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
Are Nasdaq stops possible? My broker tells me that you can't protect yourself on the downside by putting in a stop-loss sell order if your stock is listed on the Nasdaq. Is that true? -- Lana Huddleston
Good question. Since there is no actual marketplace with a single entity in control of the pricing of the stock, as there is on the New York Stock Exchange (NYSE) and the American Stock Exchange (AMEX) (specialist system), then who would be holding your stop order? Since the Nasdaq is a fragmented market (using many market makers instead of a single specialist), there is no practical way to execute stop orders.
Now, before I get letters contradicting that, let me say that some brokers love to accept stop orders, and take the responsibility themselves for proper execution. This is solely at the discretion of the broker and is definitely not recommended, since you are simply letting some retail stockbroker know where he can buy or sell your shares.
Please understand that a stop order is not an actual order; it is a triggering device which, when your stop price is hit, activates a market order to buy or sell. A stock may have a stop of $50, but the next trade could be $48. (We've all seen that happen with some of these Nasdaq stocks, haven't we?)
IDENTIFYING TRENDS EARLY
Can you suggest an indicator that helps distinguish between a trending market and a choppy market? I believe some systems are for sale that first backtest the data to find out whether the market is trending. If it is trending, it applies a breakout system, and if it is in a sideways mode, it sells on strength close to resistance and buys on weakness close to support. Please inform me in detail about such indicators/systems. Please don't talk about the average directional movement index (ADX), because it is a lagging indicator. I want to identify it early. -- DV Prasad
In short-term trading, we need an up-to-the-second indicator of the overall market to make good trading decisions. Be sure to have a live (real-time, and yes, you must pay exchange fees to the Chicago Mercantile Exchange [CME] to get it) tick chart of the Standard & Poor's 500 futures, accompanied by a digital graphic showing the relationship to the day's fair value. You can find what the program traders are using for fair value by visiting www.program-trading.com/buysell.htm.
In our offices, we save a couple of seconds by listening to a live squawk box from the floor of the exchange. You should also be aware of the daily numbers. These numbers are used to give us a rough view of where the support, resistance, projected high low, and daily pivot points are. Many traders (arbitrage players) of S&P futures will be forced to sell the underlying stocks when they are inundated with sell orders. If they cannot sell back the futures contracts, they resort to selling the stocks to keep themselves hedged. If they buy contracts under fair value, they can sell the stocks to keep a (theoretical) profit. We also display the Nasdaq futures and the QQQs (with accompanying fair value).
I have heard a lot of claims by various software developers but have yet to see a system that can do better than a good trader with the above information.
INTEREST ON SHORT SALES
I have been doing a lot of short-selling trading. I asked my broker if I should get interest on the money credited to my account from these short sales.
For example, suppose I had $100,000 cash in my account and I shorted a stock worth $60,000. The cash balance in my account is now $160,000. Later, I cover the short for $55,000, which brings my account to $105,000.
My broker will give me interest only on $40,000 from the day the short generated, plus any other credit while the position is open due to drop in the equity shorted. On the day the position closes, he will give me interest on $105,000. Is this normal? -- Talaat Abdin
Unfortunately for active, aggressive traders like you, most retail brokerages do not pay interest on short-sale cash. Some pay a minimal amount. The reasoning of most brokerages is that they may have to pay to borrow the shares shorted. In many cases, however, they have the shares under their own umbrella street name and don't have to pay anyone.
I am a bit surprised that you didn't receive interest on your initial cash balance of $100,000. You might consider checking out other brokerage firms. Most people don't realize that retail brokerages are, for the most part, banking institutions and derive the bulk of their revenues from interest and other banking charges.
Most professional traders receive short interest on their cash accounts from their firms, which is quite an edge.
I am interested in the force index (developed by Alexander Elder), the negative volume index, and Big Block's money flow (similar to those used by Bloomberg.com) for each individual stock and industry groups. Are you aware of any free websites that can provide those indicators? Also, is it true that stocks generally fall faster than they rise? -- Jack Fund
I was unable to find any free information about the force index. I did find what seemed to be a pay service that was selling videos, books, and other information. I feel compelled to reiterate my words of caution when seeking a leg up from those who make their money selling wares.
Regarding your second question, stocks do fall more quickly for the most part than they rise. There is a simple explanation for this phenomenon. When stocks are falling, buyers just get out of the way and wait for them to firm up before buying. This also accounts for the lack of volume (number of shares actually trading) on the downside.
Downside movement is also augmented by margin calls, forcing investors to liquidate at the market price. Upside movement usually has investors moving from cash to equities, while others are taking profits. Because there is more stock available from the investors taking profits, it takes more time and volume for the stocks to rise.
A good thing to remember is this old (and truthful) saying: "There are no buyers at the bottom, and no sellers at the top" of a stock move. Buyers back away when only small amounts of stock are offered (they don't want to chase the stock up for only a few shares). Sellers back away for the same reason on the downside.
I have been investing for about three years now (post-1998 downturn), mostly in penny stocks. I really need some sound advice on how to get started trading. What tools do I need and what do I need to know to really give myself a legitimate chance at being successful and not just lucky? I've read some books on investing and technical analysis and they really haven't shed much light on what things to concentrate on when venturing into trading. -- No Name Given
The first thing you need to decide is: Do you want to be a trader or an investor? There is a gigantic difference. The terms are even defined differently. If you want to be a trader by my definition, then that means you are planning to make a career of professional trading.
Please note, there are only around 10,000 professional traders in the US, including the NYSE specialists and the Nasdaq market makers, exchange floor traders, and those who trade with firms such as Bright Trading. These people are either exchange members or licensed professionals. As in any profession, it takes education and time to become proficient. Many start out as clerks on trading floors; others complete internship programs at colleges and universities. Many are trained on the job.
Now, if you simply want to become a better investor, you need to define your goals and aspirations. Determine if you would be satisfied with the historical return of the market (better than most mutual funds!), and buy one of many exchange-traded funds, which are guaranteed to track the market. These funds include Spy (SPDRs) and DIA (Dow Jones). Do your own research and find a good online broker that charges per share, not per ticket. This makes it much better for the investor who is trading 100 or 200 shares at a time. Why pay $9.95 when you can pay $1 per 100 shares?
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 February 2001 issue of Technical Analysis of STOCKS & COMMODITIES magazine. All rights reserved. © Copyright 2001, Technical Analysis, Inc.
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