Is There An Edge to Free Commission Trading?

Before there was Robinhood, which many new investors believed set the stage for Free Commission trading and claimed itself to be the pioneer of zero commission in 2012, there was in fact FreeTrade.com, a division of Ameritrade Holding Corporation (www.amtd.com). FreeTrade preceded RobinHood in the year 2000 and was founded almost 50 years ago in Omaha, Nebraska and later became TD Ameritrade though several acquisitions of all the other discount brokers, and thus was the true pioneer. At that time, I was already involved in high-speed trading as many of us were in the day trading field. We all migrated from the online discount broker model in which we were limited with the technology offered and price execution. I admit I opened an account to test out the offering and I traded there for a few months. Here is what was offered by Freetrade.com:

  1. Free commission on Market Orders through the Internet – “Freetrade.com is the ultimate discount broker — a virtual company. Instead of offering LOW commissions for qualified accounts, we offer you NO commissions on Internet market orders. We do charge $5 for stop and limit orders and odd lots, but hey, we’ve got to earn something here.”
  2. Limited Customer Service and Trading Support – “All trades and customer service will be executed by and through the Internet. Customers will not be able to telephone Freetrade.com. You can understand this would help reduce our costs of operation and increase our opportunity to succeed. E-mails for customer service will be responded to quickly, and confirmation of trades will be reported immediately.”
  3. Web based Trading Application in which they stated “Our site features dynamic postings of your account activity. Your account positions, margin balances and transaction activity will be updated in real-time throughout your portfolio. In the event that the primary trading site is unavailable, we built a truly redundant back-up trading site that will seamlessly handle your orders. The site will automatically appear on the web-trading page, with a notice to you of its implementation.”

Although they clearly stated that it was only free for certain types of orders, they were proper to disclose how they were making money. What I liked about them is that they were very transparent and clearly explained how the model worked to its account holders.

“We must also generate revenues, and we do that in four primary ways.

  1. The traditional interest income system: loaning customers funds against securities in a margin account.
  2. Market Makers and Specialists that execute trades may pay us for the order flow. This system of payment got started because execution facilities were not efficient, and the size of the market had gotten larger. This payment used to average $9.00 per order for us at Ameritrade and was instrumental in helping us reduce our costs to customers. In fact, without it, commissions would not have come as low as they are. However, as the markets have become more efficient and competitive, this revenue source has been reduced dramatically. In fact, for the last several quarters it has been as low as $1.50 per trade.In the year 2000, the industry may gravitate to decimal pricing. If and when that happens, spreads on quotes may narrow, and this revenue source may continue to go down and disappear. Hopefully, by that time our other revenue sources will be large enough for Freetrade.com to survive.
  3. We will sell advertising on our website. This is a good way to let the advertisers pay for your commissions. However, we will not sell your name and address or any information about your personal account to anyone. We will absolutely maintain your privacy. We will describe demographic and cyclographic information on our customer base to advertisers but will maintain the privacy of your account.
  4. Payment for market information flow. It is your activity, our customers’ activity, that provides the execution destination with the information to establish the Bid and Ask quotes. Quote vendors then charge for this information. We think that this is more than an economic indiscretion. When their payments were started years ago, the idea was to cover costs. However, currently these execution destinations reap revenues of hundreds of millions of dollars due to the increased size of the market. Also, the quote charges are biased against the electronic customer since you — the investor — provide the information for these quotes. You should not have to pay a high price or be subject to discrimination.”

Unfortunately, the model only lasted until the 2008 recession and was shut down in early 2009. I won’t get into the full history lesson as to what exactly happened to the US market thereafter, but I feel it is important to compare the past lesson to present events in order to better determine the future of online trading.

Earlier this month, five of the largest and most well-established US online brokerage houses, including TD Ameritrade: Etrade, Schwab, Fidelity and preceded by Interactive Brokers (IBKR), announced that they will be offering a commission-free model. It jolted my memory that TD Ameritrade is not new to this model and perhaps they felt it was now the right time to jump back in. Or perhaps they are simply joining the others in the game of market share. What does this new competition mean for Robinhood, who seems to have dominated the commission-free market share since its launch in 2012?  Interestingly, Robinhood earlier this year seemed to be poaching the other brokerage house commission-based model with the launch of Robinhood Gold and the offering of Level 2 market data. The quest for market share is based primarily on the brokerage house routing and the reselling of orders in their accounts to the exchanges, high frequency liquidity providers, market markers and big banks in exchange for Payment for Order Flow (PFOF). All brokerage house participate in PFOF, and although in Robinhood’s case it was the primary source of revenue in addition to taking the big spread between the National Best Bid and Offer (NBBO) and the fill price executed for their customers, they barely scratched the surface in monopolizing the online brokerage industry.

I want to point out in the history lesson that this model is not revolutionary. It is also not designed to help out the smaller investors in the stock markets to gain wealth by saving on commission fees, nor is it really truly free and altruistic. It is in fact quite the reverse. There is big money to be made in the PFOF model. As to why the others who may not have been as vocal about it as Robinhood, they finally made the decision to add-on and adopt Robinhood’s version of putting a pretty spin on it by calling it free trades. Take a look at this chart study below created by IBKR and sent to their prospectors in June 2019.  Not surprisingly IBKR, who had the smallest volume for PFOF, made the decision before the other four to introduce this model after conducting this study below and decided to adopt the Robinhood model in hopes of capturing more market share from the bigger houses. As you can see it’s apparent who has more of an edge than others and its as if they are predators closing in on prey.

You might be thinking who care, “if I am not getting the best fill, I’m at least still saving by not paying for commissions. And I don’t care if it is the watered down access to the US stock market.” This is not the case however, and you should care if you want better executions and higher profitability. Although I think this may be the ideal environment for individuals who are new to investing and trading on their own or who are only looking to do long-term trading. It is not right for more active traders. If you are an active trader or looking to become a better trader this is the absolute worst structure to be in to day trade for a living.  Everything in this environment is a disadvantage to the smarter trader. And here are the reasons why:

  1. Free is not really free – As I pointed out earlier with the history lesson of Freetrade.com and its predecessors, commission-free comes with conditions which many investors are not reading carefully or aware of as it may be in very small print.
  2. The tools provided to trade in this environment is subpar and very limited in order to keep the operation cost at a minimum. And this is not beneficial to the traders. The trading environment offered is always a web-based lite application coupled with delayed market data by 15 minutes. If you are trading a very volatile security, this is extremely risky. You are essentially trading blindfolded without a walking stick as you are not seeing the full depth of the market in real-time and not having the ability to execute trades faster using hot-keys or being able to enter advanced order types such as a range or stop loss which are very critical in being profitable and mitigating loss. These standard features are not offered on a free web-platform.
  3. There is no opportunity of price improvement. All commission based brokers must offer their account holders the opportunity of price improvement by getting the highest bid price on a stock. This is often not offered in commission-free environment. Getting the best price means you end up winning on a trade. And yes trading is a competition in which you are trading against algorithms (ALGOs) you are both competing for the best bid or ask in the auction.
  4. There is no opportunity of rebate sharing. Your trades are being sold to the sophisticated traders consisting of the algorithms run by market markers, dark-pools, and alternative trading systems (ATS) who are very eager to buy your order flow as it is blind, a term commonly coined “dumb.”  Additionally, the PFOF is not even being shared with you in this commission-free arrangement. It is unfair to trader, but on the same token the trader has agreed to that arrangement by forfeiting paying commissions and all execution cost.

Will this model become mainstream for the US online trading? This is hard to predict as there are a few factors which might impact this model. One is whether we are again heading towards another recession which causes a lot of people to either exit the financial market or turn to day trading as an alternative revenue source. I am foreseeing more emphasis on rebate trading or the maker taker model becoming more widely understood by those who graduate from merely investing to becoming smarter traders. I do not believe commission-free accounts will ever truly be free as it is not organically sustainable, as proven by Robinhood who is backed by venture capital money and still requires continuous infusion of capital from some other revenue source than PFOF. I do wonder whether we as a society will continue to be desensitized and accepting that we are being sold as part of larger data and how will this truly revolutionize e-commerce and the internet. I have to be hopeful in thinking that at some point traders who may have started out using the “free” with conditions will eventually come to realize this and want and expect more.

And this is where direct access and high-speed trading comes into play as it did in the early 2000s. Traders, like technology, are constantly improving and eventually they will come to the realization that commission-free trade does not offer them any edge or advantage at winning in the market. At some point they will wisen up to realize that a penny-wise and pound foolish mindset won’t help them achieve financial growth and independence.

I conclude this by offering the following advice: those who feel they need to start out in a commission-free environment should go with the house with the least market share participation model in the group, for they might be more inclined to value your order flow the most and be willing to offer you rebates and access to better technology

Introducing the Short Locate Feature to the DAS Software

DAS is pleased to announce the Short Locate application on our live trading platform.  This feature allows the trader to instantly request locates of hard-to-borrow securities without having to contact your broker.  Normally, the process takes up to 20-30 minutes of a trader’s time, but with this feature the trader bypasses the lengthy process of negotiating a symbol’s price, shares, etc. with the broker and allows him or her the instant ability to short non-ETB stock on the software.

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DAS offers this feature for a $15 monthly fee.  It does however require that your broker is compatible with this feature, so you must contact your broker to be sure they also have this feature. For more information about short selling, please read our blog “What is Shorting or Going Short” by clicking on the following link: https://dastrader.com/blog/?p=179.  Below is a concise explanation of how to use this feature on the DAS software.

How does the Short Locate feature work?

With the Short Locate app, you simply identify which stocks you want to sell short and send locate requests for the needed shares for each symbol either before the market open or before the desired trade. This allows you to incorporate hard-to-borrow short sales in automated trading strategies throughout the trading day.

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All short locate requests are valid for same-day trading, and new locate requests are required for each trading day. Any approved requests for shares that are not used by the end of the same trading day will expire.  Short locate requests can be placed at any time during standard trading hours between 8 a.m. and 4 p.m. EST.

Specific step-by-step instructions for using this feature on the DAS platform can be requested by contact our support staff at [email protected].   

Why Clearing Houses and Clearing Firms are so Important to the Stock Market

The clearing house is made up of broker dealer members whose main business is to be the clearing firm to other broker dealer and financial institutions in the Securities and Exchanges Market.  They act as part of the system of guarantees involving the individual trader, clearing firm/or clearing house and broker dealer, which ensures that the counter party does not default on any exchange-traded contracts. No individual traders can trade on an exchange without being associated with a clearing firm. The clearing firm holds the trader’s account on behalf of the broker and is responsible for the record-keeping and often provides the portal for post-trade reporting for the broker’s clients. The clearing firm is also responsible for calculating the collection of margins from individual traders, settling trade and cash transactions and holding the deposit funds on behalf of the broker’s clients.clearing house 1

One of the most important roles is that the clearing firms handle  the back office details of securities transactions between broker-dealers, thus smoothing out the settlement process and making it efficient. When you make a financial transaction, a clearing house ensures that your money is getting to the correct destination.  A clearing house is the common ground between two distinct financial institutions interest (the buyer and the seller) and hence is like a financial middle man.  The clearing house takes on the risk of a transaction between two parties and makes sure that it’s settled on both ends and provides confirmation of these transactions to the clients.  It therefore lowers the risk that one of the parties will fail in its obligation during a transaction.  This is why the stock brokers use clearing firms for settlement transactions to handle the most important aspects and practical details of buying and selling a trade.

The way clearing houses work is that once a trade is executed between two parties, the clearing house receives the post trade detail from the broker dealer trading system and matches the trade with the other clearing firm on the other side of each trade. This involves electronically requesting stock certificate to be deposited or transferred to the clearing firm via Depository Trust Company (DTCC) or with National Securities Clearing Corporation (NSCC) on behalf of its clients.  The DTCC is one of the world largest securities depositories which provides safekeeping through electronic recordkeeping of securities balances. The NSCC is a subsidiary of DTCC to provide clearing, settlement, risk on the equities, corporate and municipal debts, American depositary receipts, exchange-traded funds and unit investment trusts.  All US clearing firms use DTCC to facilitate settlement and clearing stocks in the market. The clearing firms takes on the legal counter-party on behalf of its clearing clients risk associated with the transaction and by doing so, ensures that the trade goes through since it is now responsible for it. The amount of time that this process takes is a matter of seconds via DTCC, with the exception of some transactions such as the OTC markets, where it can take days to settle.

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A clearing firm does not always have to be a third party.  Several large stock brokers have their own self-clearing firms, such as Interactive Brokers, Fidelity, Wells Fargo, E*Trade and others.  If the brokers are self-clearing they can cut costs and in turn offer customers lower transaction fees.  With that in mind, clearing houses should not be the most important factor when selecting a broker.  This is because brokers and other financial institutions can switch which clearing house they use. What is an important factor about the clearing house that a broker uses or self-clears is the availability and size of the short list which is available for the clients. It is the responsibility of the clearing firm to hold and maintenance the stocks that are available for shorting known as the Easy to Borrow list. This list is updated daily as new stocks become shortable are added or removed when restricted by the Exchanges and is normally provided early in the morning to the Broker’s trading system before the market opens.  Although many clearing firms maintain an extensive Easy to Borrow list, some brokers will request borrows from other clearing firms who will loan their short list to brokers who are not their clearing client. This type of borrow in put on a new list known as the Hard to Borrow list.

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You can tell if a stock is readily available for shorting on the DAS Trader PRO software by the letter “S” above the level 2 montage and entering the symbol Short List which is locate under the Trade menu option.  For more information on what it means to short a stock or go short in the market, please see our blog on our website covering this type of financial transaction at https://dastrader.com/blog/?p=179

It is also important to note that many brokers may have multiple clearing arrangement and may offer different commission rates and options based on the clearing house.

How to Cope with Trade Loss

No matter how much you practice or how in tune you are with the market, no matter how good your trading skills, and no matter how skilled you are with setting stops, bad things can happen.  Everyone goes into the market hoping to make more money than they went in with, yet sometimes you come out of the market with a lot less.  Yet, as a day trader, you have to accept that this is the risk you are taking and that loss can and does happen.pulling your hair out

But how do you cope with it when it does, and what can you do with this experience?  First of all, you have to get over it and move forward – it already happened and this is part of being a day trader.  It is of course painful to see your hard earned dollars disappear into the hands of other traders and that someone else gained on your loss.  But all you can do is close out of your position and realize tomorrow is a new day and that you might be on the other side of that winning trade next time.

It can also be helpful to do something positive or proactive to clear your head and your frustrations so that you can start fresh again the next time.  Also, take the time to review what happened because sometimes a loss can have positive consequences; it can teach you valuable lessons that make you a better, smarter, and more experienced trader going forward.

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Here are some tips on maintaining discipline and focus in trading:

1. Keep a whiteboard to remind yourself to stay focused and maintain composure if the trade moves against you.

2. Wake up on time and get to your PC early.

3. Show up every day to trade, either in your real DAS account or your DAS simulator.

4. Make sure you are prepared before the market opens – the earlier you start your morning the more time you will have to go through the news and find the best stocks in play.

5. Set up a Stop Market Order in DAS to ensure your order is filled.

6. Consider the different ways the stocks you have picked might trade and develop a series of “if…then” scenarios.

7. Take a break from looking at the market (nap or exercise).

8. Make it your goal to develop better trading skills, not just make money – you have to focus on getting better every single day, trade by trade.

9. Learn as much as you can, but keep a degree of healthy skepticism about everything.  I.e., ask lots of questions, but don’t always accept experts at their word.

10. Have patience and self-control.  Wait for opportunities with which you feel comfortable and confident.

11. Engage in meditation techniques or any relaxing activities to take your mind off the stress of trading and truly unwind.

12. Leave your day trading behind at the end of the day – enjoy your personal life separate from your day trading life.

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Day Trading Stocks

When individuals are trading securities in the markets, what exactly are they buying and selling?  Securities are defined as investments traded on a secondary market, the most common of which are stocks and bonds. In this blog we will take a deeper look into what stocks are and how and where they are traded.

What is a Stock?stock chart close up 2

A stock is defined as a share in ownership of a company.  If you own a company’s stock, then you own a part or fraction of that company.  For example, if you own a share of Facebook, then you own a part of the Facebook company.  A share of stock also has limited liability, which means that if Facebook were to file for bankruptcy, you can only lose the amount of your investment into the company (i.e. how many shares you own), but no more than that.

Where are Stocks Traded?

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The next aspect of stocks to consider is where they are traded.  U.S. stocks are traded most commonly on organized exchanges such as NYSE (New York Stock Exchange) and NASDAQ, but trading on electronic communications networks, some of which are operated by the exchanges themselves, is becoming increasingly more common.  The New York Stock Exchange is obviously the most famous of all stock exchanges and most of the largest U.S. corporations trade on it.  It is also more than 200 years old and is a floor-based exchange.  Though the NYSE has modernized to computerized trading wherein the NYSE allows brokerage firms to place their servers on the floor of the exchange at a cost, it allows for the fastest transactions – i.e in milliseconds. Pertaining to that, DAS systems are co-located at NASDAQ and provide the most efficient execution solutions for a firm’s clients, broker/dealers, clearing firms, online brokers, institutional trading desks and traders worldwide that demand smarter and faster execution services.

NASDAQ, which stands for the National Association of Securities Dealers Automated Quotation System, is the first electronic stock exchange and is an institution.  It divides its listed companies into three categories: The NASDAQ Global Select Market, which includes the 1,000 largest companies on the exchange; The NASDAQ Global Market, for companies that meet a market capitalization of at least $75 million; and the NASDAQ Capital Market, which is for companies that meet a market capitalization of at least $50 million.  It is important for day traders to note that NASDAQ Global Select Market companies are the most liquid.

Lastly is the BATS Exchange, which stands for Better Alternative Trading System, and was founded to improve trade execution times and is now the third-largest exchange in the U.S.  Several exchange-traded funds are listed directly on BATS.  The National Stock Exchange is an electronic communications network that trades all exchange-listed equities.  It is owned by the Chicago Board Options Exchange and a group of brokerage firms.

The last 25 years of the 20th century saw many changes in the equity markets. Specifically, the abolishment of fixed commissions, the move from physical to electronic trading floors and the development of electronic communication networks (ECNs) all have had substantial effects on how the world now deals stocks and on the professionals who facilitate those transactions. In addition is the consolidation of the twelve exchanges that occurred in the markets, and essentially changed the footprint of where stocks are most heavily traded or have the most liquidity by one conglomerate body at a time.  The Nasdaq who used to be in the 2nd largest has been displaced by the Chicago Board of Exchanges with its recently acquired BATS/EDGE (both merged last year) making it now the 2nd largest market for equities.  (http://markets.cboe.com/us/equities/).

 

NYSE still remains number 1.

 

1.            NYSE 30.9% (NYSE, AMEX, ARCA)

2.            CBOE 17.8% (BYX, BZX, EDGX, EDGA)

3.            Nasdaq (NSDQ, PSX, BX)

The NYSE equities website https://www.nyse.com/products/equities) is a great resource and has explained this:

Stocks trade on multiple markets, but the listing venue has a unique responsibility to:

 

-          Provide a well-regulated market. NYSE Regulation oversees our responsibilities to protect investors and the public interest.

-          Establish displayed prices. NYSE’s unique market model provides deep liquidity and high-quality quotes that lower volatility and the issuers cost of capital.

-          Provide price discovery during the opening and closing auctions. Our unique auction process with Designated Market Makers provides superior price-discovery.

 

This concludes the key aspects of defining what stocks are, why they are so important to day traders, and where they can be traded in the United States.  Following this topic are two other major securities in the markets, which are bonds and ETF’s, or electronically traded funds.

What is Shorting or Going Short?

What is shorting or going short? Despite what it sounds like, it has nothing to do with time.  Instead, it refers to a way to make money when things go down in price.  When prices go down, you can make money because you buy low and sell high, especially in the stock market.

To short a stock you are betting that the value of a stock will go down. Shorting stocks is the act of selling something that you do not own. In order to do this you have to borrow the shares of stock from your broker.

How important is shorting stocks?

It is very important that a swing trader learn to short stocks. Buying stocks is only half of the equation! If the market in general is in a downtrend, you are not going to want to be buying stocks. So in order to make any money you need to learn how to properly short stocks.

Learning to short stocks will also help you to better understand where reversals will take place. By shorting stocks yourself, you will be able to gauge where other traders are going to short stocks and cover their positions.

This can be a sure way to make money, regardless of whether we are in a bull market or a bear market!

What is “shorting stocks”?

When you short a stock, you will borrow the shares from your broker, wait until the price drops, buy the shares, then return the borrowed shares back and you will profit the difference. Here is an example:

XYZ is trading at $30.00 a share. You think that the price is going to go down so you short 200 shares ($6000.00). You are borrowing shares of XYZ from your broker at this high price of $30.00. Just as you expected, XYZ goes down to $20.00 a share.

You decide that you are ready to cash in, so you buy the shares at $20.00. Your broker will now return the borrowed shares to the owner and you will profit the difference. Since you shorted at $30.00 and covered at $20.00 your profit is $10.00 a share on 200 shares – a profit of $2000.00.

What’s a short squeeze?

This happens with a stock that has heavy short interest. Let’s say that a lot of traders are short a particular stock. If the stock begins to rise rapidly, then short sellers will get nervous and want to buy, or cover. This could add significant buying pressure to the stock and make the stock explode!

In the next blog, we will cover what it means to go long in the stock market.

Swing Trading vs Active Trading – Which style is better for you?

Swing trading:

Swing traders hold a particular stock for a period of time, generally a few days or up to two or three weeks, and they will trade the stock on the basis of its “swing,” or the movements between optimism and pessimism.

facebook 39The key to successful swing trading is picking the right stocks.  Usually, the right stocks are those that are the most actively traded stocks in the major exchanges.  This is because in a highly active market, these stocks will swing between high and low extremes, and the swing trader will ride the wave in one direction for a couple of days or weeks and then switch to the opposite side of the trade when the stock reverses direction.

There is more risk to swing trading in the sense that you are holding positions for 2+ days to months.  So if something happens whether it is political, such as presidential speeches or elections, or natural, such as earthquakes – these can affect your positions.

On the plus side, commissions for swing traders are less costly for swing traders than those for day traders because you will be getting in and out of trades much less frequently.

day trader vs swing trader

Day Trading:

A day trader will hold a stock anywhere from a few seconds to a few hours but never more than a day (generally less than 6.5 hours).

Being a day trader requires a tremendous amount of focus and attention as you are trading on the day’s gains or day’s losses, depending on if you are going short or long. All of the up and down movements can happen within seconds and minutes (as opposed to days, weeks, or months), so you need to be able to devote yourself to watching the rapid movements of your stocks.

Being a day trader also involves less risk because you are not holding the stock overnight – there are many things that can happen that can cause the stock to plummet.  But when you are in and out of positions within a 6.5 hour position (unless you are trading pre or post market), you do not have the risk of holding positions overnight. day trader swing trader 2

Commissions, however, are more expensive. On the other hand, as far as compounding your earnings goes, as a day trader you can collect your earnings at a much faster rate, whereas a swing trader may have to wait up to six months before he or she exits a position to gain earnings.

As a last note, the other option is to be a hybrid trader, i.e., to switch between being a day trader and a swing trader. You can be both, but one has to be adaptable to market conditions.  Certain conditions call for swing trading, and yet others are suited to day trading.  As long as you keep your eye on the market and continue gaining experience, you are able to do both.

Why is it so crucial to practice simulation trading before live trading, and how long should one practice for before going live?

Individuals across the nation and across the world work very hard to earn an income, pay bills, pay a mortgage, pay for children, etc., but what is even harder is to put aside for savings. And when that savings account gets to be a certain amount – large or small – who doesn’t think about wanting to invest it and potentially double it, maybe even triple it, in the lucrative world of investing?  And that is possible! So while we at DasTrader.com are an elite stock trading software company and very much want your interest and business, there are a few tips to consider when getting involved, as your success is ultimately ours as well:

practice 2  First and foremost, practice, practice, practice!  In order to be successful at trading stocks, one has to become experienced with how to trade first.  There is so much involved with trading stocks that one has to learn how they behave, and also how to deal with loss.  Stocks go up and down inevitably, that is their nature.  So by practicing in a real simulated environment where you can invest in those companies you believe will go up or down (depending on your strategy), you will be able to see just how well your strategy works before putting your hard earned capital into the markets. 

 In order to help our clients become more successful, we offer free educational resources which include a series of YouTube videos to help you become proficient with using the software and which you can find by going to https://www.youtube.com/user/dastradertv.  In addition, we offer FREE live webinars: Intro to DAS every Wednesday 4:00PM-5:00PM EST (GMT-5:00) with educators covering a variety of topics and time available to ask questions at the end.  Please click the link http://www.dastrader.com/form-webinar.php to register for our regular weekly webinar, or to request a one on one session. Time slots available for one on one sessions are weekdays 12:00-16:00 EST. (GMT-5:00).practice

 Additionally, there are the technical aspects of trading, i.e. what to trade: what type of trader are you?  Are you a day trader, a swing trader, position trader…? The list goes on.  (And, in another article we will cover in greater depth the differences between them).  But again, by using the simulation mode you are allowing yourself the time and practice to figure out which strategy works best for you.  (For a brief look at the differences between the aforementioned trading strategies, check out: https://www.bigoption.com/blog/active-trading/).  

Lastly, how long before you’re ready? Experienced traders will tell you that it does take between 6-12 months (sometimes more) of training before you are ready to go live.  So if you are serious about wanting to double or triple that savings account, consider practicing first.  For more information about subscribing for a simulation account, or for first time users with permission for a free 14-day trial, visit www.dastrader.com and click on the “Subscribe” link.  

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Trading Simulation and Back-Testing – What and Why

Stock trading strategiesInvesting in today’s markets can be a challenging, complex, and even intimidating experience. Not to mention that mistakes or faulty investment strategies can lead to financial loss and a lack of confidence in making future investment decisions. However, today’s technology and software tools help reduce such strategic misses and provide critical decision-making assistance for both experienced and beginning investors. Two such tools are Trading Simulation and Back-testing.

Trading Simulation – What and Why

Trading simulation is basically just what it sounds like. This is a software application that allows a potential investor to ‘pretend’ or simulate stock investments without actually making a real financial commitment. This allows you to test your strategy for investing without risking any capital to see how your logic for investing would work out from a win/lose standpoint.

By trying a mix of strategies through the simulation tools you can determine how well you’re reading market indicators and company information in making your investment choices. Modifying your choices and re-running the analysis allows you to further determine how small changes to your decisions would have impacted your results. It is easy to see how such a tool could be a considerable advantage to potential investors over those who do not have access to such analytical capabilities.

Back-Testing – How Can You Utilize It to Your Advantage?

Investopedia defines back-testing as a process that allows you to test your investing strategy against a past period in time to observe what the performance of your investments would have been over that time span. The benefits of such a tool are significant in that you can determine whether your proposed investment strategy would have resulted in gains or losses, and to what extent. Some of the valuable statistics provided to traders by back-testing software include:

  • Net Profit or LossNet percentage gain or loss.
  • Time frame - Past dates in which testing occurred.
  • Universe- Stocks that were included in the back-test.
  • Volatility measures - Maximum percentage upside and downside.
  • Averages - Percentage average gain and average loss, average bars
  • Exposure - Percentage of capital invested (or exposed to the market).
  • Ratios - Wins-to-losses ratio.
  • Annualized return - Percentage return over a year.
  • Risk-adjusted return - Percentage return as a function of risk.

As an example, you can evaluate the results you would have experienced if you had invested in oil stocks during a period of political unrest in the Middle East. Let the tools tell you if your choices would have realized gains or losses.

How Do You Get These Tools?

One consideration to keep in mind is the investing caveat that past performance is not a guarantee or promise of future results. Nonetheless, such tools bring obvious advantages to those investors who have such a tool available for their analysis of investment choices.

As with any highly-technical tool, you need to understand the criteria entered into the simulation and back-test software to get reliable results that are comprehensive and meaningful to you. Use of these software products requires some understanding of their functionality that can be provided through the software vendor or provider’s support team.

Whether you are investing for the long term or day trading, arming yourself with powerful analytical tools can provide you with a significant advantage over investors who do not have such software available to them or do not understand or make use of its capabilities.

DasTrader is a leading provider of sophisticated investing software including desktop and mobile applications that facilitate efficient reliable trading and analysis for traders of every experience level. We are constantly striving to improve the reliability of our software to the benefit of our clients. Visit our website today for additional information or contact us today to discuss how DasTrader can improve your investing experience.