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 |
BASING MY TRADES
I don't know what to base my trades off since there is no
specialist to follow. Are there guys still making money based on
specialist prints?
You need a nimble program that looks for five-cent moves in a stock
and then hits it on a sweep, or have trigger points already entered to
take advantage of a sweep. Working pretty well, according to my guys.
SCALING OUT
Do your traders "scale out" of positions, or do they close all at
once? Does it depend on their strategy or technique?--Trader92
Some do and some don't, depending on the individual situation, and,
as you pointed out, it varies depending on strategy. I do my "opening
only" strategy with two layers entered, one for 2,000 shares and another
(wider envelope) for 1,000 shares. When I get filled, my automated
program sends in a retracement order (for profits) for half of my
position in each stock. I then prefer to tape-read and get out of the
balance manually, thus "scaling out."
Many traders get into something they don't feel comfortable with,
then tend to get out of a portion early. Perhaps it would be better to
go in with a more comfortable share size.
However, don't forget the psychological factor of "covering" or
"closing half" of a position. When traders are in a bad position, many
are "sure" that if they cover, the stock will reverse (not a good
mindset, not matter what). If they sell half, they're happy (or happier,
at least) that they did so if it goes against them further. If it does
turn around, they're happy(ier) they still have half the position. Both
result in a better state of mind, and this can lead to getting into
better trades. "Whenever unsure, cover half" has helped a lot of traders
overcome their mental roadblocks.
ON THE NYSE HYBRID SYSTEM
I had an order to sell 200 shares at 40.26. I got filled and
noticed the bid offer really didn't change. Why? Did someone just sweep
through the open book and the offer wasn't reflected?--narballs
This seems to be an unforeseen benefit to the hybrid system, and my
traders are loving it. The automated scalpers and the pairs guys both
are getting some good pricing. On our RediPlus platforms, we see our
quote line change color and see a "print" down or up several cents,
filling our "outside envelope" bid or offer without even changing the
Level I bid/offer.
For example, just the other day one of my stocks was showing xx.10
bid and xx.12 offer, and I was a xx.01 bid with my outside envelope. One
second I was filled at xx.01, and immediately hit the xx.10 bid for a
quick scalp (scalping is normally not my style but I figured, what the
heck? It was a free couple of hundred bucks).
TRADING ON MARGIN
I have never traded on margin because of the risk and just not
liking taking a loan. Now I'm thinking about taking small trades on
margin. Say I take a small daytrade on margin -- let's say a 100-share,
$20 trade. So I take a $2,000 trade on margin, hold it to around close,
and sell it for a small profit. How would my interest be compiled for
those few hours?
A couple of things to keep in mind. The average return on interest is
between 8%-12% per year for the normal investor/trader, so to borrow
money at 10% makes little sense (yes, there are always exceptions, but
very few in this case). Be very careful of the spread between what they
charge you and what they pay you for your cash.
Another concern with retail brokers is that they don't pay (most)
investors interest on their short-stock sales, which makes it virtually
impossible to engage in profitable hedging strategies, like pairs
trading and mergers. A differential is one thing, but keeping 100% seems
a bit much to me. But this whole "making money on the money" is
something we've been preaching to investors for years -- and it is
obviously where most of the retail brokers' money is being made. This
makes it so they can let you trade commission-free.
I've never traded in a retail account and have to rely on others for
all the details. So basically you're saying you have a line of credit
available (which is all margin is, anyway) and you pay 10.25% when you
use it, even though it's secured by the underlying stock shares -- is
that correct? They can sell you out and recover the margin call anyway,
which still seems like a rough deal. I'll bet you're not even receiving
4% on your long stock.
For comparison, our differential is only 1.75% between what we pay
and what we charge, and traders receive a full 5% on their short-stock
sales. When you're long $1 million and short $1.2 million, for example,
you don't end up paying a gigantic amount in interest because of the 5%
payment. For most retail accounts, the lack of short-stock interest is
cost-prohibitive for many long/short hedging strategies.
Check around for the best deal; commission rates aren't the only
consideration.
E-mail your questions for Bright to Editor@Traders.com, with the
subject line direct to "Don Bright Question."
Originally published in the May 2007 issue of Technical Analysis
of STOCKS & COMMODITIES magazine. All rights reserved. © Copyright
2007, Technical Analysis, Inc.
Return to May
2007 Contents
