pftq's Stocks and Investing

Trading Guide

Tech Trader


Virtual Trading System

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July 23rd, 2011
Posted by pftq | #

2. Getting Started

     Probably the most common thing said about what to do before trading is to read, read, and read.  At the same time though, trading stocks is something that requires practice and experience above all else.  My overall stance would be to read to get started but ultimately you learn the bulk of it from doing.

     Some books I recommend reading, as well as discussion boards to follow and learn from other traders, are listed on in the resources page at the end of this guide.  If you must read only one book off that list, I'd recommend Weinstein's Secrets For Profiting In Bull And Bear Markets.  You don't need to read the entire thing, but the main ideas for Technical Analysis pushed in the first half or so of the book are crucial.

Choosing a Broker

     That said, before you begin trading, you'll probably want to set up a brokerage account.  Because it is very hard to upgrade existing accounts, make sure you request all privileges early on (options, forex, etc).  To get options and other trading privileges, make sure to only say you only want speculation with your investments; the broker basically wants to see you don't need the money you are trading.

     There are plenty of decent brokers out there - many advocate Interactive Brokers for cheaper commissions while still having a lot of features.  I personally use TDAmeritrade, only because it was the first broker I used and the tools were sufficient.  There is also an API, which you can easily get access to if you trade more than a handful of times each month or have $25k in funds (the former is easier obviously).  That will be the perspective of this guide, but other brokers should be analogous in tools and functionality.  While there are some very cheap brokers out there, I'd be careful with going too cheap as you still want decent screeners, charts, and execution.  You might find that your commissions are low, but your orders get front-run or lag to market.

     The specific chart-streaming platform I'll be using in the following pages is Command Center 2.0.  You can find it in TDA by going to Tools or going to Home > My Profile and setting it as the tool that starts up when you first login.  At the time of this post, TDA appears to have only made it accessible if you enable it via My Profile so you may not find it under Tools.

How Trading Works

     The main thing to understand is you are basically bidding and selling stocks (shares of ownership in a company) to other people.  When you see the price of a stock, that is the last price a buyer and seller recently agreed on (bid = ask).  When you see the bid vs ask prices, those are what buyers and sellers are still holding out for, waiting for someone to meet their price.

     When you want a stock to move up, you usually hoping for people to buy at the ask price, that is people want the stock enough that they're willing to pay for what the seller asks for it (and sometimes more).  Likewise, a stock is more likely to go down if sellers are constantly selling at the bid price; think of it as the seller not caring anymore and just willing to get out of the stock at no matter how cheap the price.

Settlement Times of Cash
    
     One thing to understand is that you often have to wait about 3 business days after you buy a stock before you can sell and use the money to buy another stock.  The reason is despite most trades being electronic nowadays, it takes time for the money and stock ownership to actually transfer.

     For example, if you buy XYZ on Monday and sell Tuesday, you won't get your money until Monday + 3 days = Thursday.  If you buy XYZ on Monday and sell on Thursday, you get the money the instant you sell.

     Most brokerages will allow you to sell a stock before the two days are up, but you just won't get to spend the money until after the two days.  Selling within the same day is called "Daytrading" and is usually disallowed unless you have a Margin account (more details below).  Some firms, like TDA, will let you sell in the same day just a few times times a week, presumably for maybe if you make a really bad decision and need to sell immediately.

     If you have $25000 or more, you can apply for what is called a "Margin Account".  This lets you use the money from selling a stock without waiting two days after the buy-date.  However, you are actually borrowing from the broker to make up for the time until your own money actually settles (after 3 days).  The catch here is that you pay interest for time you using the borrowed money.  You would normally only do this if you are sure the stock you buy can give you more gain than the interest would cost you.

Trading Virtually for More Practice

     While I personally started off trading with an actual brokerage account, I would recommend trading virtually as well for practice.  If anything, you can trade virtually while waiting for money to settle in the 3-day period or for riskier stocks you aren't sure of, just to get better at predicting stocks for your real account.

     For friends that I've taught, I've programmed a free virtual stock trading system here that you are more than welcome to use:  Virtual Stock Trading System.  Feel free to use it by just logging in with a site account (registration is free).

     One thing to note about virtual trading, however, is that it cannot simulate fill and slippage - that is, whether or not there are actually sellers to buy from or buyers to sell from.  Try not to get into the habit of buying stocks with too little volume because with a real portfolio, there might not be enough people wanting to buy your shares for you to get out (without causing the price to fall).
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Responses

Aaron Fraser says...

Hello, would like to try it out.  Might I suggest that you also mention that Interactive Brokers has the lowest margin rates, less than 1% if you have enough on margin.  

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