Leveling the Playing Field

CHAPTER 3

Iremember my high school history teacher telling us that Napoleon once was asked which side he thought would win the war. He responded, “The French, of course. We have the biggest cannons.”

COMPETING WITH THE PROS Imagine entering your car in the Daytona 500. Sure you may be a good driver and have a brand-spanking-new, top-of-the-line foreign sports car, but in your wildest dreams would you ever believe that you had a chance of winning against professional race car drivers with state-of-the-art racing machines? No matter how good you may be, you will never be able to compete with them until you have the same experience, know-how, and equipment. Not only would your chances of winning be slim, you’d be lucky if you didn’t wipe out. Trading should be thought of in the same way. You are not just trying to survive and make money; you are also competing with professionals who most likely are better equipped to succeed than you are. When you are not on the same playing field with them, it’s easy to lag behind.

People sometimes don’t realize that the market as a whole is composed of the aggregate positions of every trader. From every one-lot trader to every hedge fund manager, together they make up the market’s price. The market is trading at its current price and will go where it will go not because of any chart, indicator, or news

story but because that’s where traders’ positions say it should go. When a typical small trader tries to make a buck, he has to keep in mind that he is competing against the world’s best traders. These are pros who have the latest and best equipment, information, order flow, experience, capital, and buying power, which help give them an edge. They can be market makers, hedge funds, specialists, traders on institutional desks, powerful individuals, floor traders, or large producers or users of a commodity. They have the ability to move and support markets and/or play games with it. They can give the impression that there is interest in a market or be discreet about their intentions. Their goal is to make money, and as far as they are concerned, you are there to help their cause.

The point of all this is that these people are your competition, and an individual one-lot part-time trader doesn’t have the same chance to succeed as a trader at Merrill Lynch with millions in capital does. Professional traders spend thousands of dollars a month to have access to the latest equipment, software, news, information, and straight-to-the-floor service. Meanwhile, some people are trying to compete using the newspaper as their source of quotes and information. Consider that when you are trading a contract of crude oil with $5000 in your account, you are up against floor traders who have a minimum of $50,000 in their accounts, hedge funds with millions in capital, or Exxon. Who do you think is better capitalized and in a better position to succeed? Atrader on a professional desk may sit in front of two or four large monitors with real-time quotes—not only the futures prices; he probably has the cash prices as well. He has enough real estate on his screens to keep multiple charts in front of him at all times while still looking at news, quotes, and any proprietary trading systems he may have. Many firms hire quantitative people for the sole purpose of creating and backtesting systems, which can do a remarkable analysis of the market. The average trader, in comparison, may have only a ruler and chart to do his analysis.

LEVELING THE PLAYING FIELD If one wants to be a serious trader, one should do whatever possible to get on the same playing field as a professional. Since everyone else is trying as hard as possible to win, it’s important to get all the edge you can. You won’t win a battle with rocks and sticks when fighting against those who have cannons and missiles. Institutions have always had deep budgets, the latest technology, and the abiliwww.rasabourse.com

ty to have all the real-time news, quotes, and information available. Only recently, with the coming of the age of the Internet, has the average trader been able to have many of the same tools at his disposal. Hey, if professional traders are spending tons of money to get these things, don’t you think it may help a little? Now anybody, even with a limited budget, has a chance to come closer to being on the same playing field as institutions spending millions. Through the Internet, individuals can pretty much get (at a relatively low cost) the same tools and information that once were limited to institutional traders. Not everything is free or cheap, but at least it’s out there, and there is an abundance of software that can give the nonprofessional trader a little help. Despite having everything readily available in real time, many novice traders still hope to compete successfully by using free but delayed quotes, charts, and news. An old computer, antiquated software, slow execution, and not having access to the floor can also hurt traders’ bottom lines. It wasn’t too long ago that as a broker I’d be giving quotes out all day long, and if I wanted someone to see a chart, I’d have to fax it to him. Now that traders can get all that for themselves, they should take advantage of it. If traders want to be on the same playing field, they need to consider paying for the proper tools; though it may cost a little, it can dramatically improve their bottom lines.

THE INTERNET AND ONLINE TRADING There is little question that with the growth of online trading and deep discount brokerage, trading volume has increased as neophyte traders, believing that they have the same advantage as pros sitting at a trading desk, have stepped up their trading or entered the arena. Just a few years ago having the ability to see real-time charts, quotes, and news was something very few nonprofessional traders had. Now it’s available to anyone. Though today’s improved technology may not make you trade any better, it does let you trade more accurately and faster so that everybody has the chance to make money as a short-term trader. This doesn’t mean that everybody will make money, but people at least have a fighting chance.

DAY TRADING HAS BECOME EASIER Once day trading was limited to professionals and floor traders, but with the leveling of the playing field from online trading, better www.rasabourse.com

technology, real-time charts, lower commissions, improved liquidity, and wider daily ranges in the markets, the average trader now has a fighting chance to compete in the day trading arena. When I first started trading, day trading was for floor traders and a few select professionals; it was just too costly to get the data and charts needed for the average trader to do it properly. Back then when a 6-point move in the S&P500 was considered a big day and commissions were higher, there was little room for a day trader to make money. Today with 15-, 20-, and 30-point intraday swings common, an Internet connection, and dirt-cheap commissions, there is an opportunity for the average trader to make money day trading and scalping. As more and more people started day trading, the liquidity improved and the spreads narrowed, taking away some of the power that market makers and specialists held while giving more people a chance to succeed.

ONLINE TRADING When I started Link Futures, I was amazed at how eager people were to trade online. Bypassing a broker and paying less in commissions was a dream come true for many investors. Online trading allowed people to trade hassle-free at less than half the price they used to be able to, creating a tremendous advantage for experienced, active traders. The number of people who just want to trade their own money online without a broker’s advice or assistance seems to be growing constantly. Besides the cheaper rates, some people hate having to deal with a live broker, especially the pushy type. Traders like the independence of being able to trade when they want to and not having to worry about what a broker will think. They like the fact that they can take their sweet time in making decisions and can cancel an order 50 times if they want to without feeling like a nuisance.

Trading online has revolutionized the brokerage business and has become a tremendous advantage for the average retail trader. Though it has its benefits, I do not recommend it for traders who are starting out. There is just too much to learn at the beginning, and it is so easy to make mistakes, that a broker will, without a doubt, be helpful. Besides the basic trading errors, such as buying an overbought market, new traders will make mistakes because some don’t even know the difference between a limit and a market order, what the symbol of a stock is, or when contracts expire and go into delivery.

The Bonuses of Online Trading Reduced Commissions Due to online trading, trading costs have dropped dramatically, resulting in an invaluable tool to the average trader. Commissions haven’t just gotten cheaper for discount trading, but full service brokers who have to compete for business have lowered what they charge as well.

Speed When trading electronic futures contracts and NASDAQ stocks, you get back fills in seconds. In other markets, the time it takes to place and get an order executed has dropped dramatically as well. The overall result is that day trading is easier for the average trader.

Flexibility Entering, changing, parking, and canceling orders has become easy and convenient to do. There is no need to call a broker every time you want to do something.

No-Pressure Trading Online trading lets you avoid pushy brokers calling with the recommendation of the day or trying to get you out of good positions so that you generate more in commission revenues.

Information News, quotes, charts, fundamentals, and research reports are available at no extra cost when you have an online account. With just a click of the mouse, pretty much everything that you could need is there for you.

Monitoring Positions Being able to see all your positions update live is a nice bonus that wasn’t around when I started trading.

The Drawbacks of Online Trading Beginners Still Need Guidance Until one gets comfortable with trading, it is best to stick to a traditional broker. It doesn’t have to be a full-service broker, but at least you want someone on the other end of a phone looking over your shoulder a little and pointing you in the right direction when www.rasabourse.com

you stray or make one of the many common mistakes you are prone to make as a new trader.

Not Knowing How to Place Orders Until one learns all the different type of orders, the guidance of a broker is invaluable; otherwise it is too easy to make a mistake.

Lack of Risk Controls Amain reason people end up losers is that they don’t know how to manage risk. Without any supervision people can trade themselves into a deep hole. Agood broker can alert a trader when he is getting into trouble, while an online trading platform cannot.

Makes It Easy to Overtrade Atrader sitting behind his computer with access to real-time quotes, charts, and news can let it go to his head. He may think he is as good as a pro and can easily overtrade and take on too much risk. Don’t mistake online trading for an open invitation to trade nonstop. Overtrading is something a trader should make sure he doesn’t do.

THE TOOLS If you require real-time information, the days when only the big players have it are over; now it’s available to everyone who has an Internet connection. If you need something, you can pretty much find it on the Web. Though you may still have to pay for most things, there is an abundance of free information. The only difference between what you can get for free and what you pay for usually lies in the flexibility of what can be done and time delay versus real time. If you don’t need real-time information, you can get all the news, reports, quotes, and charts you want for free. The things available on the Web these days can be generic, such as simple quotes and charts, or very specific and directed toward people who use Gann, Elliott wave analysis, or neural works.

Quotes and Charts Quotes and charts are vital to a trader, without them he is trading blindly. Quotes alone will just tell you where the market is at the current moment, but a picture is worth a thousand words, and if you want to see what the market has been doing, you need charts. www.rasabourse.com

There is an abundance of free places to get quotes and charts on the Net, but for quality real-time charts you may have to pay.

I’ve been using TradeStation as my charting platform for years. It is not the cheapest software available, as it does much more than just give charts and quotes:It also gives me the ability to write and test systems and then keep track of them, alerting me anytime they generate a signal.

PAPER CHARTS

To get a better feel for the market, every trader, whether he has the greatest charting software on his computer or not, should get paper charts and update them by hand. It gives you a unique hands-on feel for the market that a computer cannot. CRB Futures Perspective (www.crbtrader.com)has great daily futures charts that I buy about once a month and update by hand. I also manually update monthly charts to get a big picture of the market. Not too long ago this was the only way for the average trader to get charts, but now anyone with an Internet connection can get free charts at the end of the day. At the very least one should print out these charts, updating and drawing in trendlines by hand. It’s more personal than just looking at charts on your computer and will help keep you in better touch with the markets.

News News is another important option one should have, not so much to trade off, but because one may want to know why a stock or commodity is doing what it is doing. If something acts differently than it should, I like to know why. Although I’m not one to trade on the basis of news, I like to keep abreast of things and see which stocks are currently in play. I get most of this information from my news wire service, but when I’m trading, I don’t look at the news that much, which is why it’s good to have the television on as well. I keep CNBC on all day. It keeps me informed on what the market is doing and what it has done but, unfortunately, not on what it will do, and after sitting in a room with 12 guys all day, Maria Bartiromo is easy on the eyes.

System-Writing Software If you are serious about trading, look into a program that can backtest your ideas. I’m a big fan of TradeStation. Besides being an www.rasabourse.com

advance quotes and charting software (all the charts in this book were made with TradeStation), it allows one to create indicators and write and test systems with historical data before risking real money. I find TradeStation to be an invaluable tool in my trading. It allows one to write anything from simple little moving average crossover systems to the most advanced systems and indicators imaginable.

If you want to improve on your trading, this is the program to get. It may be a little more difficult to use and a bit more expensive than some of the other programs, but it is the industry standard for the serious trader and brings you one step closer to leveling the playing field.

TIMES HAVE CHANGED

When I first started using a computer to look at charts, Ihad a 486 with a 13-inch monitor and a dedicated phone line that I used to get a real-time feed from Future Source. Ipaid about $1000 a month and thought it was the greatest thing in the world. Ithen started using TradeStation on that computer, and every time I called up a chart, it would take a few seconds for it to come up, but I still thought Ihad the greatest setup on earth. Years later I look back and can’t believe how antiquated all that was and what a difference trading with better technology makes. The difference a few years made is like night and day. Computers are faster, programs are more sophisticated, everything is readily available, and it’s all cheaper. Instead of one slow computer and a tiny monitor, I now have two computers and look at three giant monitors to give me all my charts, news, quotes, and positions. Having multiple screens is important to me because I need to be able to keep charts on several stocks and futures while also looking at a quote board, news headlines, my positions, and any software I have, all at once. Looking back, I can’t believe how much easier technology has made trading. If I were using my old computer to do what Ido now, Ithink it would explode.

It Takes More Than Just the Right Tools Even if a trader has the greatest tools at his disposal, that won’t make him a winning trader. It will definitely be an asset, but he still www.rasabourse.com

needs to know how to trade, manage risk, and develop discipline. You are trading to make money, so don’t skimp on your equipment. Don’t worry about paying for a good computer, a live feed, real-time quotes, and good software. It’s a cost of doing business and in the long run should pay for itself. Ideliberated on buying TradeStation for over a year before spending $3000 for it. As soon as I got it, I began backtesting the systems Ihad been using and discovered why I had been losing money. Some of my trading ideas just didn’t work. Ihad thought they did, but when I backtested them, they didn’t. After evaluating them, Iabandoned them to work on better ones. The money I spent on the program was nothing compared to what it saved me as I stopped losing as much.

It’s not only the tools. Even when they have the same tools, amateur traders still need to realize that they may not be on the same playing field or have the same edge that a professional does. Professional traders get catered to and pay hardly anything in commissions, while small traders are seen as a nuisance. An institutional trader has an edge because he can call the pit himself, get accurate bids and offers, find out any relevant information, and even stay on the phone all day with a floor clerk; these traders get preference because of their size. Some even have their own personnel on the floor to ensure quick execution and better fills.

PROFESSIONALS VERSUS INDIVIDUALS One of the things that separate the individual from the professional trader is how much they pay in commissions and the kind of service they get. When an individual trader gets an online account and pays only $12 a round turn in futures or $8 a trade in equities, he may think this is dirt cheap. But if he were to compare it to what professionals pay, he’d see he is at a grave disadvantage. I’m not referring only to traders who pay only clearing costs and don’t even pay commissions, such as floor traders and those who trade for brokerage firms. Traders such as hedge funds, CTAs, and big accounts of all types will pay a fraction of the cost a regular retail account pays. This allows them to make a profit with less of a move. People who find that they are constant losers may be so because of what they pay in commissions. Even discount commission rates can be a huge drawdown on a trader’s bottom line. If one had the same rates as a pro, getting over the hump could get easier.

Apart from the money they save, the big advantage comes from the service the big traders receive. Large traders are sought after by brokers, who will bend over backward to satisfy them. This means they get preferential treatment and excellent service. They have the ability to bypass a broker and call the floor directly; they can get accurate quotes while being able to work an order based on those quotes. When a regular trader calls his broker to get a quote, the broker usually gives it to him from his screen, but by the time the trader places an order on the floor, that quote may be off a bit. Having the advantage of getting direct to the floor service gives someone an incredible edge over a trader who has to put in a market order without knowing the exact price of the market. It can easily mean two ticks a trade, and that adds up in the long run.

Professional traders also have an advantage in that they have order flow and buying power behind them. When a small trader buys something, it means nothing to the market. When a mutual fund buys a stock, it could move the market. Professional traders can start buying discreetly until they build a position, and only then will they start openly showing their interest to buy and try to drive up the price. They can start showing huge bids and make it known that they are buying in order to get the attention of other traders, who can help lift the price. Large institutions also have the ability to call other large traders when they see action in the market in order to see what’s going on or why people are buying. Small traders are always the last to know, as they have to wait to hear or read on the news about why a stock has moved. By the time they find out, the move may already be over.

For all these reasons and more, it is tough for a small independent trader to get ahead, which is why one should try to do everything possible to level the playing field.

BECOMING A BETTER TRADER Becoming a better trader has become easier in recent years. The average trader now can pretty much have all the same information in front of him that a trader at the biggest firms has. Back in the days when nobody had a personal computer or an Internet connection, day trading was limited to a select few. Even for long-term traders, there was hardly any way to see a daily chart

on a stock unless one went to a broker’s office, went to the library and looked at Value Line, or made one by hand. Today everyone has that chance. Becoming a better trader includes doing your best in getting as good technology and information as you can. My trading got much better when I invested in the proper tools. I don’t think I could ever go back to trading with the antiquated tools and methods I once used. Day traders especially have to take advantage of anything that can help tilt the tables in their favor. Don’t be afraid to pay for something that will help you; it’s a cost of doing business. And try to pay the lowest commissions you can without sacrificing service. Remember, you are competing against people who pay next to nothing in commissions. The less you pay in commissions, the easier it is mentally to get out of a bad trade, since you don’t have to worry about making back the commissions, plus it’s more money that stays in your account.

Though online trading may be the cheapest way to go, one should really know how to trade before venturing to trade without supervision. However, once you are comfortable trading, then by all means take advantage of the low cost of trading online.

The last thing to keep in mind is that no matter what you do, you are still competing with the best traders, the ones who have the most money, experience, technology, and access, so do whatever you can to be on the same playing field as they are. Every little step you take will get you just that much closer to succeeding as a trader.

Why Traders May Not Be on the Same Playing Field

1. Lacking the proper technology 2. Lacking experience 3. Lacking real-time information 4. Lacking the proper trading capital 5. Getting slow execution on trades 6. Not having access to the trading floor 7. Paying too much in commissions 8. Lacking order flow and buying power

Things to Help You Level the Playing Field

1. Make sure you have enough capital. 2. Get real-time quotes, charts, and news. 3. Use the Internet to your advantage. 4. Get a quick and reliable Internet connection. 5. Use free information on the Web. 6. Update charts by hand. 7. Take advantage of online trading. 8. Pay lower commissions 9. Use system writing software. 10. Get a fast computer.

Helpful Questions to Ask Yourself

Do I have the tools it takes? Do I need a faster computer? Do I need real-time quotes? Are my trading costs too high? Should Ibe trading online?

PART II