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Narrator:
Hey, everyone. I'm Joe Mazzola, 25-year trading veteran, with experience as an options market-maker, portfolio manager, and risk manager. And I'm here today to answer your trading questions.
Question one. This is from 33cltn. It's a good starter question. 'So how does trading work? I'd like to learn to make a profit off trading.' Well, trading is really a systematic approach to buying and selling stock, figuring out where you want to get in, where you want to get out, and how many shares. If you do that enough times, and you make it systematic, the hope is that it turns profitable.
Alright, next question. 'If every stock trade has a buyer and a seller, how can there be more buyers to make a price go up or more sellers to make the price go down?' Great question. We get this one all the time. It's not necessarily that there's more buyers or sellers. Think of it as supply and demand. More buyers are willing to pay higher prices, and what happens is the sellers, they back off. So that causes the price to go up. Same thing on the way down, if there's less buyers to support the price, right, if people are backing up their bid price, and more sellers are selling it at lower price, that pushes the stock down. So it's not a matter of more buyers or more sellers, it's more of a matter of where they're willing to make that transaction at.
Xiao Guoan asks, 'Can I trade between 4:00 AM and 7:00 AM?' Well, sure you can. I'm glad you asked. Because now at Schwab, on our thinkorswim trading platform, you can trade 24 hours a day, five days a week, Monday through Friday on hundreds of ETFs, S&P 500 stocks, and NASDAQ stocks. But be aware of this. During those after-hours periods, there tends to be less liquidity, meaning there's less people in there buying and selling the stocks. That can cause the spreads, the difference between where you can buy it and sell it, to widen. That's why during that time, we like to use limit orders, and do not use market orders to help with that transaction efficiency.
Burt Gearhart asks, 'How are daily opening stock prices set?' Well, Burt, even though we have 24/5 trading, there still is an opening rotation, where the market-makers will match the bids and the offers to figure out where that opening price will be set.
As a follow up, Burt Gearhart asks, 'What are market-makers, and what role do they play in stock prices?' Well, Burt, as a former market-maker, my role was to provide liquidity in the markets. That's just a fancy way of saying I'd match up the bid prices and the ask prices to make sure that we could get a transaction. They do that today in the stock market, but they do that more so with computers matching up algorithms. The algorithms take the bids and they take the ask, and they do it. They match it up together. It's just a much more efficient way to handle business.
kmsoh1027 asks, 'When a stock price moves up or down over a day, what tools can investors use to gauge how long this trend will continue?' Well, there's no way to know for sure, but a of traders will use stock charts to identify trends via maybe support and resistance. Some will use moving averages. Some will use different types of patterns, such as triangles, wedges, head and shoulders, to determine if there's a breakout or bounce. Me personally, I like to use the ADX. What is that? Well, that's basically a way to identify the strength of a trend.
'If past performance doesn't guarantee future results, why are technical indicators like the RSI useful?' Good question, and a funny one, too. I think you might be asking why is technical analysis useful? Well, and I think the answer to that is technical analysts believe that prices of stock are already fully embedding the earnings, sales, cashflow growth, the fundamentals that move a stock. So a technical analyst believes if that's already embedded, then any movement from there is really the market identifying future prospects for this stock.
In regards to the RSI, if you're talking about overbought and oversold, what I will tell you is this: I don't pay attention to the overbought oversold as much as I pay attention to when it rolls back down from being overbought or when it rolls back up from being oversold. I think that's a way to trade via the RSI.
Opinion.Unscripted asks, 'Suppose I bought a stock at $100 and it's now trading at $200. I want to sell the stock at 180 in case it starts falling. What type of order do I need to execute to take profit when the stock starts falling?' Well, the order you need is a stop order. A stop order is a way for you to set a price for a market order to trigger, meaning this: if you set a 180 stop price, once the stock trades at or below that price, your market order will trigger, meaning you'll sell the stock at the next best available price. Remember though, it might not be 180, you might actually end up selling it less than that price. If you want to make sure that you get that 180 price, you might want to think about a limit stop order. A limit stop order allows you, once again, to set that trigger price at 180. The difference with this trade, though, is it will only sell it at 180 or higher after trigger. What's the tradeoff there? You're not guaranteed a fill.
'Suppose you hold shares of a stock. Can you enter an order above the current price to automatically sell If it hits that price?' Sure you can. It's called the limit order. A limit order allows you to set the price that you want the stock to be sold at. If it trades at or above that price, it will automatically transact.
FireEverLiving asks, 'When, if ever, is it unsafe to place a market order?' Well, there are some times when it's not that safe, and that's when it's really volatile in the market. You'll see that at times when, you know, the market might be down 4- or 5%, and what happens is the bid-ask spread on the stocks really widens. What does that mean? That means the difference between where you can buy and sell the stock at is much wider than in normal times. You run the risk when you use a market order of selling probably below where you wanted to or buying above where you wanted to. In that instance, it's definitely better to use a limit order.
Next up is Martin-bk3SP, and he asks, 'How can I open a paper money account?' Well, first off, what is paper money? Paper money allows you to trade in a simulated world without real money. If you are a Schwab customer, you already got paper money, all you have to do is download the thinkorswim trading software. If you're not a customer, just use our guest pass, where you can have a limited time access.
Next question. 'What does a typical day on the trading floor look like?' Ah, well, I can tell you my experience and I can tell you what it looks like now. So when I was down there in the early 2000s, you probably had about 4,000 people down at the Chicago Board of Options Exchange on a daily basis, you know, just like you see on TV, hands waving around, transactions taking place. But you know what? That only happens a smidgen of the time. There's a lot of standing around time. But basically, what we do is during the day, we buy at certain levels, and we sell at certain levels. And what we did, our job was to provide liquidity, meaning we bought at a certain price and we sold at a certain price. Today, boy, that pit is dried up and the floor is dried up. It's basically all algorithms now, where computers are sending buy and sell orders back and forth. You still have some traders, however, at floors like the NYSE, where you do still see market-makers. Why? Because in times of high volatility, it's still good to have that human element down there.
Next question. 'What's the hardest part about being successful at trading?' Great question. Discipline. It takes a systematic plan, and you have to follow that plan. Make rules. Figure out when you want to get in and when you want to get out. Position size, make sure you're not overtrading. Sometimes you fall into that trap of saying, 'I have to trade today.' No, you don't. That to me, that discipline, that plan, that will make you a more successful trader.
Next up, 'How do you know when to sell a stock?' Well, that's relative, right? And that's really dependent upon the trader themselves. Now, a lot of traders will use rules, right? They'll use rules for profit gains. They'll say, 'If there's a certain percentage that I've gained, I'm willing to sell a stock.' Maybe not all of it, but maybe a portion of it. Might have the same thing on the downside. 'If the stock is moving against me, I'm going to set a certain percentage below where it's currently trading that if I lose that amount, I want to get out.' What I would say is use those rules, but then incorporate things like technical analysis. If it breaks a trend line, if it breaks support, maybe those are the triggers that you're using, in addition to your rules, to give you that cell signal.
Well, that's it for today's questions. That was fun. I'd love to do it again. Thanks for tuning in and make sure you comment below.
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