Q&A
Since You Asked
| 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 |
SEVERAL STRATEGIES FOLLOWUP
In STOCKS & COMMODITIES' October 2003 Q&A column, in answer to the question regarding "several strategies," you said that people will have a tough time if they stick to one or two trading styles. I agree that we should not lean on systems that are performing the best in the current market environment. But if I have tested a system for a long period of time and if it gives good net results, then can I not lean on that system for trading? Why is it necessary to run two or three systems concurrently? -- Gomu Vetrivel
Interesting question. First off, there is no system that will work for any protracted period of time. I have seen and used many systems over the years, and what worked last year obviously won't work now. Volatility has plummeted from above 50 to below 10, so it is safe to assume that any system developed using old data will have a tough time.
Most trading systems are tested through either backtesting or paper trading. I have heard the story so many times: "Gee, it worked so well while I tested it, how did I lose money?" I try not to be cynical, and I do listen to those who want to explain their systemsÉ but then I feel bad when I have to explain to them that the system (whatever it may be) will probably not work.
Think of the market as a pitcher in a baseball game, and the trader as the batter. The batter cannot simply swing the bat at an angle of x with a velocity of y, and expect to hit the ball. Nor can the trader expect the market to be predictable to a point of prolonged success.
We try to encourage our people to learn eight basic strategies and combine them during their decision-making process. We advise that they watch momentum; be aware of the relative strength of the sector; add in the premium in the futures versus the spot prices (and understand how they affect the stocks); and so on. By doing all of these things plus a lot of tape-reading, you will find that you can avoid the trap of sticking to one method and watching your money slip away as the market changes.
My best traders respond to the market as opposed to trying to predict the future. Use all the tools you can find (charts, volatility, fundamentals, and so on), and be prepared to swing the bat at whatever is thrown at you!
TRADING FROM A NEW POSITION
I've always been interested in the market-making and block-positioning side of the business. I don't believe in starting off in something with no experience, so if you could point me toward any firms that are in this sector or if you have any thoughts on what this business is like, I'd greatly appreciate it -- Truncheon
Let's start with market making, which comes in two basic flavors. The first is the exchange floor trader, the option/futures/commodities market makers. These traders are found on the Chicago Board Options Exchange, the Chicago Mercantile Exchange, the Philadelphia Stock Exchange, the New York Futures Exchange, and so on. There are only a few major firms who actually employ this type of trader, and then it's primarily for off-floor hedging purposes. There are more firms that work with market makers on a profit-split basis. You can usually get a list of these firms by contacting the exchanges directly. You can always buy or lease a membership yourself and find a clearing firm to back your own financial commitment.
The second type is the Nasdaq market maker, who works for those firms you find listed on the Nasdaq website. This job is more of an order-flow business, where you accommodate orders from customers both large and small. Some of these customers may be entire brokerages.
As far as the second group, block trading desks, I suggest you look to the single-stock futures exchanges, as well as the New York Stock Exchange and the American Stock Exchange. Ask them if they have members who might be hiring or training in off-site trading. These people will often use market-savvy types to analyze derivative-based trades for banking and other financial purposes.
RELATIVE VOLUME DATA
Is there a way to get volume data from the exchanges -- that is, up volume that corresponds to the number of shares traded above the previous close, as well as down volume? Thanks -- Dan King
Most data services will show you up volume and down volume for the day and even during the day. My particular service provider uses the symbols UVOL and DVOL for those figures. A word of caution: be sure that you understand this relates to the overall volume from the exchange, broken down by simple up-on-the-day versus down-on-the-day shares traded in the issues that are up or down from the previous day's close. This differs from the number of issues up versus number of issues down for the day. Be sure you understand the significance and distinction between the two.
E-mail your questions for Bright to Editor@Traders.com, with the subject line direct to "Don Bright Question."
Originally published in the February 2004 issue of Technical Analysis of STOCKS & COMMODITIES magazine. All rights reserved. © Copyright 2004, Technical Analysis, Inc.
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