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1. The Basics of Trading Understanding how trading decisions
are made and how the mechanics of the pit works
2. 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.
3. 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
The minimum tick is cent on 5,000 contracts or $12.50.
If I buy a contract of beans at $10.40 and then sell it ten
minutes later at $10.41Ive made of a cent or 3 X 12.50 or $37.50 in
profits.
4. Margin:the power of leverage
Nominal value of contract
With corn at $5.56a bushel a contracts 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.
5. 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.
6. 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.
7. Market Forecasting
Fundamental Analysis
Technical Analysis
Quantitative
8. Fundamental Analysis
Looks at supply and demand information
Market fundamentals constantly shift
Weather for many crops
Political situations as well
9. Technical Analysis
Looks at trying to recognize patterns on price charts.
Example on next slide.
10. March Coffee
11. 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.
12. Mechanics of pit trading
Every exchange a little different but most agree on generals of
buy and sell.
Hands out = selling
Hands in = buying
13. 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
14. Hand signals for Quantity
15. Recording Trades
Badges, Jackets, andCard
16. Jobs on the Floor
With Brokerage Company
Service Representative
Broker
Independent
Local trader
Local broker
With exchange
Pit reporter
Educational
PR and financial
17. 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