Q&A



Since You Asked

Professional trader Don Bright of Bright Trading, an equity trading corporation, answers a few of your questions.

Don Bright of Bright Trading


TRADING DISCIPLINE

I am a new proprietary trader about seven months in. I have started moving up the learning curve, but my biggest problem is discipline. I have great entries and I feel I have developed an intuition for when something is going to move; my problem is holding on to money and sitting on my losses. For example, today I had three great trades. My problem began when I traded a stock for the fourth time and was up another 0.25 when it started to rally against me. I could have easily gotten out with a profit but I decided to sit a little, and ended up giving back $400.

Next I saw a short seller (150,000) stepping down. I was about to bid out when he spread the offer up to some ridiculous price, and that's when I froze. I ended up losing a full point on 1,000 shares.

I also sit a lot in stocks and make a decent profit (like 0.30 to 0.60), but I won't take that profit. Do you have any advice on how I can overcome this discipline problem? I can make profitable trades, but either I don't take the profit or I give it all back (and then some)! - Michael

Your plight is shared by many other "newbie" traders. It takes quite a bit of time before a trader is proficient in exit strategies. One problem is the fear of missing a larger profit. But a profit is a profit, and there is no harm in taking one. For example, if you are ahead 20 cents, and decide to get out, but the stock continues in your direction, you can always get back in and make some more money. Look at each trade as if it were a new hand in a poker game. You get fresh opportunities and new risk, simple as that.

On the other hand, we give our traders a tool to gauge whether they are letting the losses run while cutting their profits short. Make a simple graph with a zero point in the middle. Plot each trade horizontally from the center point, with losses going to the left and profits to the right. Mark from the zero point (your entry price) with a line to your exit point (in cents), and then plot how much further the stock went in the same (positive) direction before it turned around by a nickel or so. This is an easy aid to show how well your exits are working.

There is no magic to any of this, but you'll be surprised how big a benefit experience is after you have traded for a couple of years!


INITIAL PUBLIC OFFERINGS

I've been long on two initial public offerings (IPOs) in the market for two weeks now. Since then, price has gone down $1.5 and is hovering in that range. How do I know when to exit or stay in? I know that IPOs are tricky. - Diana Diaz

You certainly hit the nail on the head with the comment "IPOs are tricky"! What you need to find out is where the investment banker (distributing brokerage) has acquired its own shares of stock (many will guarantee 10-30% less than the inital offering price to the company). This may give you an idea of where the initial support would be for the share price.

After getting into an IPO, you really need to treat the shares like you would any other stock purchase. Check the fundamentals on the stock to see what its book value and P/E ratios are. Check how well it is positioned within its industry/sector, and see if it has revenues. The days of "get into an IPO and make money" are over. The bubble has burst, and the investor climate is a bit chillier than in the late 1990s. I suggest you place a mental stop near the broker's guarantee price.


QQQ TAPE READING

What exactly should a person be looking at to perform a thorough tape reading of QQQ intraday? -- David Dexter

The QQQs are obviously an index, and trade much differently from stocks in several regards, so standard tape-reading basics don't always apply. To trade the QQQs properly, you should set up a correlation basket of a few stocks that will "lead" the index. Some basics do apply, however, such as premium over fair value of the S&P and the Nasdaq.

Remember that the QQQs trade on the Amex (modified specialist system), on the NYSE (specialist system), and on the various electronic communication networks (ECNs). I actually have found excellent markets on the ISLD ECN that seem to lead the other exchanges (and the liquidity is excellent).


OSCILLATORS VS. MOMENTUM INDICATORS

There is a plethora of indicators in technical analysis. Would you explain the difference between oscillators and momentum indicators? -- Dr. Jagdish Chandra

An oscillator reflects stock pricing in a wavelike manner, much like a sound wave. A momentum indicator reflects direction based on (among other things) price and volume. When price "breaks out" of a wave pattern, then that is a strong buy signal. When we see momentum, either intraday or longer-term, we see pricing movement along with (generally) increased share volume.


Don Bright is with Bright Trading (www.stocktrading.com), a professional equity corporation with offices around the US. E-mail your questions for Bright to Editor@Traders.com, with the subject line direct to "Don Bright Question."

Originally published in the October 2002 issue of Technical Analysis of STOCKS & COMMODITIES magazine. All rights reserved. © Copyright 2002, Technical Analysis, Inc.



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