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 |
TRADE ADJUSTMENTS
How do people adjust their trades if the market is expected to open higher or if the market is expected to open flat or lower? The night before, I do my research and create a list to trade but don't see how to find a way to integrate it with the market open situation. Any suggestions?-- Jim Clark
We monitor the S&P futures contracts (eminis) after adjusting the spot price to fair value, right before the market opens (see www.stocktrading. com/Tradinginfo.htm for an example). This gives us the expected percentage of up or down opening points (extremely accurate by definition). To better understand fair value calculations, check out www.programtrading.com and www. indexarb.com.
WHY BETA?
I have been reading some of your online posts, and I am curious what makes you pick up beta to adjust the price when you play open-print strategy. And I have noted the value of beta could be different. Which beta are you using now, or are you computing beta yourself? --daytrader06
We use beta to alter the envelope percentage so we don't get left out of trades on low-volatility stocks. Our programs go out and check beta with the click of a button, and I update about once a month. Beta is not a primary consideration, but certainly helps with the fill rate.
The (automated) opening programs are fluid, and we modify them quite often, adding stocks, taking some off, looking at news items. Always tweaking a bit to stay ahead of the game.
THE NEXT BIG THING
Don, I am just trying to get another point of view from the research I have been doing in online trading applications. What do you see as the next big idea, innovation, emerging technology that will shape the online trading community? Do you think it is something like collective intelligence (predictwallstreet.com, for example), algorithmic trading applications for the average (nontechnical) person, or something completely different? Your input would be greatly appreciated.
Pretty tough question, especially since you're asking about online, retail traders, but I can offer this. Brokers are bringing commissions down to zero (Bank of America for example), and this will likely bring in more online participation from the general public. This is not necessarily a good thing, for a couple of reasons. First off, the average online participant has not had enough training to understand proper hedging strategies (long stock vs. short stock), and are stuck with buy-only stockpicking for their investments. Most brokerages don't even pay their customers' interest on their short stock sales. Imagine buying $1 million worth of stock and shorting $1 million worth of another stock, as in pairs trading or mergers & acquisitions, and the broker keeping all the interest money from the short sale while charging you interest on the long side. Our traders, for example, do receive interest on short stock sales of (currently) 5% or so, or simply don't allow it all.
The retail public has not had a great record with "buy-only" trading in the recent past. I am not suggesting that retail traders use brokers or other experts either, don't get me wrong. I am suggesting that online investors should learn as much as they can about fundamentals, hedging techniques, and proper technical analysis before diving into the game. In this day of free information flow, it is easier than ever to learn how to properly handle your own investments/trading.
I do not see collective intelligence via websites being either anything new, or of any particular benefit. Anyone thinking that some signal from a website is going to make them any money should think again. Such sites as Trade-ideas.com and eSignal offer excellent screening and low costs to those who have a good grasp of what they're looking for in the markets. The best tools in the world still need a good mechanic to work well.
CROSSROADS
Hi Don, I read your article titled "Formulating Trading Plans" and found it interesting. I've already put together a basic list of things to follow and really need to tweak it. I'm at a crossroads after trading for six years based on fundamentals and tips. Can you share a generic plan for swing trading as well as a trend-following plan? I'd get a lot out of seeing what the plan of someone who is successful looks like. I typically do swing trading and buying good companies that are about to break out or resting on a 20- or 50-day moving average. Thanks in advance! -- John Yazinsky
John, first off let me say I feel your frustration. Yes, a trading plan is critical to success. Here is a STOCKS & COMMODITIES-labeled link you may use to formulate your basic, initial plan:
www.stocktrading.com/TradingPlanTASC.htmPlease understand that in most cases it takes at least a $1 million or more to make a good living in this business (there are always exceptions, of course). Our traders have the ability to use that kind of money with only $20,000 or so of risk capital put up. We focus on the lower-risk, higher-reward, capital-intensive strategies we know work. As with all trading styles, you must work hard to keep ahead of the game. We do opening-only orders on the Nyse every day. We do a lot of pairs trading and M&A plays as well. The average retail trader is generally forced to attempt higher-risk techniques due to capital limitations.
Hopefully this will help jumpstart the next phase in your trading career.
BACKTEST TAPE-READING
Don, is it possible to backtest tape-reading? Most backfill only has price/volume/time. I found it is much easier to detect the big shark's move by reading the tapes rather than looking at the historic price/volume info.--qll
Tape-reading is all-encompassing and includes too many variables to be backtested. Just for starters, it's hard to backtest the Prem/Disc to fair value at the time of price volume action vs. the peer (of the stock in question) and the sector and the overall market. We also check the commodity of the sector related, and normal things like the depth of the book, and where the futures sit on a self calibrating tick chart, and so on.
Good tape reading can be shown and explained, but it is still pretty much an art, and a valuable one at that.
ODDS FOR A BETTER RETURN
Can you buy a stock hoping it will go up so you can short-sell it? So if the stock doesn't go up you can make money if the stock jumps down and just cancel the order to buy for long? What about with options? Can I buy puts and calls on one stock to increase the odds of making a better return?
If you buy a stock and then short-sell it, you are flat with no position and a locked-in profit (provided you shorted it higher than the buy price). Buying puts and calls are separate bets, and both can be very costly. All you can lose is everything you paid for them, not much consolation in my mind.
SWEEPING
Hey Don, I'm guessing your guys are taking the other side of the sweep? If a sweep order come in to wipe the book for 30-40 cents on the bid, your guys would buy into that to make the 20-30 cents? Or your guys would go in the flow of the sweep?--traderyin
By having orders generated at the end of a sweep, or having bids/offers in place, they tend to fade the sweep. I've noticed that at times I may have a 0.66 bid on, with a 0.75 x 0.78 market, without changing the market, it goes "hybrid brown" and fills me, and then right back to normal pricing.
And, yes, the guys who always make money are still making money, although they're adapting once again.
SPOT THAT SWEEP
Is there a specific and reliable method to spot a sweep? And once you spot it, how can you tell if the sweep has ended? Thanks.--Scalper007
Our RediPlus has the quotes change color when they are "taking over" for manual sweeps.
SWEEPING REPLY ON REDIPLUS
Thanks, but unfortunately, I'm not using RediPlus for the time being. Is there any other way to tell when sweeps are starting and ending?--Scalper007
The book will close temporarily and go 1x1 in the size column. We also have a "slow bid /slow ask" column; perhaps you have one of those.
ALERT FILTERS
Do you have filters set up that will alert you when a book has closed so you can position yourself for the sweep, or do you monitor several books at the same time?--javs5150
We have traders with programs that kick in with a five-cent (for example) move from last. Newer scalpers have bids and offers in at all times on their "children" stocks (stocks they trade every day). We do what we can to maximize our entries via sweeps whenever possible.
HEY, HOW DID A FUNDAMENTALS DISCUSSION GET IN HERE?!
From exQQQQseme: I am big on fundamentals. I look for real news -- preferably negative news. I then ask myself if this is something management can fix quickly. If the answer is no, I do a negative directional long-term play. When a company's stock is doing poorly, I look at the balance sheet, particularly the cash position and short-term debt. If the stock is down, they are sitting on a pile of cash, and short-term debt does not exist, then I'm long-term bullish.
From Bob Bright: My favorite long-term (six to 12 months) strategy that doesn't require constant maintenance: Otm butterflies.
From Maverick74: Bob, I don't believe there is an edge trading off of publicly available information. Most hedge funds that are successful doing that trade off information that is not public. If everyone has it, it's not an edge.
From Don Bright: Now for a different perspective from the "Bright side" (although I do agree about the news comment -- there is nothing that we're going to learn that someone else doesn't already know). Where my differing opinion may come into play is in regards to fundamentals and balance sheets.
My brother, whom I respect greatly (how can you not respect someone who has made over $100 million with his own trading, never using other people's money?) is a strong supporter of fundamentals in all his trading, both short-term and long-term portfolio management. We spend a zillion hours going through the details of every stock we trade, every pair relationship (fundamentally), and every sector strength (for relative strength via fundamentals).
Bob says that if you're going to buy a stock for a week, you shouldn't
mind holding it for a year or a decade, especially as it relates to a peer
or a pair. This thinking has made millions (and, yes, I thank Bob for being
the one in charge of our family LLC, where most of my money is kept!).
E-mail your questions for Bright to Editor@Traders.com, with the subject line direct to "Don Bright Question."
Originally published in the April 2007 issue of Technical Analysis
of STOCKS & COMMODITIES magazine. All rights reserved. © Copyright
2007, Technical Analysis, Inc.
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