The Complete Guide to Trading Point for Investors
Trading point is an important concept for investors to understand. This comprehensive guide will explain what trading point is, how it works, and why it matters when making investment decisions.
What is Trading Point?
A trading point refers to the specific price level at which a security or asset is bought or sold. It represents the exact price that a trade is executed at.
For stocks, the trading point would be the specific dollar value the stock is trading at when an order is filled. For example, if an investor bought shares of Apple at $150 per share, the trading point would be $150.
For forex currencies, the trading point would be the exchange rate at which a currency pair is traded. For example, if the EUR/USD pair is trading at 1.2500, the trading point would be 1.2500.
The trading point can vary throughout the day as prices fluctuate due to shifts in supply and demand. High volume trading times usually see larger spreads between the bid and ask price as more market participants are active.
Key Characteristics of Trading Point
There are a few key characteristics of trading point that investors should understand:
- Precision – The trading point is an exact price, not a range or average. It will be precise down to four decimal places for most securities.
- Execution – A trading point reflects the moment of trade execution, not the price it was ordered at. The market price may have shifted between order placement and fulfillment.
- Temporal – Trading points are associated with specific timestamps down to the millisecond. This allows trade details to be recorded in an order book chronologically.
- Liquidity – Trading points represent where liquidity exists in the market to facilitate trading. Less liquid assets may only have trading points at certain price intervals.
- Bookkeeping – Trading points are important for bookkeeping. They allow brokers and investors to record the precise cost basis and profit/loss for tax and performance reporting.
Trading Point vs Bid/Ask
Trading point is often confused with the bid/ask spread:
- The bid price is what buyers are willing to pay for an asset.
- The ask price is what sellers are asking to receive.
- The difference between the two is called the bid-ask spread.
For example, if a stock is quoting a bid price of $49.00 and an ask price of $49.05, the bid-ask spread is $0.05.
The key difference is that bid and ask prices are stated prices, while the trading point is the binding price of an executed trade.
Trading point also differs from the last traded price, which refers to the most recent trading point prior to the current moment. The last traded price represents the closing price on market exchanges.
How Trading Point is Determined
On organized exchanges like the NYSE and Nasdaq, trading points are determined by the limits of bid/ask spreads set by market makers and competing bids/asks from investors.
For example, if the bid is $20 and the ask is $21 for a stock, the trading point could be anywhere between those values depending on what buyers and sellers are willing to transact at. The matching of a bid and ask pricepoint creates the trade.
For over-the-counter markets like forex where there is no central exchange, banks and brokers provide liquidity and quotes which define tradable bid/ask ranges. Trading points will occur at prices where two parties match for a trade.
Some key factors that influence trading point prices:
- Available volume at different price levels
- Spread between bid/ask prices
- Trading activity and liquidity
- Newly released information impacting valuations
- Changing market sentiment and investor demand
Computerized trading systems and algorithms are now responsible for large volumes of trades. This can result in multiple trades executing across a range of prices in milliseconds.
Why Trading Point Matters
Understanding trading point is important for investors for a few key reasons:
Trade Execution – It allows you to know the exact price your order was filled at, not just the price you saw quoted when you placed the order. This is vital information for trade confirmation and record keeping.
Liquidity – Trading points indicate where liquidity exists in the market. Knowing the density of trading points shows liquidity at key prices.
Price Movement – Looking at trading point history helps determine price trends, volatility, support/resistance levels, and potential breakouts.
Slippage – Comparing your order price to the trading point shows if slippage occurred between order placement and execution. This helps assess trade execution quality.
Transparency – As a binding transaction price, the trading point creates market transparency and a fair playing field for participants.
Let’s look at some examples of how trading point impacts investors based on different trade scenarios:
Trading Point Scenario 1 – Market Order
John places a market order to buy 100 shares of XYZ stock. At the time, XYZ is quoting an ask price of $25.15.
Due to high volatility, the market price starts moving up rapidly. By the time John’s order is filled, the trading point is $25.40.
In this case, the trading point differs from the quoted ask price due to:
- Latency between the quote and order execution
- Underlying price movement
- The ask side having insufficient volume at $25.15
Because a market order trades immediately at the next available price, John’s trading point is higher at $25.40. This demonstrates the importance of considering trading points, not just quoted prices.
Trading Point Scenario 2 – Limit Order
Sarah places a limit order to sell 100 shares of ABC stock at no less than $85 per share.
At the time, ABC has a bid price of $84.95 and an ask price of $85.15.
Her order sits on the book waiting for the bid to reach her limit price. Hours later, the bid price increases to $85 and her order is filled at a trading point of $85.
In this case, Sarah avoided any slippage by setting the limit order threshold. She received her required trading point price.
This demonstrates how limit orders grant the investor greater price control compared to market orders.
Trading Point Scenario 3 – Stop Market Order
Steve sets a stop market order to sell his XYZ stock holdings if the price drops below $33.
Over the next week, XYZ stock sees increased volatility and the price declines rapidly. Steve’s stop order is triggered when the ask price trades at $32.90.
However, by the time his market order is filled, the trading point is $32.75 due to the high selling pressure.
This example shows the risks of stop market orders being susceptible to gapping and slippage in fast markets. The final trading point can deviate significantly from the stop trigger price.
How Investors Can Control Trading Points
While investors can’t completely control trading points, there are some strategies to target desired entry and exit prices:
- Use limit orders – Place limit orders at your ideal trading points instead of market orders. Be patient for the market to reach your price.
- Scale into positions – Build up positions across multiple orders at different trading points instead of executing one large order.
- Use stop-limit orders – Stop-limit orders combine a stop price with a limit price to control slippage on exit.
- Trade with liquidity – Focus trading on high volume periods and instruments with deep liquidity at narrow bid/ask spreads.
- Consider VWAP – Target entry trading points at or below the volume weighted average price based on historical data.
- Watch order book depth – Analyze level 2 quotes to see volume available at specific prices to guide trading points.
- Manage larger orders – For big block orders, use an algorithmic trading system or broker desk to optimize order execution.
While not fully controllable, being strategic with order types, monitoring market conditions, and managing order sizing can help investors improve the trading points achieved.
Key Takeaways on Trading Point
Some key points on what every investor should know about trading point:
- Trading point represents the precise executable price for a trade, not the hypothetical quoted level.
- Monitor trading points closely to detect any slippage from your intended entry or exit price.
- Trading points vary based on market conditions and order types used – be strategic for best price execution.
- Use trading point history and level 2 market depth to analyze liquidity and detect support/resistance.
- Limit orders allow control over trading point by setting a price threshold for execution.
- Review trading point execution quality by comparing orders to resulting fills.
- Poor trading points can significantly impact performance – always aim for ideal entry and exit levels.
Understanding trading point nuances is vital to navigating the markets and implementing effective trading strategies. Mastering trading point execution leads to greater returns over the long-run.
Frequently Asked Questions
What happens if a trading point falls outside the bid-ask spread?
Most trading points occur within the prevailing bid-ask spread. However, in rare cases it is possible for a trading point to fall outside of the quoted spread. This can happen in very fast-moving markets where prices change rapidly. The bid-ask quotes may lag slightly behind actual trading prices.
How is trading point different than last traded price?
The last traded price refers to the trading point of the most recent transaction executed on an exchange. It represents the last price a buyer and seller agreed to transact at. Trading point refers to any price where trades are executed, not just the most recent one.
Do all trades have to occur at trading points?
On regulated exchanges, all executed trades must match up with a trading point – representing an actual buyer and seller. However, over-the-counter trades between two parties can theoretically occur at any arbitrarily agreed price, not necessarily at recent trading point levels.
Can you request a specific trading point?
Investors can aim for a desired trading point by using limit orders which set a price threshold. However, there is no way to guarantee execution at a specific price. The market will ultimately determine if a trade materializes at the requested trading point based on matching buyers and sellers.
What does low trading point volume indicate?
Low trading point volume at certain price levels indicates lack of liquidity. Large bid-ask spreads and big price jumps between trading points also reflect poor liquidity. This suggests the asset may be difficult to trade efficiently at the desired price.
Conclusion
Trading point is a critical, yet often overlooked concept for investors to understand. It represents the precise execution price for a trade, not just hypothetical quotes. Monitoring trading points and targeting specific price levels leads to better execution and performance.
While trading points can’t be controlled outright, investors have options like limit orders, stop-limits, scaling into trades, and analyzing liquidity conditions. Mastering trading point execution is key to maximizing returns.
This guide covers everything investors need to know about trading points – from definitions to real trading examples and strategies. With the right knowledge and tactics, investors can better navigate the intricacies of trading points in any market environment.
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