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could take their chances on a coin toss, winning $9 more if the coin came up heads but losing $9 if it turned tails. About 70% took the gamble, knowing that they would end up with at least $21. Traders in another group were offered a slight variation. They could flip a coin, and heads would pay $39 and tails would pay $21. Or they could just take $30 with no coin toss. Only 43% chose the gamble. A little arithmetic shows that the two outcomes are identical, but the traders made different choices. Why? Because, as behaviorists note, it is not just the information that determines behavior but also how it is processed. That is mental accounting. |
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Mental accounting may explain why the 1987 market crash did not have the negative impact on the economy that pundits had forecast. Traders merely thought it was a correction, and so no panic. |
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Question 6: Can you explain the concept of spreading? |
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Neal: To explain spreading as a trading techniqueand its importance to the liquidity and viability of futures marketsit is necessary first to understand the sources that give rise to market liquidity. The success of any market, especially a futures market, is dependent on its liquidity, that is, the bids and offers flowing into the pit. In markets, it is a common thought that the more bids and offers compete with each other, the narrower the spread between the bid and the offer. And the narrower the spread between the bid and offer, the more liquid and efficient the market. An illiquid market is one where the spread between bid and offer is wide. In such a market there are large price gaps between sales. |
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Be it electronic orders or floor orders, the more active the participation, the more liquid the market. Market liquidity will not always be enhanced because it exists on the Internet, or any other computerized delivery system. In fact, the E mini has liquidity because of the larger S&Ps. |
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There are only a few basic techniques for trading futures markets. They are used interchangeably by participants whether |
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