Market Risk Analysis and Forecasting An Experiential Approach to Financial Economics Session 1 “Getting Started with FTS” Prof. Jim Forest Department of Finance University of Connecticut Class Session 1 • In this session we will get acquainted with the FTS real-time trading system. • Students will participate in a semester-long trading competition in one of the below markets: 1. Dow 30 Stocks 2. Treasury Bonds and Fed Funds Futures • Each case involves … participants Initial Parameters • Trading Costs: $9.99 per trade • Initial Funds: $1 Million “Cyber dollars” • Your Goal: Outperform your peers over the term (you need to start building a strategy right away) Hint: Never marry a trading strategy or security!! Goals of This Session • To introduce the trading interface • To engage in our first trades • To offer initial suggestions of basic strategies you may want to experiment with in the early stages of the semester The FTS Interface Getting Our “Feet Wet” • We will take you on a quick tour of the basics of the FTS real-time • Note: You should download, print and read the real-time trading manual to learn more details of the trading capabilities of FTS • You may enter any strategy the system will allow of you!!! Starting Up FTS • Step 1. Run the FTS System Manager and select the FTS Real Time Trader Client (as shown below). Getting Into the System • Step 2. Launching the FTS Real Time Trader Client: Click on Run Selected Application using the button below FTS Real Time Trader Client • Now you are in the system!!! Enter Appropriate Data • Select Language: Select a language preference • Select Pre-specified Server: Select the appropriate server • IP Address of Server: Enter your IP Address or proxy • Port Number: Leave this field as it is unless directed otherwise • Trading Name: Enter your assigned trading name • Password: Enter your assigned password The Main Window The Support Window • Notice the upper right-hand window • Support Window: The Support Window contains all of your TIP: The Second Tab has a drop-down support pages, that allows you to choose support including access to options such as Bloomberg, Yahoo, and the Fed websites. After we select a web information. security, you can check it out!!! Analytical Support & Reports Window: • This window displays reports and analytical support both of which are controlled by the two drop down menus located at the top of the window (defaults - US Dollar and Select Analytics). Tabs Window: • This window contains the following three tabs: • Login to Server: Displays login details • Trade Securities: Displays a screen that allows you to submit markets orders for all of the tradable securities in the case Reports Window: This window displays the securities that are available to be traded. Activity One: Your First Trade We will start by taking a long position in any one security of your choice. Go long one unit only after a short break to allow you a little research Suggestion: Buy Low (But how do I know what is low??) 10 Minute Break for Research • Take some time to research one or more securities – Build a strategy for a long • Perhaps a technical analysis strategy would be a basis as we have just scratched the surface. • If you are in the Dow case, you may want to use a metric such as PE ratio. Discussion Session What did you do for your first trade? Managing Risk “Pulling out the stops” Remember: A Stop Loss Order… …Is a special limit order to sell below (buy above) the current price on a long (short) position Stop Orders Any combination of buy or sell stop orders can be submitted by selecting the appropriate radio control. Above you enter your price and quantity. The stop order specifies the price or “worse” that you want to transact at. This order type is used to close out a trade if the market moves against you. Safer to Use Protection!!! • At this point I want you to decide on whether or not to use a stop order to manage the risk of your long position. • Note: If you set the stop too close to the current price you run the risk of being “stopped out.” This can be a problem in a volatile market as you are selling low!! • This is an example of TRADING RISK Activity 2. Stop Time Two Minute Break: Enter a stop order Discussion Session What determined the stop out price for you? Note: When you have a stop order out… …you don’t want to be away from the market for too long!!!! This is why your spouse the trader worries about the yen during dinner!!! You are now happily married to the market and your spouse…Polygamy!!! Other Trade Possibilities • Limit Buy Order – This is when you are interested in a long position for a given security, but below the current price • Short Sale – Again, this is a strategy to profit on a price decline. We could also conjure up other strategies… • Limit Short Sale??? • Stopping out of a Short Position??? Limit Short Sale • I might want to enter into this trade when a security takes a big jump in price. Imagine One Situation: A hedge fund manager uses a programmed trading strategy to capitalize on reversals to large price swings. She programs a limit order to short sell 10 shares of IBM if the price rises to two standard deviations above the current trade. She is betting that, if the market jumps by that large a step, it will retrace from that level. Stopping Out of a Short Question: • When might I want to enter into this trade? Answer: • When I have a short position that I want to cover against a big rally (sharp increase) in the price. Imagine One Situation: Magic Jack has just shorted a bunch of Euro based on his trading model. Jack doesn’t usually pay attention to fundamentals but his friend Professor Jim warns him that ECB is meeting today and may surprise the market with a rate hike!!! Jack doesn’t want to cancel the trade but he wants to get some protection in the event that the Professor’s fears are realized. Jack places a stop order on his short Euro position (converting it to dollars) at one standard deviation above the current price Just to Be Safe! Your Turn!!! • You are now equipped with some basic trading knowledge from which to develop a strategy to outperform your peers. • Advice: Given that we are just starting, start of with small positions. • Suggestion: Stay at least 50% in cash for the first couple weeks until we have some more tools in our tool chest and have performed more research in our market.
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