Thursday, July 18, 2013

Introduction to trading: the first steps to riches

How to become a trader? It's easy, you don't have to do anything for it. If you ever used the marketplace, you are a trader. The bad news is that you are a trading in the same sense as a Hulk pilot is PvP-ing during Hulkageddon. If you play EVE, trading is just as unavoidable as PvP. You can act like it's not important, but it only result in you being ganked. The good news is that you can learn it without any capital, investment or anything, just with your ordinary trades.

What makes one poor on the marketplace? Impatience and inability to plan. These manifest in the two cardinal sins: buying from a sell order and selling to a buy order. Whenever you do these, you lose money. Sometimes not enough to care. I do buy from sell orders when they are close enough to buy orders to give a damn. But this is dumb:
50M profit after taxes for a few clicks from people who just can't set a buy order.

The first step is thinking ahead of you. Do you fly a Rokh? Then you'll need Rokhs. So instead of buying an overpriced one when you are podded back to your staging system, how about setting a buy order a few days before? If you could wait 3 months training to fly a Rokh, you can wait 3 days to get one much cheaper. If there are no buy orders, check the price in Jita (if you don't have a Jita alt, you are dumb), and set a buy order 10-15% below it. Not deeper, it will never fill. Do the same if there are laughably small buy orders. If there are already buy orders above Jita-15%, set above the highest by 1-2%. Not 0.01, that just get re-0.01-ed. Let's say a Rokh is 250M in Jita, lowest buy is 210M, set yours to 215M. Check it a day after. If it got "overcut", set it to 220M and so on. Sooner or later it'll be high enough for someone to sell. If you are not planning to transport from Jita or manufacture it or whatever, continue elevating the price after the Jita price. Same goes for sell orders. Don't sell to a low buy order, set a sell order 20-25% above Jita, cut it every day until it sells. Again: if you don't plan to transport it yourself, continue cutting under Jita prices.

The second step is manufacturing/transporting: you want the item, but your buy order does not fill, despite it's high enough for profitable transportation. But no one wants to transport or manufacture it. Step in! Check the hauler services available or haul yourself if it worths your time. This way you can get the item cheaper than accepting a high sell order. Again: it needs time, so doesn't help you if you are in the hurry. Don't be in the hurry, plan ahead!

The third step is what really makes you rich: if the first and second steps saved you money, it will save to someone else too, and he will pay you. You can buy one item from buy order or transport it for your own saving. Why not buy or transport more and sell the ones you don't need? This answers the most annoying question I use to get: "what items are good for trading?" The answer is "anything you get for yourself"! After all, you know at least one buyer: yourself. Unless you are doing something exotic, there must be many others like you. Every time you want to say "damn this price is a ripoff", you found a profitable trading niche! Under/overcut that price!

Remember, every time you are buying from a sell order or sell to a buy order, you are losing money. Becoming a billionaire needs nothing else than be the guy who has these orders.


Lucas Kell said...

This is a drastic oversimplification of what everyone already knows. Buy low, Sell high.
You missed pointing out that buying from a sell order means that you don't pay a brokers fee so if the buy order and sell order are within about 1% of each other, then a player with lower trade skills will actually lose money setting up a buy order. Then by buying and selling you can lose up to 3.5% when reselling, so it's not as clear cut.

Most people buying from a sell order and selling to a buy order are not dumb. They simply don't want to wait the 3 days as they have more important things to do than chase trade. The majority of players in EVE don't want to trade. They have different goals and targets and want to achieve them. If you are going to PVP and you are replacing your PVP ship, 3 days waiting on trade is 3 days you don't have a ship to play with.

Capitalising on those people is a great idea, but it takes a lot more investment of time to make decent money that you are stating here. Especially if you are starting out (which by the title I assume this is targeted at those people). You don't want to buy just anything, you want to buy something that sells quickly for a profit, so you can cycle you cash quickly. If you buy the implant you've shown fro 950m, then resell at 1.01b and it takes 3 days, then you've just made 40-50m (60m minus fees) in 3 days at the cost of tying up 950m in liquid capital. That's pretty awful and you'd be better served picking an item that moves a lot quicker. Also, in general smaller cost items will make you a better % profit as the price difference is less obvious. Just yesterday I performed a station trade on an item I've never even seen before and in 2 hours turned a 175m profit on 1b after fees.

Anonymous said...

"Remember, every time you are buying from a sell order or sell to a buy order, you are losing money."

From a bulk producing T2 inventor/builder I can assure you you are wrong.

example 500x Co-Processor II:
manufacture cost: 553k / item => 276.5m total cost
(includes invention, POS fuel calculations).
selling to buy order: 975k / item
instant profit (after tax): ~414k => 207m instant profit
selling to via sell order: 1.07m / item
potential profit (after tax/broker): ~502k/item => 251m profit
sell order profit - instant profit: 44m.

Profit calculation took into account .75% broker fee and .75% transaction tax.
so both skills lvl5

This lets me in total miss miss out 44m potential profit.
And this is the keyword "potential".

I doubt it is possible to sell off the whole batch within an acceptable timeframe (3-4 days).
Unless you babysit the orders very active.
And each additional order you plant to work around the 5 minute countdown,
will drive the potential profit further down eventually crashing it.
In the worst case to buy order prices leaving you behind with a stockpile waiting for prices to normalize.

so Id rather phrase it "you loose potential profit".

Anonymous said...

Wow, that's a great point about buy orders and sell orders. Like when you buy off of a sell order what you've really done is paid some other dude to .01 buy orders for you so you have the convenience of having your thing instantly. Like he's the trader .01ing and you're the guy who wants the thing. But you can cut out the middle man and keep his cut by becoming a trader yourself!

Actually, now I think about it, there are a bunch of useless middle men. The hauler takes his cut for doing his useless work, the manufacturer builds at a profit, cut him out and keep his cut too. Even the miners take minerals they get for free and sell them a 100% pure profit. They're all in it together with the trader to create an item for sale in the hub while robbing you of potential profit. Cut out the middle man, doing anything else is dumb.

Anonymous said...

Occasionally you get situations where the price of an item is abnormally high (say, Megathrons in Jita a couple of weeks ago) and you fear that a lot of extra supply is going to arrive and push prices down well below the current buy price. You might sell all or some of your megathrons to the buy orders and let those guys deal with the risk of prices crashing.

You always need to be asking "would I rather have a smaller profit right now or tie up this capital for who knows how long". Most of the time it's best to be patient but sometimes it's not.

Lucas Kell said...

@Anonymous it's almost never best to be patient. Any serious traders knows that cycling your cash is more important than waiting out a buy and sell order. Think about it this way. SAy you have an item to buy/produce that you buy/produce for 100m, you can buy/produce in a day and nets you 110m. You could wait on the sell order to sell that item for 115m, gaining you an extra 5m, but if that takes 2 days, you could have cycled your 100m twice more in that time which would get you 20m profit in the same time.

You should always have buy orders up for what you need to use (minerals, etc) but with the rest, you should only be station trading with your excess, the funds you can't use for your main trade. Gevlon can say this because he has billions. 2% of billions is a lot of isk, but for explaining "first steps" in trade, you should be looking to keep your margins at between 10 and 15% daily.

Anonymous said...

This is a great discussion. What people are trying to convey here is that there is an opportunity cost for having capital or product that is idle. It makes sense to sell to a buy order if you can immediately turn the capital into another transaction and make your profit margin again, especially if the item you are selling could take days to move (high end implants) rather than minutes (raw minerals).

Anonymous said...

@Lucas Kell:

Agreed. If you're an active trader then you definitely want a quick sale and to cycle through your capital as quickly as possible. Especially if you're just starting out, since your capital is probably as small, and therefore easy to cycle through, as it ever will be. The larger / lazier / more passive you are, the more patient you can afford to be. If you only log in once a week, you're indifferent to whether orders take one day or six days to fill.

Anonymous said...

There are accounting measures of efficiency that we can apply to the idea of turning capital over.

Asset Turnover = Revenue/Assets

Working Capital Turnover = Revenue/Working Capital

There is an important distinction between the two, using assets would include the value of capital equipment in your operation (IE Freighters and transports) whereas working capital would just be the ISK that you use in your trading operation. The resulting value is going to be a measure of the efficiency of your operation.

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