Q&A
Since You Asked
| Here's something that's been too long in the
planning: a question & answer column. Professional trader Don Bright
of Bright Trading, an equity trading corporation, answers a few of
your questions. |
Don Bright of Bright Trading
|
NASDAQ STOPS
Are Nasdaq stops possible? My broker tells me that you can't protect
yourself on the downside by putting in a stop-loss sell order if your stock
is listed on the Nasdaq. Is that true? -- Lana Huddleston
Good question. Since there is no actual marketplace with a single entity
in control of the pricing of the stock, as there is on the New York Stock
Exchange (NYSE) and the American Stock Exchange (AMEX) (specialist system),
then who would be holding your stop order? Since the Nasdaq is a fragmented
market (using many market makers instead of a single specialist), there
is no practical way to execute stop orders.
Now, before I get letters contradicting that, let me say that some brokers
love to accept stop orders, and take the responsibility themselves for
proper execution. This is solely at the discretion of the broker and is
definitely not recommended, since you are simply letting some retail
stockbroker know where he can buy or sell your shares.
Please understand that a stop order is not an actual order; it is a
triggering device which, when your stop price is hit, activates a market
order to buy or sell. A stock may have a stop of $50, but the next trade
could be $48. (We've all seen that happen with some of these Nasdaq stocks,
haven't we?)
IDENTIFYING TRENDS EARLY
Can you suggest an indicator that helps distinguish between a trending
market and a choppy market? I believe some systems are for sale that first
backtest the data to find out whether the market is trending. If it is
trending, it applies a breakout system, and if it is in a sideways mode,
it sells on strength close to resistance and buys on weakness close to
support. Please inform me in detail about such indicators/systems. Please
don't talk about the average directional movement index (ADX), because
it is a lagging indicator. I want to identify it early. -- DV Prasad
In short-term trading, we need an up-to-the-second indicator of the
overall market to make good trading decisions. Be sure to have a live (real-time,
and yes, you must pay exchange fees to the Chicago Mercantile Exchange
[CME] to get it) tick chart of the Standard & Poor's 500 futures, accompanied
by a digital graphic showing the relationship to the day's fair value.
You can find what the program traders are using for fair value by visiting
www.program-trading.com/buysell.htm.
In our offices, we save a couple of seconds by listening to a live squawk
box from the floor of the exchange. You should also be aware of the daily
numbers. These numbers are used to give us a rough view of where the support,
resistance, projected high low, and daily pivot points are. Many traders
(arbitrage players) of S&P futures will be forced to sell the underlying
stocks when they are inundated with sell orders. If they cannot sell back
the futures contracts, they resort to selling the stocks to keep themselves
hedged. If they buy contracts under fair value, they can sell the stocks
to keep a (theoretical) profit. We also display the Nasdaq futures and
the QQQs (with accompanying fair value).
I have heard a lot of claims by various software developers but have
yet to see a system that can do better than a good trader with the above
information.
INTEREST ON SHORT SALES
I have been doing a lot of short-selling trading. I asked my broker
if I should get interest on the money credited to my account from these
short sales.
For example, suppose I had $100,000 cash in my account and I shorted
a stock worth $60,000. The cash balance in my account is now $160,000.
Later, I cover the short for $55,000, which brings my account to $105,000.
My broker will give me interest only on $40,000 from the day the
short generated, plus any other credit while the position is open due to
drop in the equity shorted. On the day the position closes, he will give
me interest on $105,000. Is this normal? -- Talaat Abdin
Unfortunately for active, aggressive traders like you, most retail brokerages
do not pay interest on short-sale cash. Some pay a minimal amount. The
reasoning of most brokerages is that they may have to pay to borrow the
shares shorted. In many cases, however, they have the shares under their
own umbrella street name and don't have to pay anyone.
I am a bit surprised that you didn't receive interest on your initial
cash balance of $100,000. You might consider checking out other brokerage
firms. Most people don't realize that retail brokerages are, for the most
part, banking institutions and derive the bulk of their revenues from interest
and other banking charges.
Most professional traders receive short interest on their cash accounts
from their firms, which is quite an edge.
STOCK MOVES
I am interested in the force index (developed by Alexander Elder),
the negative volume index, and Big Block's money flow (similar to those
used by Bloomberg.com) for each individual stock and industry groups. Are
you aware of any free websites that can provide those indicators? Also,
is it true that stocks generally fall faster than they rise? -- Jack
Fund
I was unable to find any free information about the force index. I did
find what seemed to be a pay service that was selling videos, books, and
other information. I feel compelled to reiterate my words of caution when
seeking a leg up from those who make their money selling wares.
Regarding your second question, stocks do fall more quickly for
the most part than they rise. There is a simple explanation for this phenomenon.
When stocks are falling, buyers just get out of the way and wait for them
to firm up before buying. This also accounts for the lack of volume (number
of shares actually trading) on the downside.
Downside movement is also augmented by margin calls, forcing investors
to liquidate at the market price. Upside movement usually has investors
moving from cash to equities, while others are taking profits. Because
there is more stock available from the investors taking profits, it takes
more time and volume for the stocks to rise.
A good thing to remember is this old (and truthful) saying: "There
are no buyers at the bottom, and no sellers at the top" of a stock
move. Buyers back away when only small amounts of stock are offered (they
don't want to chase the stock up for only a few shares). Sellers back away
for the same reason on the downside.
GETTING STARTED
I have been investing for about three years now (post-1998 downturn),
mostly in penny stocks. I really need some sound advice on how to get started
trading. What tools do I need and what do I need to know to really give
myself a legitimate chance at being successful and not just lucky? I've
read some books on investing and technical analysis and they really haven't
shed much light on what things to concentrate on when venturing into trading.
-- No Name Given
The first thing you need to decide is: Do you want to be a trader or
an investor? There is a gigantic difference. The terms are even defined
differently. If you want to be a trader by my definition, then that means
you are planning to make a career of professional trading.
Please note, there are only around 10,000 professional traders in the
US, including the NYSE specialists and the Nasdaq market makers, exchange
floor traders, and those who trade with firms such as Bright Trading. These
people are either exchange members or licensed professionals. As in any
profession, it takes education and time to become proficient. Many start
out as clerks on trading floors; others complete internship programs at
colleges and universities. Many are trained on the job.
Now, if you simply want to become a better investor, you need to define
your goals and aspirations. Determine if you would be satisfied with the
historical return of the market (better than most mutual funds!), and buy
one of many exchange-traded funds, which are guaranteed to track the market.
These funds include Spy (SPDRs) and DIA (Dow Jones). Do your own research
and find a good online broker that charges per share, not per ticket. This
makes it much better for the investor who is trading 100 or 200 shares
at a time. Why pay $9.95 when you can pay $1 per 100 shares?
Good luck!
Don Bright is with Bright Trading (www.stocktrading.com),
a professional equity trading corporation with offices around the United
States. E-mail your questions for Bright to Editor@traders.com, with the
subject line directed to "Don Bright Question."
Originally published in the February 2001 issue of
Technical Analysis of STOCKS & COMMODITIES magazine. All rights reserved.
© Copyright 2001, Technical Analysis, Inc.
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