Q&A

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Since You Asked

Confused about some aspect of trading? Professionaltrader Don Bright of Bright Trading (www.stocktrading.com), an equity tradingcorporation, answers a few of your questions.

Don Bright of Bright Trading

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EXITING TRADES

I've been trading for about a year. I've started using a combinationof gray boxes, which keeps me focused and disciplined. My entries havebeen consistently profitable and timed well, but my exits have not beenbecause I always sell too early. My most profitable system has been topick the strongest 30 stocks every day, and by strong I mean what doesn'tgo down when the market is going down -- my gray box then buys them after2:00 pm Eastern time on a moving average convergence/divergence (MACD)crossover with a midrange relative strength index (RSI). Right now, myexits have been when the MACD crosses back down, but it's not great andI know there's better. What do you look at to exit long positions on strongstocks? What's the best way to use stops?--Joseph Klar

Your entry time is generally a good one, after the lunch hour(s) inNew York. I'm going to assume you're daytrading and not keeping positionsovernight.

Here are a couple of things I teach my traders to watch for. Choosea couple of peers for each of your 30 stocks, and look for the relativestrength between your stocks and their peers. This will give you an ideawhether these stocks are strong based on specifics with the stock or theindustry group. Be sure to check pivot points on the S&P futures, sincethese will show you where a slowdown in direction might take place, and/orwhen a breakout takes place in the overall market. You can check dailypivots here if you like: www.stock trading.com/Tradinginfo.htm.

I post the fair value numbers and other pertinent information on thatpage as well on a daily basis, premarket. When you see an S&P futurereversal based on a negative Prem (discount) to fair value, you generallysee the stocks follow. The futures work as an excellent leading indicator,based on overall market mechanics, program trading, and other hedging tactics.

At 3:30 pm, take a snapshot of all the stocks and futures prices. Watchfor a drift for the next 10 minutes. This will give you an idea of howthe MOC imbalances will be running. You should have the imbalance columnon your screen for all your stocks and peers. Some even take a larger sampling(OEX 100, for example) to get a feel for immediate market direction. Theseimbalances are published again at 3:50 and may be smaller, gone altogether,or actually reverse direction. (Edit: Initial imbalance published at 3:40, re-published at 3:50).

If you see sell imbalances on your stocks, I suggest getting out ofat least half your shares immediately, understanding there will be somepressure on the stocks for the next 20 minutes. Watch this daily, usingsnapshots, to see how your stocks react to these published imbalances;not every stock reacts the same.

And all the basics apply -- New York open book, ARCA depth of book, andeven a simple Level 2 montage. This will help see where the larger ordersare.

I don't generally use mechanical stops; I prefer to use alerts. Thisgives me a chance to take a quick view of the overall market and indicatorsto see if I really want to exit now. When in doubt, exit half. Most ofthis information applies to listed stocks, which is what I primarily trade.I generally get involved with NASDAQ stocks only in my correlated pairsand/or M&A activity.

Hope this helps. Good trading!

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MENTORING AND MINDSETS

When I was young I played rugby. At the kickoff, our mindset wasto destroy the other team -- mentally, physically, and emotionally and thenpile on the points both before half time and after. This meant playingthe game in their territory within kicking distance of their sticks, alsoknown as limiting the effects of your own mistakes. Just like trading.

All very simple, and yet difficult to execute under extreme pressure.-- Fearless

Something to ponder. Although I appreciate the rugby example, quitethe opposite is true in the case of trading the markets, in my opinion.

When I first started on the trading floor, I too wanted to show theother guys that I was as good as they were -- that didn't work too well.

Then I thought, "Maybe if I try to follow the lead of the best tradersin the pit, I could do much better." That's what I did, and it worked muchbetter.

We teach to trade "with" the experienced traders, not "against" them.Trade "with" the market, don't try to "beat" the market, simply becauseno one will ever really "beat" the markets. Earning a good living is not"beating" anything or anyone, it's simply understanding how market mechanicswork. When all is said and done, all we as traders can do is to provideliquidity, and seek out and correct disparities.

Trading is simple, yet trading psychology is not. But first you needto know "what" to do and "how" to do it. Sounds trite, but it reverberatesthroughout the industry.

Learn as much as you can about what longer-term professionals are doing,and do your best to replicate their techniques and strategies -- but besure you're attempting something that fits your personality. A serious,calculating guy shouldn't try to "ride the wave" of an intuitive trader,and vice versa.

One last thing: Don't overcomplicate trading. It shouldn't be complicated.

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

Originally published in the March 2008 issue of Technical Analysisof STOCKS & COMMODITIES magazine. All rights reserved. © Copyright2008, Technical Analysis, Inc.

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