Ibm Stocks History
Ibm Stocks History
Trading And Level Playing Fields
I still remember the first time saw the young man pitch on TV in the Little League World Series back in 2001. His fastball was devastating as he struck out player after player on the opposing team.
This Little League World Series is a baseball extravaganza has capture worldwide attention for years and is now played before millions through the ESPN broadcasts.
My son Josh played Little League Baseball for four years, and I served on our local Little League board, so I know from the inside how far this organization goes to provide a fair playing environment for the players. Birth certificates are required to play and are checked for every player, even at the local level. Additional scrutiny comes for All Star players to participate in the playoffs that lead to the World Series. For four straight Junes, Josh and I dug out original, notarized birth certificates so that he could play on the All Star team that year.
But for a brief few weeks in 2001, one pitcher was so dominant that he became the lead story on ESPN Sports Center – even ahead of the pro players. He pitched the first perfect game in over 50 years; he struck out an unheard of 86% of the batters he faced.
And he was two years older than every other player on the field.
Everyone who has kids or has been around children’s athletics knows the huge difference that 2 years can make in the 12 year old age bracket. An overly zealous little league dad had forged a foreign-born birth certificate. And in doing so he created one of the most uneven playing fields in recent sports history.
The young man (whose name I’ve purposely left out) was a good baseball player, and went on to play baseball at the community college level. But a good baseball player pitching against kids two years younger does not provide a level playing field.
Unfortunately, the same situation exists in the certain areas of the trading world.
Level and Not-So-Level Playing Fields
We’re often asked about what I’ll term the “low capital requirement” trading instruments. These are areas that have high leverage and the potential to turn a relatively small account into a much larger one. Things like forex, options and futures (especially the e-mini futures).
Of course the hottest of these is currently the forex market. Thanks to a huge advertising push and the promise of huge leverage and “no commissions” (more on that one later), the forex market has exploded.
Unfortunately, the retail forex market is not yet a level playing field.
If that’s the case, then why is it growing so rapidly? Because there are some real advantages in forex, but none of which overcome uneven playing field.
Let’s look at forex advantages. And to be fair, I’ll say that I have traded forex through a retail forex broker so that I could understand the market. I also believe that there are enough positives about forex that we continue to actively search for a way to participate in this market that provides a fair game for retail traders. For now, I have not found that venue.
Forex Advantages:
Huge underlying market. The forex market is underpinned by the interbank currency market that exists to facilitate international trade. So there are a massive amounts of transactions made every day (though most of this is in the major currency pairs).
Extremely Low Capital Requirements. There are forex dealers that allow you to open an account with $200 dollars. I’ve even seen this as low as $100. Combined with the huge leverage (see the next bullet point), there is the dream of turning a very little pile of cash in to a very big one.
Big leverage. Many forex houses provide 400-to-1 leverage, allowing account holders to control $400 dollars worth of currency for every $1 in their account (this leverage ratio typically drops as account sizes grows).
24 hour market. Forex trades 24 hours a day, five+ days a week. And there is real action at the Tokyo and London opens.
Trending markets. There are legitimate studies that show currencies among the most trendy financial markets.
Forex DisAdvantages:
There is no trading exchange and little regulation. The real forex market is an interbank dealer market. Retail accounts are mostly handled by firms that allow customers to open small accounts and then the firm provides liquidity or takes the other side of your trade (rather than market makers and other trading participants). While this does not ensure abusive practices, it does open the door.
Trade fills as moving targets. I have personally experienced and have heard multiple reports from others when the posted bids – asks were moved, especially in fast markets. Some firms may be better than this than others, but the problem appears to be pervasive.
Higher transaction costs. While there are no commissions, the forex firms do make the bid-ask spread and profit from widened spreads during fast markets. In addition there are “hidden fees” that are charged to almost all forex clients, such as currency exchange fees that can be, depending on the firm, much higher by themselves than commissions for other instruments. These issues combine to make costs the same or at times significantly higher than other markets.
The bottom line is that the retail forex market is still a bit like the Wild West when compared to other markets and this uneven playing field means that the edge provided by your trading strategy has to be even bigger than normal.
Until we’ve found, talked with and traded with forex firms that address the “uneven playing field” issues, we think it is more prudent to trade currencies on the futures exchanges such as the CME.
A Truly Level Playing Field for Traders
In the futures trading world, e-mini index futures have grown into quite a phenomenon. They have experienced growth unlike any other instrument, and for good reason. E-mini contracts were started by the Chicago Mercantile Exchange (CME) in 1998 with the S&P 500 e-mini. It currently is worth 1/5 of the larger, pit traded S&P futures contract..
However, for the reasons we’ll discuss next, the S&P e-mini has far eclipsed its older and more higher valued sibling. As of the first quarter of 2007, the S&P e-mini was trading 4.5 time the dollar volume of the large S&P 500 contract. Today, the e-mini trades more than 12 to 15 times the volume of the pit traded contract! There are many reasons for its popularity. Here are just a few:
The e-mini contract is traded electronically on a platform called Globex.
Trades are executed instantaneously and are basically error-free, especially relative to the pit traded contracts that may require several levels of human interaction before orders are executed.
The smaller size and therefore reduced margin requirements of the e-mini contracts allow a high degree of retail participation.
The immense popularity of the S&P e-mini has led to number of other equity indexes trading electronically in the e-mini size. The most popular among traders are the Nasdaq Composites, Dow Industrial, the up and coming Midcap 400 and the Russell 2000. E-mini trading has also spread to commodities (gold, oil) bonds and currencies.
Let’s look at why traders love these instruments so much. After we review these attributes, we’ll talk about what’s happening now in the world of e-mini trading.
Leverage. One of the biggest advantages for e-mini trading is the high amount of leverage they offer. And for day traders, this leverage is increased still further. Let’s look at the actual leverage available: the S&P e-mini trade unit is $50 times the S&P 500 Stock Index. Currently, that calculation is looks like this: $50 x 1070 = $53,500. The margin to control $54k worth of underlying stock is around $5.6k giving you leverage of about 9.5:1 on your money. However, the day trading margins are dropped significantly with $1,000 margins still available and some reputable firms offering $500 margins. At these rates, you can increase your intraday margin to greater than 100:1!
But leverage is a double edged sword that definitely cuts both ways. While such leverage allows for large returns on very little money, it can also mean that you can lose large amounts as well. In next week’s “Part II” We’ll cover tools that allow us to use this leverage in a big way, while protecting our downside.
Liquidity. Liquidity is usually thought of in terms of volume, and it is the characteristic that gives us the ability to get in out of trade both quickly and at a preferable price. E-mini index trading gives us exceptional liquidity and great fills with little slippage. And these attributes are very necessary to allow us to take advantage of the available leverage.
Scalability. There are certain types of trading that can only be used on a small scale and cannot be translated to larger volumes as success occurs and larger position sizes are required. But e-mini index trading in general and S&P e-mini trading in particular are highly scaleable. Getting virtually no-slippage fills on 200 S&P e-mini contracts is an extreme advantage large scale traders.
Round-the-clock liquidity. The S&P e-mini has liquidity 23.5 hours a day which gives another advantage – the effect of overnight gaps is greatly reduced. You can keep a stop in the market if you’re doing a swing trade and have your protection kick in at a time when your IBM stock is still sleeping.
The Best Market Keeps Getting Better
As I mentioned above, higher volatility equates to greater opportunity for day traders. Today’s markets while not having the volatility last fall or this past spring, still have good volatility. However, with moderately reduced volatility, it is more important to be patient and wait for the 2 – 5 high quality set-ups that come almost every day.
Next week we’ll look at some specific tools and strategies that top e-mini traders are using today to take profits in these markets.
Please note that I’ll be teaching, along with my business partner and market maven Christopher Castroviejo, our highly rated, cutting edge workshop on e-mini index trading in Las Vegas on November 27 –29. It’s a learning experience you don’t want to miss!
IBM Turns 100: What’s Next?
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