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
MARKET ON CLOSE
What significance does the 3:40 pm ending order imbalances entail for daytrading? Also, can you recommend any books that will expound on the subject? Thank you in advance. -- Marcus
MOC imbalances are fundamental to all types of trading. Suppose you're trading all day long, and you're long 2,000 shares at 3:30 or so -- you think you want to get out, but you might wait until 3:40 to see if there is a buy or sell imbalance. If it's a buy, wait; if it's a sell, sell immediately. Of course, you'll have to monitor each of your "children" (stocks you trade day in and day out) during all the time frames near the end of day -- 3:30, 3:40, 3:50 (republish), 4:00 bell, and the final MOC price. I provide my traders with software to do that for them (with futures as well so we can tell if price movement is related to an imbalance or simply a basic market move at end of day). Hope this helps.
I know you're busy being in charge of all those traders and boot campers, but I was wondering if you could answer something. Today there was a buy imbalance and the market sold off a little. Does the market generally rally or sell off when there is a buy imbalance? I think it rallies, but I wanted to ask the expert. -- Tim
In a relatively flat market, your thinking is correct (the tendency is to go up with large buy imbalances), but when the market is already up 180 points or whatever, it's much less likely. Time to fadeÝ the knee-jerk move up at 3:40.
BEYOND THE MENTAL BARRIER
I've been trading for over a year now and I'm finally starting to see the results, but I'm still having a lot of difficulty taking my trading to the next level. I made about $6,000 on a recent trading day on a market rally (on the financial and retail stocks), but I know I'm a good trader and should have made more had I capitalized on the opportunities in front of me. I read a lot about the best traders out there and the common factor I see is that they know how to take risks and are fearless -- and this is what is holding me back. Can you recommend how I can push myself past this mental barrier? Do you think it would help if I had more money in my account? -- Joseph Klar
Being "fearless" causes the downfall of many traders. I don't know what strategies you're engaging in, but I assume you're speaking of directional-type holding of positions. If you're making good money, then let your account build up to where you have $100,000 or so in there, and that alone will allow you to expand your risk management to a level of comfort that might allow for more profits. Remember, fear and greed control the market, and traders need to control both elements.
WHAT AM I MISSING?
I have recently been trading the 2x inverse funds -- Qid, Dxd, Sds. The price I see at closing sometimes is very different from the final closing price. For instance, today at the bell my platform showed 48.92, but the price kept changing for several minutes and finally closed at 49.76. Is this a result of sorting out the market on close orders? What am I missing? -- selecto
Moc orders are placed all day long, both buys and sells, and the specialist must match them. At 3:40, the specialist will publish the imbalance for everyone to see. If there were one million shares of buy orders and 500,000 of sell orders, you would see a 500,000 imbalance. Specialists do this because they're looking for help in accommodating these extra shares.
Traders can put in orders to help with the imbalance as long as the published imbalance is still showing. But at 3:50, they republish based on the shares entered between 3:40 and 3:50. Most often, at least half of the imbalance will go away, but many go away completely, and some even reverse. The Moc imbalance play is one of our most successful, for what it's worth.
WHO'S MOVING THE MARKET?
It appears to me that all the courses, formulas, technical analysis, tape readers, and so forth are designed to find and ride the rallies and declines. So who's left to move the market and how can they accomplish that if everybody is watching and waiting to pounce? -- Dominick
The basic mechanics of the market are what cause movement. When you see the Standard & Poor's 500 futures trading over the calculated fair value for that particular day/hour/minute, the floor traders and other big players will be selling the futures contracts and most often buying all the underlying stocks. This causes immediate and longer-term upward movement. The opposite is true on the downside, of course. Selling futures at a premium (Prem) simply means that they are selling the equivalent of all 500 stocks at a price higher than where they are trading currently, even including the cost of carry based on interest rates and time to expiration. They reverse the trade when the futures are trading at a discount to fair value.
Options and other derivatives add to the overall supply and demand of the equities. When all is said and done, the market moves based on supply and demand, along with derivative valuations.
E-mail your questions for Bright to Editor@Traders.com, with the subject line direct to "Don Bright Question."
Originally published in the May 2008 issue of Technical Analysis of STOCKS & COMMODITIES magazine. All rights reserved. © Copyright 2008, Technical Analysis, Inc.
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