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 |
ADJUSTING ENTRY PRICES
How do you go about entering a trade after considering it for purchase the morning after your nightly analysis, when premarket indicators look to gap sharply higher, gap sharply lower, moderately higher, moderately lower, and neutral? Do you adjust your entry price accordingly, or do you use pivot numbers? --Joseph Anthony
I assume you want to attempt the best possible entry (buy) the next day. If you see an expected gap up prior to the stock opening, based on opening indications from the specialist, then I would not buy on the opening. Remember, the specialist cannot participate on the buy side when there is a gap up opening; rather, he must accommodate the excess buy orders by selling. It is never a good idea to go against the specialist. Now, if you see a gap down based on opening indications, I suggest you double-check your homework, and then participate with an opening-only order to buy. This way, you'll be on the same buy side as the specialist (for the reasons I mentioned).
If you are referring to the opening-only order strategy by itself, I would adjust one side of the entered limit pricing before sending the order. For example, if my fair value calculations (you say "pivot points") show a $31.10 bid and a $31.40 offer, but the opening indication is $32.50-$33.00, then I leave the buy price alone, but move the short sale price up to around $32.75. I want to be in the top half of the indicated price, but I do not want to buy a gap up, no matter the circumstances.
DISCRETIONARY vs. SYSTEMATIC RISK
Discretionary trading on an intraday basis seems much riskier than systematic trading. Why do you think those outcomes are the way they are? There is the idea in some circles that those who are older or have been in the brokerage business do not make good discretionary traders, proprietary or otherwise. Is there a remedy for that, if in fact that is correct? Would the overall success rate be higher with a systematic approach or by simply disengaging from the whole endeavor? Thanks in advance for your insight. --Craig
The NYSE specialists have been making money for 200 years, and we teach our traders how to trade on the same side as the specialist. We do opening-only orders (based on fair value calculations) and we "outside envelope" the basic markets to take advantage of trade-throughs (price improvements, guaranteeing we are on the same side as the specialist).
As former exchange floor traders, we understand we make money by responding to the market. I often use a baseball metaphor, of the batter (trader) responding to the ball being pitched (by the market/pitcher), wherein we can't possibly have a systematic approach to an unknown factor (the pitch). If we were to say we want to swing at a 70-degree angle with a swing speed of 18 miles per hour (MPH), it obviously wouldn't work, since the pitcher is throwing the ball all over the place.
There are systems that work for a while, and we have traders with great black boxes (fully automated reactions to the market), but they need constant tweaking to stay successful. We have more traders who make money by knowing what their response will be to a possible variable (Federal Reserve chairman Alan Greenspan speaking, market breakouts, and so forth), and doing the same profitable strategies, day after day (opening only, enveloping, and so on).
If a system worked forever, there would not even be a marketplace, since everything would be absolutely predictable. Systems work until they don't, but - as long as we have a free marketplace - discretionary traders will be able to make money forever.
FLOAT, VOLUME, AND BETA CORRELATION
I'm trying to understand the correlation, if any, between volume, outstanding shares, float, and volatility beta. I thought there might be a relation between large volume/small float or small volume/large float to beta. Am I looking for something that's not there? --Joe Osborn
The best way to look at various aspects of individual stock data is to think about supply and demand. The more stock that is available via the float, the less locked stock that is unlikely (but not impossible) to be traded. A good example is Wal-Mart. A large portion of the stock is still held by the Walton family and is not likely to be traded in a short period. This stabilizes the stock and causes a lower beta (stock movement vs. the entire market movement).
Now to the daily volume, where the supply and demand issue takes over. If I can buy $50 million worth of stock within a $1.00 range, then the overall supply is pretty high and able to fulfill occasional demand fluctuations. If, on the other hand, $50 million worth of buying would cause a stock to move 20% or so, then that stock has a much higher beta, for the obvious lack of supply.
E-mail your questions for Bright to Editor@Traders.com, with the subject line direct to "Don Bright Question."
Originally published in the April 2005 issue of Technical Analysis
of STOCKS & COMMODITIES magazine. All rights reserved.
© Copyright 2005, Technical Analysis, Inc.
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