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 |
VOLATILITY & TREND
Does volatility of a particular market have any correlation with
its trendiness? Does increased volatility result in more trends or
choppy markets? Any insight, tips, thoughts, or comments on the
relationship between volatility and trend will be welcome.
--rizwanuk
One of my concerns is that most people don't truly understand implied
volatility (as reflected in the VIX, for example) vs. historical
volatility. When compared to one another, the two actually show the
trending direction, if not the magnitude (gammas) of the move.
Due to basic math, as markets trend up or down, volatility goes up.
The opposite is true when markets stabilize or become choppy, and
implied volatility goes down.
For a good start, I suggest that you search through www.Traders.com
for articles on the subject.
SPECIALIST'S OPENING PRICE
I have a question regarding opening prices and indications. If,
for example, a stock indicates premarket at 27 x 27.50 with the previous
day's close at 27, does this indicate that the specialist is likely to
open the stock higher? In addition, once two companies announce a
merger, does this mean only one specialist will handle both companies'
stocks after the announcement? --Tito
First off, in this scenario, the specialist is indicating that the
opening price will likely be up from the previous close. At the same
time, he is looking for sellers in that price range. Track your stocks
to see how the actual openings relate to the preopen indications.
As for a merger, the change in specialist posts takes place after the
merger or acquisition is completed. Oftentimes, the specialist for the
buying company will keep the stock at their post. Between merger
announcement and completion, the same specialists will trade the
individual stocks.
FILLING MULTILEVEL ORDERS
If I put out a bunch of orders on a stock, say at each level, and
the specialist gaps the market up, how do I get filled? Do I get price
improvement? Does the specialist fill my limit orders as they were
placed at each individual price level, or do all my orders get filled at
one single price level? --putladder
There are two times of the day that there is a single price on a NYSE
stock: the opening print and the closing print. For example, if
you place five buy orders on XYZ (before the opening, marked "opening
only" at 22.50, 22.40, 22.35, 22.30, and 22.20), then if the specialist
opens the stock at 22.04, all of your orders will be filled at 22.04.
At the end of the day, if you were to place the same limit orders as
above but marked them "market on close," and the specialist closed the
stock down to 22.04, then you would also get all the fills at the 22.04
price.
MORE MULTILEVEL ORDERS
What if somebody sends in a big order and the specialist has to
move up through several limit orders at once to fill the order? How do
those limit orders get filled? --putladder
During the trading day, you get filled at or near your specific
pricing when the stock trades there. During the day, these are called
"trade throughs." And, yes, the orders will get the better price. The
NYSE must give you the best price. We demonstrate this phenomenon the
first day of our trading classes; you always want to have bids/offers
slightly away from the market in your "children," just to take advantage
of these price improvements (primarily because you will very likely be
participating with the specialist).
LEVEL 2 IN DAYTRADING
I usually trade on a three- to 10-day time basis but recently
started to daytrade. I was wondering how some of you daytraders use
Level 2 quotes? Is there anything of particular importance to pay
attention to while watching them?-sportmatt37
Level 2 quotes became less useful when they opened to public access
in the mid-1990s. What happens is that firms have automated programs
with "if-then" statements that send in and cancel orders continuously
throughout the day. This hits the various electronic communications
networks (ECNs) and even the NYSE at times. Small trades on
over-the-counter (OTC) stocks don't help much in picking entry/exit
points.
Valuations have taken a much bigger role in determining trade
entries. So when picking your "children" - the stocks that you will
trade every day -do the fundamental and technical analysis of that stock and a couple of
peers. You want to know each stock extremely well, and watch its
intraday movements compared to the overall market, its industry group,
and its particular peers to find a sort of mental relative strength.
Email your questions for Bright to Editor@Traders.com, with the
subject line direct to "Don Bright Question."
Originally published in the March 2006 issue of Technical Analysis
of STOCKS & COMMODITIES magazine.
All rights reserved. ©
Copyright 2006, Technical Analysis, Inc.
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