You have an edge over the Wall Street trader!
Guest Post by Isaac Kahan, First: Let me define over whom you have an edge.
In every trading market there are different categories of people trading it. They include: In the silver futures market, there is the scalper or floor trader: This is the trader buying & selling the item with no attachment to the product itself.
What this trader is concerned with is the difference between the bid & the ask. To explain these terms, know that every trade-able entity really has two prices. The bid, which is what you get if you sell the item now & the ask, which is what you can buy the item for. For example, If silver is trading at $10.50, the ‘real’ number if you want to sell it would be $10.495 & if you were to buy it you would have to pay $10.505.
This half penny in ether direction is the spread that represents the money the floor traders make when they buy from one person & sell it to another. This same system happens with everything such as wheat, sugar & even treasury bonds, etc.
The next kind of trader is the hedger. This trader can be from a gold & silver mining company to a dealer in metals. For example, a dealer in metals gets an order and sells some coins & bars. He needs to replace this inventory that he just sold & buying from the market is the best & cheapest way to cover his position. The same thing happens when a dealer buys coins & bars but has no customer for it. He will go out & sell a contract on the market so as not to lose money should the market go against him.
This trader buys or sells for any number of reasons. It might be that he or she is following the trend or any other system that they have. It might be that they have a gut feeling. It really doesn’t matter what the reason is. What does matter is that these are the people that are out there buying & selling & causing the market to move.
These people are helpful in the marketplace as they are providing liquidity & allowing for the markets, such as silver, the ability for the spread between the bid & ask to be only half a penny.
The concern with the different types of traders is that in most cases they don’t care about the underlying market. All that the floor trader cares about are making the half penny spreads between the bid & ask & to be able to do it many times in a day. The more such trades he makes, the more times he can earn the spread. All that the hedger cares about are that he can cover his exposure to the market so if he bought the actual silver then he needs to sell it at the best price. In most cases the hedger is not a true hedger in the sense that if he bought silver at 10.5 & now silver is at 10.51 he will try to squeeze out a little bit more & wont sell it till it gets a little higher. By the end of the day these people will try to be flat in the market.
What about the “speculator”? This person is buying or selling for his own undisclosed reasons. He or she feels that the price will go up or down. This is the person that really interests us. Why? Simply put, it is this type of trader who really moves the market.
In the end, the scalper is just trading for the ½ cent the dealer hedger is covering the base so in reality nothing that he is doing is moving the market all that he is doing is buying in one place & selling in another. But the speculator is the only person that is causing the market to move. How? The speculator is the only one who is really holding a position.
What causes the speculator to cover their position? There are three reasons.
1) To take profit.
2) To cover losses.
3) Found a better market.
For reasons 1 and 3, you can’t predict where & when the speculator will get out of their position. The speculator might be using a specific dollar amount & since it is not known when he got in the market it can’t be determined what will compel him to get out. The speculator might also be using any number of technical tools available to him. He might be using trend lines, overbought & oversold levels or even just round numbers (for some reason people like to use all round number such as 10 dollars 10.50 & 11 and son on).
Don’t worry; we are starting to get closer to disclosing where you have an edge. To some extent the speculator will have to cover losses. This is done in one of two ways:
1) Essentially, the opposite of taking profit. The speculator says that he has had enough of losing & just bails out of the position.
2) The speculator has a certain dollar amount that they are willing to lose. Now, remember, since it is not known what that amount is nor is it known where they got in, we simply can’t know when they will get out.
Now let me interrupt with a little story. It was back in 2002 & a customer/friend of mine comes up to my office & shows me his brokerage statement. His final balance was a little more than one million dollars. I don’t remember how long it took him to make this but it wasn’t more then three or four months. I told him to be careful because by this time I was already trading for 15 years & I knew that trading with a gut feeling cannot achieve such returns in the long run. Anyway, to make a short story even shorter, it wasn’t more then one month later, and he was back ashen faced. When I asked what was happening, he whispered “margin.” To this day I don’t know why I had not warned him of this as I should have known that this was the only way for him to make so much in so little time. You see, the margin is a silent killer. Just the mere fact of getting a call from your broker saying that you have to pay up or else . . .
This changes the way your thought process works. From having a rational train of though of where you want to buy or sell you go to thinking what can I do to get this guy off the phone! Another thing is that for some reason or other the margin clerks only call you when the extreme is happening. I feel that if I had the ability to take the other side of any trade that is happening because of a margin call I would be extremely rich.
Now back to the program.
All three classes of traders that I spoke about before have margin issues. The least is the scalper because he isn’t really holding any positions it doesn’t really matter to him. Nevertheless, in order for someone to make a lot of money as a scalper he needs to trade on a large scale. So if a scalper trades 10 times a day with one contract of 5000 ozs silver, then each ½ penny that he makes comes to only $25.00. I don’t know anyone in this business that will be happy to earn $250 a day & remember the 5000 represents $50,000 of underlying value. Also keep in mind that no person is right all ten times. So what does the scalper need to do? He has to over trade so instead of trading just 1 contract he has to trade several.
Now the hedger has things a little better because since he has the underlying stock, his margin requirements are lower than that of a speculator. So let’s say a dealer sold his silver at $10.00 and re-buys it on the Comex. There should not be any problem because he has the money from the sale to cover any margin requirement. But what if the dealer bought some silver & sold it on the Comex as a hedge? Now he spent money to buy the silver & he needs to have extra money to cover initial margin. If the market moves against him, he will have to cover even more money. Now granted he has not lost money because the silver is his and he now has the choice of going un-hedged or he can sell some of the silver that he has at any price to give him some money to pay the margin clerks.
The Silver Investor
This brings me to another category: the silver investor. I will not talk about selling silver short because since silver can go up & up your risk is unlimited.
But the silver buyer that is buying silver with his or her own money & owns the silver will never be forced to get out of the silver position because of the silver market. Silver can go up, down or even stay at the same price. There is no interest to pay because you have not borrowed to buy it. No margin clerk will ever call nor will any broker call you because he has found a better investment.
You remain in complete control of your investment. No one can ever tell you to get out of it. Also, since the silver remains in your possession, there can be no possibility of a bank default that should affect you. It has been valued since the beginning of time & at no time did it make more sense to own it than today.
About the company: Bullion Trading LLC accepts orders of any size and processes orders using the spot price. Bullion Trading LLC only sells from their active inventory and only stocks in-demand grain, coin and bar products. Come visit our website and see for yourself at: http://www.bulliontradingllc.com/index.php