Online Trading Frequently asked Questions (FAQ)

“If something is free, the product is you.”

Before You Start Day Trading

Review the most frequently asked questions to gain tips from the experts and avoid beginner pitfalls. Click here for the daytradr product manual. Click here for the Jigsaw plug in product manual.

FAQ’s

What is trading? What is the game being played?

Simply put, trading is a competitive game in which the skilled take money from the unskilled. There are times when your “opponent” is taking a trade for insurance and isn’t looking for profit. There are times when an institution is doing a major re-positioning, which you can “piggy back.” The latter are times of greater opportunity during which your trading is more like providing a service than being in opposition. Successful traders take more out than they put in, but it will never be possible for every trader to take out more money than they put in. It takes many months of education and experience to learn how to trade. Experience, focus, dedication, and the process of journaling and reviews are essential to identify problems and opportunities to improve, so the majority of profits will go to the more skilled players. Don’t believe internet chatter that retail traders can become experts in days—it’s not true. Trading is also not a “zero-sum game.” When one considers the fees and spreads paid by traders, the exchanges that need substantial financial support, and the TV commentators and analysts who need to be paid … these funds have to come from somewhere, right? These funds are deducted from the collective pot of money used to trade. This reduction in the size of the pie occurs before a single trade is made, reducing the chances of success (i.e., profitability) for everyone.

What’s the difference between trading and investing?

Investing is seeking financial opportunities in different markets in which you believe assets will appreciate over time. Investors can have a short-, medium-, or long-term horizon, and during this period funds are committed to the chosen investment and not available to use anywhere else. Trading is about using the same money over and over again. Day traders may execute hundreds of trades every day, depending on the strategy. When the same capital is used over and over, you’re spending more time trading, and therefore you should be getting a greater return for that time spent—so in theory, it should yield higher returns over time (or why do it?). Day trading is also not necessarily about making a huge return; many small returns are usually preferable. Rather, day trading is about generating income.

What is day trading and what are the benefits?

Day trading is the opening and closing of a position with a financial instrument during a single day. Day trading offers a number of benefits, including the following:

No Financial Exposure Overnight

When you hold positions overnight, you can’t react to market-impacting news when you are asleep, so day traders normally do not hold positions overnight or over weekends. These margins increase outside of regular trading hours, presenting another reason not to have overnight positions.

Low Margin Requirements (Compared to Holding Overnight Positions)

Because day trading limits risk by closing positions the same day, brokerages are also at lower risk and can pass this benefit along through the easing of margin requirements.

More Frequent Trading Opportunities

Depending on the style and strategy deployed, day traders may see (and exploit) dozens of potentially profitable transactions every day.

Accelerated Learning Curve

Trading is a skill, and everyone improves skills through repetition. With so many opportunities to trade every day, novice (and even expert) traders will gain experience quickly, learning what works and what doesn’t in far less time.

Can I trade after U.S. working hours when the markets are quiet?

Markets in Asia are open in the evenings, U.S. time. The Osaka, Hong Kong, and crude futures markets are traded 24/7, as is the Eurex Exchange (DAX, Euro-Bund, and Euro Stoxx 50).

What are the main techniques used by professional day traders?

Professional day traders use a number of techniques to profit.

Scalping

Scalps are very short-term trades in which the intent is to gain a relatively small profit from the trade with relatively little risk. Scalps are usually based on what the market is doing in the moment, as opposed to having an opinion on where it is going. Scalpers can execute hundreds of trades daily.

Spreading

There are many types of spread. The main characteristic is that you are trading related products (e.g., crude, natural gas, gasoline, or November crude versus December crude), and there is a temporary discrepancy in the prices that you expect to be “fixed” (mean reversion).

Trading News Events

There are various types of scheduled and unscheduled news. Many traders specialize in understanding how various markets typically react to certain types of news and exploit these moves.

Momentum Trading

Being able to recognize that a market has momentum in one direction allows you to join the move. Knowing whether news has created that momentum gives you an additional edge because news-driven moves often last longer than moves driven by pure speculation.

Analyzing Order Flow

Although not a technique, by reviewing order flow, it is possible to determine where the next move will be (and its strength).

What sort of tools do professional traders use?

The main tool for execution and analysis is the depth-of-market (DOM) reading. Traders mastering this tool are true tape whisperers. Pro traders also use Autospreaders, which display the implied market for any given spread inputs. Another strategy is scaling in (buying more as the price drops) and scaling out (selling pieces) of a position. The pros also use footprint charts.

Which indicators or tools do traders need to use?

The general rule is to use as few charts as possible. If you have so many charts and indicators to trade a single instrument that they won’t fit on one screen, you have way too much information. With that said, to be more successful at most approaches, traders will need a good DOM with volume profile and footprint charts (to see where people are positioned). Because markets can go up and down, adding more and more indicators means more decisions to make in less time. This will never be a recipe for trading success.

What is order flow and how does it differ from traditional charting approaches?

Charts show the results of historical trading, but order flow shows what is happening now. Order flow traders are looking for the cause of future moves. However, order flow is still just information—it is not a technique in itself. It can be thought of as looking inside the chart “candlesticks” to see how people are trading. Order flow will alert you to changes in market sentiment much earlier than charts, which is why they are so popular in the professional world as a way to enter, manage, and exit trades.

What are the advantages and disadvantages of order flow trading?

Advantages

You see all the available information to make informed trading decisions. Order flow is WYSIWYG—what you see is what you get—and charts don’t show current trades (the only “real” information the market provides). Limit orders can be pulled after the fact, and of course, the tape cannot be altered or manipulated in any way. Using order flow enables a trader to enter at better prices or hold off if the flow is moving in the wrong direction.

Disadvantages

The only disadvantage to using order flow in trading is its initial profound impact. When people first discover and understand what it shows, they can become irrationally exuberant and trade too much for their skill or capital (or both).

What are the typical win rates in the professional world?

This is dependent on technique. Generally speaking, those holding longer positions based on news/trapped traders and other event-generating market moves are about 50 percent profitable. It’s more than possible to make money at a 50 percent win rate if the focus is on events for which the move will be big if the trade works but small if it doesn’t. With this risk/reward, a system that breaks even at 20 percent with a 50 percent win rate is much better than a system that breaks even at 80 percent with a 90 percent win rate. It is all about looking for skew and knowing where being right pays off much more than being wrong.

What is the risk/reward ratio and why is it more important than win rate?

Investopedia defines the risk/reward ratio as “the prospective reward an investor can earn for every dollar they risk on an investment.” Investopedia offers the following example scenario: “An investment with a risk-reward ratio of 1:7 suggests that an investor is willing to risk $1, for the prospect of earning $7. Alternatively, a risk/reward ratio of 1:3 signals that an investor should expect to invest $1, for the prospect of earning $3 on their investment.”

What are margin requirements and leverage?

In futures, margin is the amount in dollars you need to trade a single contract. This amount increases for overnight trades. For one E-mini S&P 500 futures contract, the minimum margin to trade is $500, or $1,000 for two, and so on. Leverage is the ability to control a large contract with a relatively small amount of capital. Typical leverage for equities is 4:1 intraday and 2:1 overnight (or borrowed capital).

What do people mean when they talk about liquidity and volatility?

Liquidity and volatility are two sides of the same coin. Liquidity is the availability of someone on the other side of the market when you want to take a trade, whereas volatility is how fast the price moves. Low liquidity usually causes high volatility.

What are the differences between limit, stop, and market orders? (Investopedia)

A limit order is a passive order to buy or sell at a specific price. This order can be seen by the market on the book. A market order is an order to buy or sell at the best available bid or offer. This order cannot be seen until it is triggered. A stop order will turn into a market order when a stop price is met or exceeded.

What is slippage and when is it most likely to occur? (Investopedia)

Slippage occurs when a market order is executed at a less or more favorable price than originally intended because of a lack of liquidity. It is most likely to occur in volatile or low-liquidity markets, during news events, and so on.

What are the fees and costs associated with futures trading?

There are fees for the platform and data feed and commissions for trading. These include the exchange fees, NFA, FCM (for clearing), and broker fees.

What are the biggest myths about trading?

Myth No. 1: Trading is a get-rich-quick scheme. In reality, trading is more of a process leading to a career. Myth No. 2: “They” know more than me. Nope. It’s all about experience, skill, and discipline. Myth No. 3: All it takes is a simple “method” or “strategy” to make money. Interns at professional firms usually go through a 12-week trading program that is 25 percent teaching and 75 percent hands-on experience. After completing the program, it takes 6-9 months to “earn” their live account. If a system existed that would allow traders to learn everything in one day and start profiting the next, everyone would use it. Systems promising such things may be sold in unregulated markets, but it is naive to think you could beat the market so easily.

How should I get started as a brand-new trader?

Accept that trading is a skill that you’ll develop over time. Stop throwing tools and strategies away just because they don’t work the first time. There are no certainties in trading, so stop looking for red or green light approaches. Avoid the junk trading industry and try to avoid technical analysis and magical methods. Trading is more of an art than a math problem to be solved. Start like the pros do with drills and one DOM. Do this for two weeks for 90 minutes every day. Just watch the DOM without SIM trading, and take notes. It will start to make sense, and you’ll never use charts exclusively again. Know that markets are like a symphony—when you learn to read the action and people like music, it’s impossible to go back.

How much time do you need to devote to trading?

New traders should plan to spend at least two hours a day trading—and be sure to trade the live market with a simulated account. There is no path from market replay to live trading.

Why do companies like Robinhood allow you to trade stocks for free? How do they make money?

As mentioned earlier, brokerages that offer free trading do so for two reasons: They want to hold your money in their business, and they want to earn from it. They sell your orders to HFT firms who gain an information edge by knowing which side of the market people are trading before anyone else does. Don’t forget: If something is free, you are the product. This is not necessarily bad … it’s just not free.

GET STARTED NOW

Futures and forex trading contains substantial risk and is not for every investor. An investor could potentially lose all or more than the initial investment. Risk capital is money that can be lost without jeopardizing ones’ financial security or life style. Only risk capital should be used for trading and only those with sufficient risk capital should consider trading. Past performance is not necessarily indicative of future results.

Testimonials appearing on this website may not be representative of other clients or customers and is not a guarantee of future performance or success.

Jigsaw Leaderboard
Note that the Jigsaw Leaderboard contains a mixture of SIM/Live Traders. For many traders, you can click by their name to see the trades along with the SIM/Live designation.

The following is a mandatory disclaimer for SIM Trading results:

HYPOTHETICAL PERFORMANCE RESULTS HAVE MANY INHERENT LIMITATIONS, SOME OF WHICH ARE DESCRIBED BELOW. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFITS OR LOSSES SIMILAR TO THOSE SHOWN; IN FACT, THERE ARE FREQUENTLY SHARP DIFFERENCES BETWEEN HYPOTHETICAL PERFORMANCE RESULTS AND THE ACTUAL RESULTS SUBSEQUENTLY ACHIEVED BY ANY PARTICULAR TRADING PROGRAM. ONE OF THE LIMITATIONS OF HYPOTHETICAL PERFORMANCE RESULTS IS THAT THEY ARE GENERALLY PREPARED WITH THE BENEFIT OF HINDSIGHT. IN ADDITION, HYPOTHETICAL TRADING DOES NOT INVOLVE FINANCIAL RISK, AND NO HYPOTHETICAL TRADING RECORD CAN COMPLETELY ACCOUNT FOR THE IMPACT OF FINANCIAL RISK OF ACTUAL TRADING. FOR EXAMPLE, THE ABILITY TO WITHSTAND LOSSES OR TO ADHERE TO A PARTICULAR TRADING PROGRAM IN SPITE OF TRADING LOSSES ARE MATERIAL POINTS WHICH CAN ALSO ADVERSELY AFFECT ACTUAL TRADING RESULTS. THERE ARE NUMEROUS OTHER FACTORS RELATED TO THE MARKETS IN GENERAL OR TO THE IMPLEMENTATION OF ANY SPECIFIC TRADING PROGRAM WHICH CANNOT BE FULLY ACCOUNTED FOR IN THE PREPARATION OF HYPOTHETICAL PERFORMANCE RESULTS AND ALL WHICH CAN ADVERSELY AFFECT TRADING RESULTS.