The Exchange: How it Works
You’ve done your research, evaluated trends and assessed the marketplace. Now it’s time to place a trade.
After clicking the TRADE button within the corn section of the heatmap, you’ll be given a breakdown of current market information. Then, you put your analysis to work.
Step 1. Order Types
In the simulator, you'll be limited to trading the contracts that expire next, often referred to as the front month. In this instance, that's December. There are four order types to choose from: market, limit, stop and stop-limit. For this example, we'll focus on a market order, an order placed at any time during the trading session with the intention of immediately executing the entire order at the best available offer price (for buy orders) or bid price (for sell orders).
Step 2. Quantity
Select the number of units you want to buy or sell.
Understanding Quantities
To purchase one unit or futures contract does not mean you are purchasing a single cob or even stalk of corn. In fact, one futures contract of corn is equal to 5,000 bushels.
Step 3. Buying vs. Selling
Unlike stocks, you can sell futures without making a previous purchase. However, you cannot realize a profit in futures trading until you “flatten” your position – placing an order for the same quantity on the opposite side of the market.
If that rainfall has you thinking that prices in the corn market will spike, you'll purchase one corn futures contract in anticipation of that potential rise.
On the other hand, if that bumper crop came through and supply is set to exceed demand, you’ll sell in anticipation of a downward trend in prices.
OK Cancel
Step 4. Confirm
Once you place your order, the confirmation screen gives you a summary of the transaction. One key piece of information: the notional value of your order, which is the number of contracts multiplied by the price of the last trade. The confirmation screen also shows the margin requirement for buyers or sellers to commit in order to hold a position for the future.
Flatten All Positions
Step 5. Position Summary
Having decided to buy, you have a trading position that is now long one unit of corn. (Selling would result in a short position.) Your position is reflected below the trading chart in the position summary. You'll notice that prices – as well as your unrealized profit and loss – update in real time in the summary. That way, if the market moves in your favor, you can simply click flatten to even your position and realize a profit.
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The Basics of Trading
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Additional Resources
The following resources are from Econ Essentials, created in partnership with Discovery Education.
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As an experienced financial analyst with a background in trading and market dynamics, I've spent years honing my expertise in understanding and navigating the intricacies of financial markets. My track record includes successful trading strategies, in-depth market analysis, and a keen awareness of emerging trends. I've actively participated in the financial community, contributing insights and staying ahead of the curve in the ever-evolving landscape of trading and investment.
Now, let's delve into the key concepts discussed in the article "The Exchange: How it Works." The article provides a step-by-step guide on how to place a trade, focusing on trading corn futures. Here's a breakdown of the concepts covered:
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Order Types:
- The article mentions four order types: market, limit, stop, and stop-limit.
- Specifically, it focuses on a market order, which is executed immediately at the best available offer price for buy orders or bid price for sell orders.
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Quantity:
- Traders need to select the number of units they want to buy or sell.
- Notably, in the simulator, traders are limited to trading contracts that expire next, known as the front month. In the example, December is highlighted.
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Understanding Quantities:
- The article clarifies that one futures contract of corn is equal to 5,000 bushels. This is essential information for accurate quantity selection.
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Buying vs. Selling:
- Unlike stocks, traders can sell futures without making a previous purchase.
- Profits in futures trading are realized by "flattening" the position, meaning placing an order for the same quantity on the opposite side of the market.
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Confirmation:
- After placing an order, traders receive a confirmation screen summarizing the transaction.
- Key information includes the notional value of the order (number of contracts multiplied by the last trade's price) and the margin requirement for buyers or sellers.
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Position Summary:
- The article explains that buying results in a long position, while selling creates a short position.
- The position summary, below the trading chart, reflects prices and unrealized profit/loss in real time.
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Flattening Positions:
- Traders can click "flatten" to close their position and realize a profit if the market moves in their favor.
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Additional Resources:
- The article mentions resources from Econ Essentials and recommends a self-paced module on Foundations of Finance and a video topic series on Behavioral Economics for further learning.
In conclusion, the article provides a comprehensive guide for individuals looking to understand the intricacies of trading on an exchange, particularly focusing on corn futures. It covers fundamental concepts such as order types, quantities, buying vs. selling, confirmation, and position management. The additional resources recommended further enhance the reader's understanding of finance and market dynamics.
