Home | S&C Magazine | Working Money | Traders' Resource | Message-Boards | Store

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

PROFESSIONAL VS RETAIL

I have read some of your articles where you refer to "professional" trading, and wonder what that actually means. In addition, what is the reason for allowing your traders to use a million dollars of your firm's capital to trade with? Isn't that awfully risky, like too much margin? --dtcryer82

Good questions! I haven't written here about "professional" trading in a while, so here goes. When referring to professional trading I mean professional versus "retail" trading, not versus "amateur" trading. Since around 1998 or so it's been a requirement that all traders have licenses (at least a Series 7), or else they are stuck trading with a retail brokerage. The inherent restrictions on retail traders make it virtually impossible for most traders to make money. The main restrictions affect a trader's use of capital and market access, which leads into your other question.

The current strategies that are working well are very capital-intensive, yet lower risk. These strategies include opening-only orders based on fair value calculations and correlated-pairs trading, which is an excellent market-neutral methodology. Our traders may use (not abuse!) a million dollars or more when entering opening-only orders on 50 stocks (2,000 shares to buy, 2,000 shares to sell short, for example). This strategy is lucrative, but does require significant capital.

Both strategies are used daily by hundreds of our traders.

DOES TECHNICAL ANALYSIS WORK? MESSAGE-BOARD DISCUSSION

Whether technical analysis works is always a subject of debate. If you don't use technical analysis (in the traditional sense of moving averages/trendlines and so forth), what do you use? The way I see it, if you aren't looking at a chart to pinpoint an entry, you are randomly guessing, using order flow, or using fundamental analysis. With fundamental analysis, I can't see how it would be effective on an intraday level without having to set ridiculously wide stops. How do you know what price to get in? Then there's scalping. If you can do this, that's great, but scalpers looking for one tick isn't what is moving the markets; it's the big players making predictions on the future value of the commodity, so it's wise to join them.

So we are left with people looking at charts -- technical analysis. Have I left out any approach? I'd be interested to hear from any intraday traders who don't use technical trades. Please let me know of your alternative approaches. --Tommo

Yes, technical analysis is part of successful trading. I get the "What kind of trader are you?" question often - "technical, fundamental, scalper, momentum, pairs trading, tape reading, automated program trading"? Most of my traders and I will answer the same way: "Yes, yes, yes, yes, yes, yes, yes, and yes, and a few more advanced strategies as well." Not only that:

A. No one would enter into a good technical setup with bad momentum, bad earnings, bad news, wide spreads, poor trending -- you get the idea.

B. Good entries and exits require all-encompassing market snapshots -- premium/discount, spread, what are the company's peers doing, momentum, news, sector, and so on (again, you get the idea).

I have never seen a trader using only one aspect of trading make any real money. If it were that simple, then there would cease to be a marketplace at all.

WASN'T THERE A HEALTHY EDGE? MESSAGE-BOARD DISCUSSION CONTINUES

Coming from you, Don, that really surprises me. Wasn't there still a healthy edge in boxes and other vanilla "single-minded" strategies when you were on the floor? What about Arthur Merrill's old "stat arb" program in the 1980s? What about the opening-only and order enveloping strategies you advocated? What about the predecimalization order book programs that took advantage of free options by front-running liquidity (as in "penny jumping")? And electronic communications network (ECN) liquidity rebates? It is true that those programs increased market efficiency, eventually eroding the edge. However, didn't these strategies rely on one aspect of trading to generate substantial profits? Flexibility is a nice trait to have as a trader, but maybe I am just taking you way too literally here. --SEGV

Good point, but back in 1979, we had an edge by trading "boxes" and selling conversions. By 1985, the edge for both was gone or minimized. No one would pay what we wanted for them, so that market ceased to be viable. Entries and exits are very different than they were a few years ago. Program trading works, but only when proper market conditions allow it to by having derivatives fluctuate enough to find the edge. I'm not disputing, just adding my interpretation.

E-mail your questions for Bright to Editor@Traders.com, with the subject line direct to "Don Bright Question."

Originally published in the June 2006 issue of Technical Analysis of STOCKS & COMMODITIES magazine.
All rights reserved. © Copyright 2006, Technical Analysis, Inc.

Return to June 2006 Contents