Q&A
Since You Asked
| Confused about some aspect of
trading? Professional trader Don Bright of Bright Trading
(www.stocktrading.com), an equity trading corporation, answers a
few of your questions. |
Don Bright of Bright Trading |
TRADE ADJUSTMENTS
How do people adjust their trades if the market is expected to
open higher or if the market is expected to open flat or lower? The
night before, I do my research and create a list to trade but don't see
how to find a way to integrate it with the market open situation. Any
suggestions?-- Jim Clark
We monitor the S&P futures contracts (eminis) after adjusting the
spot price to fair value, right before the market opens (see
www.stocktrading. com/Tradinginfo.htm for an example). This gives us the
expected percentage of up or down opening points (extremely accurate by
definition). To better understand fair value calculations, check out
www.programtrading.com and www. indexarb.com.
WHY BETA?
I have been reading some of your online posts, and I am curious
what makes you pick up beta to adjust the price when you play open-print
strategy. And I have noted the value of beta could be different. Which
beta are you using now, or are you computing beta yourself?
--daytrader06
We use beta to alter the envelope percentage so we don't get left out
of trades on low-volatility stocks. Our programs go out and check beta
with the click of a button, and I update about once a month. Beta is not
a primary consideration, but certainly helps with the fill rate.
The (automated) opening programs are fluid, and we modify them quite
often, adding stocks, taking some off, looking at news items. Always
tweaking a bit to stay ahead of the game.
THE NEXT BIG THING
Don, I am just trying to get another point of view from the
research I have been doing in online trading applications. What do you
see as the next big idea, innovation, emerging technology that will
shape the online trading community? Do you think it is something like
collective intelligence (predictwallstreet.com, for example),
algorithmic trading applications for the average (nontechnical) person,
or something completely different? Your input would be greatly
appreciated.
Pretty tough question, especially since you're asking about online,
retail traders, but I can offer this. Brokers are bringing commissions
down to zero (Bank of America for example), and this will likely bring
in more online participation from the general public. This is not
necessarily a good thing, for a couple of reasons. First off, the
average online participant has not had enough training to understand
proper hedging strategies (long stock vs. short stock), and are stuck
with buy-only stockpicking for their investments. Most brokerages don't
even pay their customers' interest on their short stock sales. Imagine
buying $1 million worth of stock and shorting $1 million worth of
another stock, as in pairs trading or mergers & acquisitions, and
the broker keeping all the interest money from the short sale while
charging you interest on the long side. Our traders, for example, do
receive interest on short stock sales of (currently) 5% or so, or simply
don't allow it all.
The retail public has not had a great record with "buy-only" trading
in the recent past. I am not suggesting that retail traders use brokers
or other experts either, don't get me wrong. I am suggesting that online
investors should learn as much as they can about fundamentals, hedging
techniques, and proper technical analysis before diving into the game.
In this day of free information flow, it is easier than ever to learn
how to properly handle your own investments/trading.
I do not see collective intelligence via websites being either
anything new, or of any particular benefit. Anyone thinking that some
signal from a website is going to make them any money should think
again. Such sites as Trade-ideas.com and eSignal offer excellent
screening and low costs to those who have a good grasp of what they're
looking for in the markets. The best tools in the world still need a
good mechanic to work well.
CROSSROADS
Hi Don, I read your article titled "Formulating Trading Plans" and
found it interesting. I've already put together a basic list of
things to follow and really need to tweak it. I'm at a crossroads after
trading for six years based on fundamentals and tips. Can you share a
generic plan for swing trading as well as a trend-following plan? I'd
get a lot out of seeing what the plan of someone who is successful looks
like. I typically do swing trading and buying good companies that
are about to break out or resting on a 20- or 50-day moving average.
Thanks in advance! -- John Yazinsky
John, first off let me say I feel your frustration. Yes, a trading
plan is critical to success. Here is a STOCKS & COMMODITIES-labeled
link you may use to formulate your basic, initial plan:
www.stocktrading.com/TradingPlanTASC.htm
Please understand
that in most cases it takes at least a $1 million or more to make a good
living in this business (there are always exceptions, of course). Our
traders have the ability to use that kind of money with only $20,000 or
so of risk capital put up. We focus on the lower-risk, higher-reward,
capital-intensive strategies we know work. As with all trading styles,
you must work hard to keep ahead of the game. We do opening-only orders
on the Nyse every day. We do a lot of pairs trading and M&A plays as
well. The average retail trader is generally forced to attempt
higher-risk techniques due to capital limitations.
Hopefully this will help jumpstart the next phase in your trading
career.
BACKTEST TAPE-READING
Don, is it possible to backtest tape-reading? Most backfill only
has price/volume/time. I found it is much easier to detect the big
shark's move by reading the tapes rather than looking at the historic
price/volume info.--qll
Tape-reading is all-encompassing and includes too many variables to
be backtested. Just for starters, it's hard to backtest the Prem/Disc to
fair value at the time of price volume action vs. the peer (of the stock
in question) and the sector and the overall market. We also check the
commodity of the sector related, and normal things like the depth of the
book, and where the futures sit on a self calibrating tick chart, and so
on.
Good tape reading can be shown and explained, but it is still pretty
much an art, and a valuable one at that.
ODDS FOR A BETTER RETURN
Can you buy a stock hoping it will go up so you can short-sell it?
So if the stock doesn't go up you can make money if the stock jumps down
and just cancel the order to buy for long? What about with options? Can
I buy puts and calls on one stock to increase the odds of making a
better return?
If you buy a stock and then short-sell it, you are flat with no
position and a locked-in profit (provided you shorted it higher than the
buy price). Buying puts and calls are separate bets, and both can be
very costly. All you can lose is everything you paid for them, not much
consolation in my mind.
SWEEPING
Hey Don, I'm guessing your guys are taking the other side of the
sweep? If a sweep order come in to wipe the book for 30-40 cents on the
bid, your guys would buy into that to make the 20-30 cents? Or your guys
would go in the flow of the sweep?--traderyin
By having orders generated at the end of a sweep, or having
bids/offers in place, they tend to fade the sweep. I've noticed that at
times I may have a 0.66 bid on, with a 0.75 x 0.78 market, without
changing the market, it goes "hybrid brown" and fills me, and then right
back to normal pricing.
And, yes, the guys who always make money are still making money,
although they're adapting once again.
SPOT THAT SWEEP
Is there a specific and reliable method to spot a sweep? And once
you spot it, how can you tell if the sweep has ended?
Thanks.--Scalper007
Our RediPlus has the quotes change color when they are "taking over"
for manual sweeps.
SWEEPING REPLY ON REDIPLUS
Thanks, but unfortunately, I'm not using RediPlus for the time
being. Is there any other way to tell when sweeps are starting and
ending?--Scalper007
The book will close temporarily and go 1x1 in the size column. We
also have a "slow bid /slow ask" column; perhaps you have one of those.
ALERT FILTERS
Do you have filters set up that will alert you when a book has
closed so you can position yourself for the sweep, or do you monitor
several books at the same time?--javs5150
We have traders with programs that kick in with a five-cent (for
example) move from last. Newer scalpers have bids and offers in at all
times on their "children" stocks (stocks they trade every day). We do
what we can to maximize our entries via sweeps whenever possible.
HEY, HOW DID A FUNDAMENTALS DISCUSSION GET IN HERE?!
From exQQQQseme: I am big on fundamentals. I look for real news --
preferably negative news. I then ask myself if this is something
management can fix quickly. If the answer is no, I do a negative
directional long-term play. When a company's stock is doing poorly, I
look at the balance sheet, particularly the cash position and short-term
debt. If the stock is down, they are sitting on a pile of cash, and
short-term debt does not exist, then I'm long-term bullish.
From Bob Bright: My favorite long-term (six to 12 months)
strategy that doesn't require constant maintenance: Otm butterflies.
From Maverick74: Bob, I don't believe there is an edge trading
off of publicly available information. Most hedge funds that are
successful doing that trade off information that is not public. If
everyone has it, it's not an edge.
From Don Bright: Now for a different perspective from the
"Bright side" (although I do agree about the news comment -- there is
nothing that we're going to learn that someone else doesn't already
know). Where my differing opinion may come into play is in regards to
fundamentals and balance sheets.
My brother, whom I respect greatly (how can you not respect
someone who has made over $100 million with his own trading, never using
other people's money?) is a strong supporter of fundamentals in all his
trading, both short-term and long-term portfolio management. We spend a
zillion hours going through the details of every stock we trade, every
pair relationship (fundamentally), and every sector strength (for
relative strength via fundamentals).
Bob says that if you're going to buy a stock for a week, you
shouldn't mind holding it for a year or a decade, especially as it
relates to a peer or a pair. This thinking has made millions (and, yes,
I thank Bob for being the one in charge of our family LLC, where most of
my money is kept!).
E-mail your questions for Bright to Editor@Traders.com, with the
subject line direct to "Don Bright Question."
Originally published in the April 2007 issue of Technical Analysis
of STOCKS & COMMODITIES magazine. All rights reserved. © Copyright
2007, Technical Analysis, Inc.
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