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.
No stop-losses in opening-only strategies?
I have heard you say that you don’t like using stop-loss orders when you trade the opening-only strategy. Why is that? Most “experts” preach that you must use stops. Can you shed some light on this? — Chico
Sure, let me try to explain this often-confusing strategy, or lack thereof.
First off, you can check past issues of Stocks & Commodities to get an in-depth idea of what we do each day at the opening of the markets. To summarize, each day, Bright traders place buy orders and sell short orders on hundreds of stock prior to market opening. Each trader may place orders on from 10 to 200 different stock symbols. We have a methodology for determining the actual order pricing, based on estimated opening prices, overall market and so forth. We hope to get filled only on the stocks that gap way up or way down. We know that when stocks do that, the Nyse specialist will be on the same side that we are. If they are short, so are we.
We immediately place profit targets of from a few pennies to a half-dollar or more in hopes of catching what we call the “slingshot effect” when a stock gaps in extremes. Of course, the stock will sometimes move against us a bit, causing an immediate concern. I have found over the decades of trading that mechanical “hard” stops tend to get triggered too often. So what we do is place alerts or triggers, where if, for example, a stock moves 12 cents against us, we will send a market order for only 100 shares (we generally trade 1,000 to 5,000 shares with this strategy) to alert us that we need to watch this stock closely. By doing so, we can ascertain what other stocks in the sector are doing, listen to the Squawk Box (go to www.tradersaudio.com) and so on to get a feel for what the market is doing. At this point, we can better make a decision as to whether we choose to cover or let the stock reverse back in our favor.
Now, in all fairness, some traders do choose to have actual stops sent in. However, they will be sure that an adequate number of shares have traded at their stop trigger price. These days, we have to be careful for “ghost prints” from electronic communications networks (Ecns) and other market centers that could trigger stops incorrectly. I am a fan of taking profits with automation, and tape-reading to monitor any stocks in a negative situation.
One last point for those investors who use stops. Yes, since you are not able to monitor daily movements, then please keep your losses to a minimum. The stock market is a wonderful place — if you sell, it will let you get back in again, often at better prices. Hope this helps.
A Capital Idea?
I’ve been reading your column and about your firm for years, but I still don’t understand a couple of things. You say that your traders use the firm’s capital, yet you also say that your traders put up some capital of their own. How does that work? You’ve also said that your traders are connected at all times to the firm, what do you mean by that? Thanks in advance. — Naztrdr
First off, thanks for reading the column; I appreciate that. Now to your question. Bright Trading engages in what is generally referred to as the “stock exchange floor trader” business model. Some background: Going back to when my brother Bob and I started trading in the 1970s (!), we had to buy seats/memberships on various exchanges. This was costly, but what we discovered is that after doing so, we could place about $25,000 with our clearing firm, and then use the clearing firm’s capital to trade with. This is “use of capital” compared with “leverage” or “margin.” We were able to engage in strategies that tended to be lower risk, higher reward, but somewhat capital intensive. A perfect example is the opening-only strategy written about many times in this column (and in fact, the first question in this column this month!).
Trading for a living should be thought of just like any other business. You need to develop a trading plan with your capital available, strategies that you plan on engaging in, and cost structure. Our traders put up capital that is still theirs but can then use our money to enter trades. The profits and losses go to the trader, just like any other business they might engage in. The benefits that we provide are simply a virtually unlimited upside, and very limited downside (due to our corporate structure), and we provide daily capital for free.
Our model has survived and thrived for a long time. Entrepreneurship at its best, in my opinion.