Q&A
Since You Asked
| Here's something that's been too long in the planning: a question & answer column. Professional trader Don Bright of Bright Trading, an equity trading corporation, answers a few of your questions. | 
Don Bright of Bright Trading |
CHOOSING STOCKS
I know many traders follow a few stocks they always like to trade. Anyone care to share some names? Thanks. -- Walter M.
There is a very simple set of criteria for choosing your stocks to trade. Be sure they have one, two, or three letters in their symbol (very rarely do we actively trade Nasdaq stocks). They must trade at least two million shares a day, and they should be in the Standard & Poor's 500. Be sure they are not involved in a merger or acquisition (if they are, be sure you understand the ratios involved and other pertinent data). We start our new traders with General Electric (GE), Wal-Mart (WMT), Lucent Technologies (LU), America Online/Time Warner (AOL/TWX), and so forth.
The reason for not attempting to trade over-the-counter (OTC) stocks is that we are not the professionals in that arena; the market makers are. Combine that with the fact that (and I quote Securities and Exchange Commission chairman Arthur Levitt) "... 85% of all [market] orders do not go to the best price." I trade 100-200 times per day at 2,000 shares each. If I lost only an eighth on each trade due to market makers, that would cost me thousands every day.
Hope this helps.
MOVING AVERAGE OFFSET
While reading trading articles from various sources, I have repeatedly come across a phrase like "a 13-bar moving average offset seven bars into the future." Precisely what does "offset seven bars into the future" mean, and how would it be constructed? Thanks very much for your help. You guys do a great job! -- Laura Huddleston
When charting a moving average over a historical period, many technicians plot into the future to estimate future moves. The "offset" is merely the number of bars/plotlines into the future.
TRADE DAY OF THE WEEK (TDOW)
In Don Bright's Q&A in the October 2000 issue of S&C, he answers a question about Trade Day Of Week (TDOW). TDOW is useful, especially in commodities. Combining TDOW with Trade Day Of Month (TDOM) is even better. These two indicators become building blocks for setups to enter the market for trades.
I agree with Don on his assessment that "you don't put too much credence in these results." I personally would never trade TDOW on its own. However, Larry Williams combines these two indicators with filters such as gold and bonds to find some very profitable trades in commodities.
Readers should do their own research and draw their own conclusions. Only then will they discover the truth. -- James A. Goulding, Member Chicago Board of Trade
You say you do not put too much credence in either trade day (week or month), basically agreeing with my answer. I am familiar with the work of Larry Williams, and I quote from another Website: "Larry Williams is one approach to commodity trading, but Larry Williams' commodity trading is not the only approach for success."
This column is designed to answer questions without bias. Therefore, I cannot endorse any single person or methodology. Since TDOW and so forth is a standard term in the industry, my answer is based on my experience (and many of our traders').
I try to poll a sampling of our traders before answering any question where there is little quantifiable evidence of either success or failure. I am always concerned about the "turn $10,000 into $1 million in one year" type of marketing. I agree everyone should do his or her own research. Your comment about not believing everything you read is something to live by.
I wish you success in your trading.
STOCKPICKING SERVICE
I am looking for a good stockpicking service. Any suggestions? -- Alton Wayne
I am sorry, but I must say, "Beware of stockpicking services!" I use the analogy of the guy at the racetrack selling his "Daily Best Bets." If they had any validity, why would he reduce his own odds of profit? On the other hand, the services that tout stocks are being shut down by federal regulators. Either way, you need to use caution. The self-fulfilling prophecy can be a factor, but I suggest you do your own research.
FOLLOWING THE INDEX
I have heard it is necessary to select stocks (for trading, not investing) that among other things "follow the index." What index does that mean? Are there different indices for different types of stocks (sectors)? Also, how far in the future do the indices lead the stocks? -- John Lillie
Great questions! One of the first things we teach our traders is how the S&P 500 futures floor traders use baskets of stocks to hedge their positions, assuming they are not simply scalping in and out. If they are forced by market buying to end up short the futures, then they call out to their clerks to buy groups of stocks or even the entire 500 stocks of the index in an amount to equal their current short position. This can be a matter of seconds or minutes in a market with a distinct direction. When the market is choppy, they will usually hold off from this tactic, hoping to simply buy the futures contracts back.
When you pick stocks for trading, it is advisable, as you say, to find issues that follow the market and their particular group or sector. We have many sectors like the retailers, brokers, airlines, oil, pharmaceuticals, and so forth. We watch the actual index as it moves within the sector, and also the other stocks in the group to see if they are trending in the same direction (as they usually are).
This is especially helpful in the first few minutes of trading. If Halliburton (HAL) opens up 2, then you might immediately put an "opening only" buy order for several of the other oil service stocks above yesterday's close. If you happen to catch one or two that still had some leftover sellers, you may see a quick rise in their price during the first 20 minutes or so, reflecting the activity in the sector.
TRADING IN DECIMALS
Would trading in decimals for listed stocks be an advantage or disadvantage for Bright traders, considering that a majority of your traders are scalpers? Thanks for your quick response to my earlier question. -- Michael Uy
The jury is still out on this. I am inclined to believe it will not be too big of a change, since we look for entry and exit points, not price. We have to wait to see if we are going to have one-cent, five-cent, or 10- to 20-cent spreads on the different issues.
Don Bright is with Bright Trading (www.stocktrading.com), a professional equity trading corporation with offices around the United States. E-mail your questions for Bright to Editor@traders.com, with the subject line directed to "Don Bright Question."
Originally published in the December 2000 issue of Technical Analysis of STOCKS & COMMODITIES magazine. All rights reserved. © Copyright 2000, Technical Analysis, Inc.
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