocks, you make a down payment to own shares of stock and must put upat least 50 percent of the value of the shares, a minimum margin requirement established by the Federal Reserve years ago.In futures, you do not own anything—whether you buy or sell—but are onlyspeculating on the price movement of the market, unless you are hedging yourrisk. For this right to speculate on how prices might change from your entry point,you must have a sufficient amount of money in your account to assure the marketplace that you will perform your side of the transaction when the time period forthe contract expires. This amount of money is typically called margin. It actuallyshould be called a good-faith deposit or a performance bond because that is how itfunctions, but because margin is the conventional term commonly used bytraders, we’ll use it in this discussion.99
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Exchanges set the minimum margin requirements for each contract, continually adjusting the amount to account for the value of the contract, volatility, andother market conditions. At the most basic level, suffice it to say that margins aredesigned to cover a normal or average move in the market without incurring adebit at the account level over a reasonable period of time.Exchanges adjust minimum margins regularly, and clearing member firms areat liberty to require higher amounts. Therefore, you need to check with your broker to see what the current requirements are.There are two types of margin:1. Initial margin is the sum required to establish a futures position for the pur-
pose of holding it overnight.2. Maintenance margin is the minimum balance required to maintain a futuresposition.Beginners often think they have to add the two numbers together to arriveat the margin requirement for what they are trading, but that is not correct.Maintenance margin is really a subset of initial margin. Margin calls, a termthat sometimes creates anxiety, happen when your account balance falls belowmaintenance margin levels.Maintenance margin is usually a smaller number than initial margin anddoesn’t come into play unless the account balance shrinks due to losses. If thevalue of the account balance falls below the maintenance level, then you arerequired to get the account back into compliance (a margin call). You can dothis either by sending more money (raising the balance back up to the initial margin) or by lightening up your positions (lowering the initial margin back downto the balance).For example, if the initial margin requirement is $4,000 per contract, you willneed to have at least that much money available in your account to buy or sell asingle contract that you hold overnight. If the maintenance margin requirementis $2,800 and the value of your account balance falls below that amount, you willget a margin call requiring you to bring your balance back to at least $4,000.However, if your position generates a gain, you can withdraw any excess funds(those funds above the required initial margin) or use them to fund additionalmarket positions.Minimum initial margins on futures typically run 4 percent to 10 percent ofcontract value with a few exceptions, most notably single-stock futures, whichhave a minimum initial margin of 20 percent of the contract’s value. To determine the actual percentage rate at any time, find out the current margin requirement from your broker and divide that number by the full contract value. Forexample, if the initial margin on E-mini S&P futures is $4,000 and the full contract value is $55,000 (1100 × $50), your initial margin is about 7.3 percent of thecontract’s value compared to the 50 percent you are required to have to purchase stocks.
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The fact that margin requirements are such a small portion of contract valueunderlies the most important feature of futures trading: leverage. Assume thatwith the $4,000 initial margin on one E-mini S&P contract, you decide to buy December E-mini S&P futures at 1070 and the market then rises to 1080. The 10-pointmove is not uncommon on any given day. Whether you offset or stay in the market,your account has appreciated by $500, which is 12.5 percent of the margin or performance bond.Of course, the opposite holds true for a move 10 points lower; if you arelong, you could lose 12.5 percent of your money with a 10-point decline. Leverage is a powerful tool, but it is a double-edged sword. Traders should understand the impact that low margins and leverage can have before getting into afutures position.
ORDER TYPESEverything you know about trading will not be very useful if you do not know howto tell the market what you want to do. Your wish is conveyed to the market in avariety of orders that specify the contract, quantity, price, conditions, and timeframe to buy or sell. The type of order you choose and the manner in which youuse it play a big role in how you enter or exit a position.Exchanges and brokerage firms offer a large number of acceptable ordertypes for all active markets. The most common and those you will probably findthe most useful are market, limit, stop, and market on close (MOC) orders. Allopen-outcry markets accept those orders as well as many others. However, not allelectronic exchanges accept all of these orders all of the time. For instance, ecbot, the Chicago Board of Trade’s electronic platform, does not accept a marketorder before the open, but a market order is accepted during trading hours. In addition, some electronic exchanges do not accept open orders or require stop orders to be made as stop limit or stop with limit orders.When placing orders, it is important to be aware of proper price incrementsand trading conventions for markets that you are trading. Unlike securities, individual futures markets vary greatly in terms of contract size, price increments, andvalid order types. For instance, grain futures trade in 1/4-cent increments, bond futures in 1/32nds, and gold futures in 10-cent ticks. Correct prices stated in the correct way are essential to create a valid order that will be accepted by an onlinetrading platform or by the trading floor.An open order is good until canceled or filled or until the product goes off theboard—that is, the contract has expired and is no longer available for trading.Open orders are also referred to as good till canceled (GTC). A day order is goodonly for the regular trading session during which it is placed or for the next session if placed in between sessions. All orders are assumed to be day orders unlessotherwise specified.
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Entry/Exit OrdersHere are brief descriptions of the most used orders and when and how they areemployed. The online abbreviations often used on trading platforms are shown inparentheses.Market Order (MKT) A market order is filled at the first available opportunity.Buy orders are filled at the first available offer, and sell orders are filled at the firstavailable bid. A market order is the fastest and surest way to get a fill. In most situations, you cannot cancel a market order if the market is open.When placing orders over the telephone, you say “at the market” instead ofstipulating a price. If you are trading online, trading platforms usually have you select “MKT” from a drop-down menu under “Order Type,” and you leave the pricefield blank.Use this order when you definitely want a fill and are not concerned aboutpossible slippage. Some traders are unable to watch real-time market prices, soonly market orders will suffice.Stop Order (STOP) Commonly referred to as a stop-loss, stops are often usedas loss limiting orders, indicating that you want to get out of the market at a specified target level if the market trades at or through your stop price. Buy stops areplaced above the market and become market orders if the market trades or is bidat or above your stop price. Sell stops are placed below the market and becomemarket orders if the market trades or is offered at or below your stop price. Generally, bids and offers affect stops only in open outcry markets.Although stops are most commonly used to exit a losing position, they canalso be used to protect profits or to enter positions as markets move into territoryconsidered to be a favorable entry point. Keep in mind that, although stops become market orders when elected, they are subject to slippage. Slippage occurs infast-moving markets when stops are filled at prices worse than the stop price. Inaddition, in markets with limits, stops may be “unable”—that is, not able to befilled because no trades are allowed beyond the established limit moves. A stopplaced as an open order, or GTC, may be “unable” for several successive sessionsif the market is in a limit up or limit down situation but will be filled at the firstavailable opportunity.When placing a stop order on the telephone, it is important to use the wordstop for the order type at the end of your order placement instructions. Stops onelectronic-only markets usually have to be placed daily.This order is mainly used to exit markets, hence the term stop-loss, but it canbe used to enter positions on a favorable price signal or to protect profits and liquidate positions as markets start to rise or retreat.Limit Order (LMT) A limit order specifies that you only want to be filled at thelimit price or better. A limit buy order is placed below the market, while a limit sell
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order is placed above the current market price. Although a limit order implies “orbetter,” it is useful to say “or lower” for buy orders and “or higher” for sell orders.A limit order provides protection against slippage and is advisable in thin markets. However, a limit order does not guarantee you will get into a position even ifthe price you specify is hit. If you absolutely must be sure to get into or out of a position, you should probably use a market or stop order.Use a limit order when you want a position at a specific price or better and inthin markets to enter positions and possibly also to exit positions. However, youmust be prepared to watch markets if you believe you have to trade with limits.Or Better (OB) The use of this term is helpful when placing limit orders whenthe market is trading at or through your limit price. The “OB” designation indicatesthat your order is indeed a limit order. For example, you may use an “OB” ordertype such as, “For account 12345, buy 5 March yen at 9345 OB” when the last pricein the market is 9344. That indicates you are willing to pay 9345 or less, but you donot want to buy if the market rises to 9346 or higher. “OB” isn’t needed in fullyelectronic markets, and can be counterproductive in open-outcry markets. Youmay want to check with your broker before using “OB.”Stop Limit (STL) A buy stop limit order becomes a limit order at the stopprice when the market trades or is bid at or above the stop price. A sell stop limitbecomes a limit order at the stop price when the market trades or is offered at orbelow the stop price. The stop and limit are the same price. These orders are designed to eliminate slippage on stops. However, they may come back “unable,”which simply means they are not able to be filled, and cannot be considered asprotection in fast-moving markets.This is not a common order type in open-outcry markets but may be almost anecessity on some electronic markets due to lack of liquidity. However, manyother electronic markets are now very deep, and the use of such orders is generally unnecessary. In addition, the possibility of an “unable” renders these ordertypes useless in terms of protection.Stop with Limit (STWL) This order type is similar to a stop limit in that alimit price is established. However, the limit on a stop with limit is differentfrom the stop price and provides some allowance for slippage on the stop. Oncethe stop is elected, the order works as a limit order and, as is the case with thestop limit order, may come back “unable” so it cannot be considered as protection in fast-moving markets. Although created for use in open-outcry trading,these orders are most functional on electronic platforms that accept them, suchas Globex.This order is useful when you want to place limit orders slightly above themarket on buys and slightly below the market on sells. The additional room to fillthe order may eliminate missed market opportunities. However, check with yourbroker before using this order type actively.
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Market on Close (MOC) Use this order if you want to be filled during theclosing price range. An MOC is a market order that is executable only during theclosing range and can be filled at any price in the closing range. The closing rangeis a defined period of time that varies by market, usually the last 30 seconds or oneminute of trading.Use this order when you do not want to carry a position overnight. Many daytraders use MOCs to close out positions on the close.Market if Touched (MIT) An MIT is similar to a stop but is positioned on theopposite side of the market. A buy MIT is placed below the market while a sell MITis placed above the market. An MIT becomes a market order when elected. For example, with the market in April live cattle trading at 8420, you may place an ordersuch as, “Buy 4 April live cattle at 8390 MIT.” If the market trades at or below thetrigger price, your order becomes a market order and can be filled at the first available opportunity.As with a stop, this order type is also subject to slippage because you may notbe filled at your MIT price. Using the same example, an appropriate sell MIT wouldbe placed at any price above 8420, such as 8435. Some traders use this type of order to enter markets that trade to price levels that appear to be good entry points.Unlike a limit order, which can be “unable” if the market trades only at but notthrough a price, an MIT becomes a market order if elected and will almost certainly be filled. In most cases, you will not miss the market if you correctly determine the bottom or top for the session.This type of order is great when you are able to pick a peak or valley and wantto enter a position. It avoids the frustration of limit orders when the market tradesat the specified price but the order is not filled.Stop Close Only (SCO) This is a stop order that will be executable if the day’sclosing range is at or through your stop price. There is no reference point to determine if this is a good order and, as such, it can be placed at any price within theday’s allowable range. If the market has no limit, there are no such restrictionswithin reason.Use an SCO when you do not want a stop order to be activated during the session but do want it to be activated if the market trades at your stop order level during the closing price range. This order helps you avoid being taken out of aposition on a stop that might be hit during intraday price fluctuations.Order Cancels Order (OCO) This order type actually gives the broker two instructions at once. Execution of one order automatically cancels the other. Buyand/or sell instructions cannot be combined. For option orders, the order can onlyinclude one strike price and can be for either calls or puts but not both. An OCO isnot allowed on many markets, so be sure to check with your broker.The most common use of an OCO is to take profits if the market trades to acertain level but to get out if it goes too far against you. For example, if March
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S&P 500 index futures are trading at 1142 and you are long one contract, youmay place an order such as, “Sell 1 March S&P at 1155, OCO, 1132 stop.” If themarket trades to 1156, you can expect to be filled on the limit order, and the stopwill be canceled by the executing broker. If the market trades to 1132 first, youwill be filled on the stop, and the limit will be canceled. The broker will executewhichever comes first.
Cancellation OrdersIn some cases, you may just want to cancel an order or replace the original orderwith another order. As long as the original order is not a market order and has notbeen executed, there are specific orders to accomplish this goal.Straight Cancel (CXL) If you have an order working that you no longer wantworking, you may attempt to straight cancel. These instructions are clear that youdo not want a fill on the order. If the order has already been filled or the cancel instructions do not reach the broker in time to stop the order from being filled, youwill receive a “too late to cancel” (TLTC) notification. Depending on market conditions, the TLTC response may not be immediate.Electronic-only markets generally provide an immediate “confirm out” (discussed later) once an order is canceled, sometimes denoted by an asterisk next tothe order number. A confirm out on an order placed for open-outcry trading mayrequire a response from the floor through your broker.When placing a straight cancel over the telephone, inform your broker or order desk that you wish to straight cancel an order and follow the same procedureas you would to place a new order. For example, you could say: “For account12345, access code 6789, straight cancel order number 481 to sell 4 March E-miniS&P at 113850.”Because the E-mini S&P is a strictly electronic market, a confirm out would benearly instantaneous and could be provided by the broker if asked.Canceling an order while trading online merely involves selecting the workingorder and submitting the cancel instruction. Bear in mind that an order submittedfor cancel is not the same as a “cancel confirmed” or “confirm out.” Never assumean order is out unless actually confirmed out by your broker.Cancel Replace (CXL REP) These instructions are used to modify an existingorder. A cancel replace must be for the same contract and delivery month. Buy/sellinstructions cannot be changed, but you are allowed to change quantity, price, andorder type. In addition, you can change open/day order designation.Placing a CXL REP over the telephone is basically the same as cancel order instructions. You inform your broker or order desk that you wish to cancel and replace a working order and provide the details on the working order. Once theworking order has been found, you can proceed with the instructions to modify.For example: “This is Smith, account number 12345, access code 6789. I want to
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cancel replace order number 481, which is selling 4 March E-mini S&P at 113850.The new order is to sell 4 March E-mini S&P at 113600.”If you are trading online, you select the order you wish to modify and choose“Replace.” The screen will pull up the existing order and allow you to make modifications within the stated parameters. It may be too late to cancel the order, atwhich point the new order would be out and you would receive a fill on the original order. In some open-outcry cases, you may receive notification that you areTLTC and prices follow later.Confirm Out An order is confirmed out when it is verified as not working orfilled. As mentioned earlier, orders for electronic markets are usually confirmedout instantaneously and are noted as such through various means, depending onthe trading platform.However, a number of U.S. markets trade in open-outcry pits or rings, as theyare referred to in New York. Open outcry presents a variety of circumstances withwhich traders must deal, and a market’s trading platform is the most important determinant in the time it takes to receive information about orders. Regardless oforder-routing technology, a confirm out on an order sent to open outcry must beobtained by your broker or order desk.
Options OrdersOptions on futures orders are placed in the same fashion as futures orders, withthe addition of two other pieces of information: strike price and whether the position is a call or put. Insert that information between the commodity name and theprice, if any. For example, with the March bond 112 calls trading at 1-35:Limit order: “Buy 2 March bond 112 calls at 1-26.”Stop order: “Sell 2 March bond 112 calls at 1-25 stop.”Your broker or electronic platform will also ask if the trade is to open or offseta position. This information is obtained for purposes of placing the order but doesnot confirm your position in the market.One other important note about options orders: Option price increments maydiffer from the underlying futures contract increments. In the preceding orders,for example, note that Treasury bond options are priced in 64ths while futures arepriced in 32nds. Be sure to check the contract specifications or ask your broker.
Futures Spread OrdersA futures spread order involves the simultaneous purchase and