Boston University Trading Club 2012 Trading Guide Http://108.171.210.47/

1. Boston University Trading Club 2012 Trading Guide Http://108.171.210.47/

2. Opening Remarks Welcome. Why the BU Trading Club? Why choose this one over all the other activities you can do at BU? To begin with, BUTC is a fun, new experience and it welcomes BU students from all colleges and trading experiences. Here, we genuinely wish to educate members about trading, and at the same time, we want to keep the interest of students by providing hands-on experiences such as managing personal equity portfolios. Regardless of your experience in trading, our club will challenge you to learn more.

3. Our Promise • Mission: To educate aspiring individuals about effective trading strategies and to put knowledge into practice. • Here you will: • Be challenged both academically and socially • Learn and develop technical and financial abilities • Connect with fellow peers and professionals • Be engaged in your work in order to fully utilize the club’s potential • Manage your own mock portfolio

4. The Basics of Trade What is Trade? Trade is the buying and selling of securities and investments to make profits. Securities and Investments Encountered Stocks may be the most commonly known and traded form of securities, but we understand that trading goes well and beyond the scope of just stocks. We are confident that members of BUTC wish to gain more knowledge about the trading of bonds, currencies, and options, just to list a few, and that is the precise reason as to why we choose to expose these other forms of securities to you.

5. Stocks Stocks are simply shares of ownership of a company. It is important to understand that stocks represent claims on a company’s assets and earnings. Other similar terms you may come across, but essentially mean the same thing, include shares and equity. Your ownership of any stock is represented with something called a stock certificate, which in this day and age is electronically stored by your brokerage. You will be exposed to two main types of stocks: Common Stocks: These are a type of security which can also be referred to as shareholder’s voting share. This type of stock is the most popular in terms of ownership. Preferred Stocks: These differ in that shareholders usually do not have the right to vote. However, shareholders are generally guaranteed a fixed dividend indefinitely.

6. Markets • Securities and investments are traded all over the world, and it comes to no surprise that there exists several markets and indices. Here are a few we will be focusing on this year: • DJI (Dow Jones Industrial Average) • Nasdaq • Nikkei 225 • Hang SengIndex • FTSE100 • S&P 500 • DAX • Euro STOXX 50

7. Sectors • BUTC focuses on 5 main market sectors: • Technology • Relating to the research, development and/or distribution of technologically based goods and servicesa • Consumer Goods • Relate to items purchased by individuals rather than by manufacturers and industriesa • Capital Goods • Manufacturing and/or distributing as goods, also known as industrials.a • Services • Produces intangible goods, ranges widely from financial investment to waste management servicesa • Energy • Relate to producing or supplying energy Source: Investopedia.com

8. Rules and Regulations of Day Trading Federal Securities Act of 1933: The Federal Securities Act of 1933 regulates public offerings and sales of securities; it also prohibits trading stocks which are not registered with the SEC. Free Riding: This is a violation in trading used to describe the act of buying shares of securities without having the capital to do so. Stock transactions usually take three business days to settle. For example, if you purchase a stock on Monday, you do not pay for it until Thursday. Purchasing other securities before this initial transaction is settled is called free riding, and usually leads to a 90-day violation suspension. During this time period, the trader is not allowed to make trades with unsettled funds. Insider Trading: This term describes the practice of trading securities by using information not available to the general public. The US government maintains strict laws to prohibit insider trading; therefore the consequences are extremely severe. Realized & Unrealized Gains/Losses: If you purchase a security and decide to hold it, all gains and losses made in this period are referred to as unrealized gains/losses. Only after you sell the security, and after the transaction has been settled, are the gains and losses considered realized.

9. Risks of extended hours trading Risk of Lower Liquidity. Liquidity refers to the ability of market participants to buy and sell securities. Generally, the more orders that are available in a market, the greater the liquidity. Liquidity is important because with greater liquidity it is easier for investors to buy or sell securities, and as a result, investors are more likely to pay or receive a competitive price for securities purchased or sold. There may be lower liquidity in extended hours trading as compared to regular market hours. As a result, your order may only be partially executed, or not at all.. Risk of Higher Volatility. Volatility refers to the changes in price that securities undergo when trading. Generally, the higher the volatility of a security, the greater its price swings. There may be greater volatility in extended hours trading than in regular market hours. As a result, your order may only be partially executed, or not at all, or you may receive an inferior price in extended hours trading than you would during regular market hours. Risk of Changing Prices. The prices of securities traded in extended hours trading may not reflect the prices either at the end of regular market hours, or upon the opening the next morning. As a result, you may receive an inferior price in extended hours trading than you would during regular market hours. Risk of Unlinked Markets. Depending on the extended hours trading system or the time of day, the prices displayed on a particular extended hours trading system may not reflect the prices in other concurrently operating extended hours trading systems dealing in the same securities. Accordingly, you may receive an inferior price in one extended hours trading system than you would in another extended hours trading system.

10. Risks of extended hours trading Risk of News Announcements. Normally, issuers make news announcements that may affect the price of their securities after regular market hours. Similarly, important financial information is frequently announced outside of regular market hours. In extended hours trading, these announcements may occur during trading, and if combined with lower liquidity and higher volatility, may cause an exaggerated and unsustainable effect on the price of a security. Risk of Wider Spreads. The spread refers to the difference in price between what you can buy a security for and what you can sell it for. Lower liquidity and higher volatility in extended hours trading may result in wider than normal spreads for a particular security. Risk of Lack of Calculation or Dissemination of Underlying Index Value or Intraday Indicative Value (IIV). For certain Derivative Securities Products, an updated underlying index value or IIV may not be calculated or publicly disseminated in extended trading hours. Since the underlying index value and IIV are not calculated or widely disseminated during the pre-market and post-market sessions, an investor who is unable to calculate implied values for certain Derivative Securities Products in those sessions may be at a disadvantage to market professionals.

11. Cash and Margin Accounts Cash Accounts: Requires the user to deposit cash which for the purpose of buying stocks. Trades that are worth within this cash amount will be executed. Margin Accounts: Essentially a cash account with the additional capability of taking credit out of the brokerage in order to buy more stock. Usually, margin accounts in major brokerages have a value that is double the cash you initially deposited. For example: if a person deposits $2,000 into his margin account, he will be able to trade orders up to $4,000. However, it is vital to note that brokerages charge interest rates on the borrowed funds, which are expected to be paid along with other fees (such as transaction costs and SEC fees). Margin Accounts are considered riskier than a cash accounts since your trades are comprised of partially or fully borrowed funds.

12. Buying and Selling Stock • Types of Orders • Market Order: An order to buy or sell a stock at the best available price. Usually, this order will be executed immediately. • Limit Order: An order to buy or sell a stock at a specific price or better. • Stop Order: An order to buy or sell a stock once the price of the stock reaches a specified price. Once the stop price is reached, the order automatically becomes a market order. This order is usually used to limit losses and protect profits. • Stop- Limit Order: Combination of the limit and stop orders. • Day Orders: Orders in which the investor does not specify the expiration of the order. • GTC Orders: Orders to buy or sell a stock until the order is executed or has been cancelled. • IOC Orders: Orders to buy or sell stocks that must be executed immediately • *For examples and further clarifications, please go to http://www.sec.gov/investor/alerts/trading101basics.pdf.

13. Buying and Selling Stock • Selling Short • Investor borrows stock and sells it, and later repurchases the stock and return to the lender (covers the short position) • Short-seller’s profit (loss) is the original selling price minus the repurchase price • Rules of short-selling: • Short sellers pay all dividends to the lender • Short seller deposits margin/collateral • Idea is to sell high and buy low to cover short sale • Buy Stock on Margin • Margin transactions involve borrowing part of the money needed to buy stock • Brokers lend the money and hold the stock as collateral • Margin requirement (required equity percentage) is set by the Federal Reserve Board • Maintenance (minimum) margin. Equity percentage is (stock value – loan value) as a percentage of the stock value • Price for a margin call:

14. Executing Your Trade It should be noted that trade executions aren’t instantaneous. “Many firms use automated systems to handle the orders they receive from their customers. In deciding how to execute orders, your broker has a duty to seek the best execution that is reasonably available for its customers' orders. That means your broker must evaluate the orders it receives from all customers in the aggregate and periodically assess which competing markets, market makers, or ECNs offer the most favorable terms of execution. “ Image and cited source: -U.S. Securities and Exchange Commission http://www.sec.gov/investor/pubs/tradexec.htm

15. Brokerages Should you choose to invest your own money in the future, it is also important to choose a brokerage suited for your trading style. Different brokerages offer different trading “plans,” which often means that commission fees are varied as well. Most brokerages charge you based on each transaction, others charge you based on the number of shares transacted, and a select few may charge you on a periodic basis. It is recommended that you take some time to think about which brokerage to go with before you even begin trading.

16. Efficient Securities Market • Market Efficiency • Operational efficiency • Timely and accurate information • Liquidity and marketability • Price continuity (small price changes) • Depth (many buyers and sellers) • Internal efficiency (low transaction cost) • Informational efficiency • Current security prices “fully reflect” all information currently available • You can’t make positive abnormal returns on average • Assumption of Market Efficiency • Large number of profit maximizing participants • New information comes to the market randomly • Investors adjust their estimates of security values rapidly to reflect new information • Security prices implicitly reflect risks • Efficient Market Hypothesis (EMH) • Weak form • Semi-strong form • Strong form

17. Efficient Securities Market • If the market is perfectly efficient, there will be no opportunity for profits. That’s why we usually look for inefficient market. • Six Market Anomalies • Anomalies that suggest some market inefficiency • Quarterly earnings surprises (persist) • Calendar studies; January and weekend effects • P/E ratios • Small-firm effect • Neglected stocks (low analyst coverage) • Book-to-market values • Behavioral Finance • Investors don’t behave in ways that make economic sense

18. Technical Analysis

19. Supply And Demand • The relationship between supply and demand plays an important role in our study of rolling stocks. In fact, the channel that defines the support and resistance levels in our rollers is nothing more than an expression of the supply-demand relationship. For instance, in the figure below, we have two diagonal lines, supply and demand. • The supply line shows the number of sellers willing to sell at a given price. • The demand line shows the number of buyers willing to buy at a given price. • Quite simply, as the price increases, the number of buyers willing to buy at the higher prices decreases.

20. Double Top Pattern A double top occurs after a stock has enjoyed a protracted move upward. As interest in the stock grows, people are willing to pay more for it. At some point the price becomes to high, (TOP #1) and a correction occurs. A correction is a short term drop in a stock’s price that occurs to bring overpriced stocks closer to their actual valuation.As the price falls speculators are shed until the price reaches a point where the stock stabilizes. This is called a "reaction low". The next thing that happens is usually some sort of earnings report or PR which causes more interest bringing in new buyers, and trades from those that wish to 'average down'. As new buyers come in, those that bought TOP #1, as well as many previous holders who missed the top and endured the correction without selling, are looking to get out. There is normally some talk of new highs as the price approaches the old top. As a new wave of players exit, downside volume increases and TOP #2 occurs. A technical target is derived by subtracting the reaction low from TOP #1 and then subtracting the result from the reaction low. In the chart below, Top #1 is 112.19 & the reaction low is 70.62, making the target 29.05.  (See Next Page for Chart)

21. Double Top Pattern (Chart)

22. Triple Top Pattern The triple top pattern is much like the Double Top Pattern, and it is suggested that you learn that pattern 1st. The difference is that there is an additional peak before the final steep correction. As with the double top, a price oscillation occurs when: a) The price rises to the point that buyers lose interest. (Top #1) b) Some investors take profits and a correction ensues. c) The price stabilizes (Reaction low) d) News, analyst upgrade, earnings report, etc., brings new interest. e) Another 'top' offers those who missed the 1st one to sell. (Top #2) f) Rinse and repeat. 

23. MACD Signals “Moving Average Convergence/Divergence” It is used to spot changes in strength, momentum and duration of a trend in a stock’s price. MACD generates bullish signals from three main sources: Positive divergence  Bullish moving average crossover  Bullish centerline crossover 

24. MACD – HOW TO INTERPRET IT • 3 Factors to Consider: • Blue line is ABOVE yellow line = positive indicator • Both lines above the pink “zero” line = positive indicator • The amount of area between blue and yellow lines. The greater the area between the two, the more intense the action is. • Ideally, you want to BUY when the MACD is about to cross the 0 line upwards, if the blue line is about to cross the yellow line upwards, and if it appears that the area between blue and yellow lines is large. Conversely, you want to sell or short when the opposite happens.

25. Introduction to Level II Level II Quotes tell us what type of traders are buying or selling a stock, where the stock is likely to head in the near term, and much more. What Is Level II?Level II is essentially the order book for NASDAQ stocks. When orders are placed, they are placed through many different MMS, Market Makers and other market participants. Level II will show you a ranked list of the best bid and ask prices from each of these participants, giving you detailed insight into the price action. Knowing exactly who has an interest in a stock can be extremely useful, especially if you are day trading. This tell us that UBS Securities is buying 5,000 shares of stock at a price of 102.5. Note that the number of shares is in hundreds (x100). Now let's take a look at the market participants.