Q&A
Since You Asked
| 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
|
SEVERAL STRATEGIES FOLLOWUP
In STOCKS & COMMODITIES' October 2003 Q&A column, in answer
to the question regarding "several strategies," you said that
people will have a tough time if they stick to one or two trading styles.
I agree that we should not lean on systems that are performing the best
in the current market environment. But if I have tested a system for a
long period of time and if it gives good net results, then can I not lean
on that system for trading? Why is it necessary to run two or three systems
concurrently? -- Gomu Vetrivel
Interesting question. First off, there is no system that will work for
any protracted period of time. I have seen and used many systems over the
years, and what worked last year obviously won't work now. Volatility has
plummeted from above 50 to below 10, so it is safe to assume that any system
developed using old data will have a tough time.
Most trading systems are tested through either backtesting or paper
trading. I have heard the story so many times: "Gee, it worked so
well while I tested it, how did I lose money?" I try not to be cynical,
and I do listen to those who want to explain their systemsÉ but then I
feel bad when I have to explain to them that the system (whatever it may
be) will probably not work.
Think of the market as a pitcher in a baseball game, and the trader
as the batter. The batter cannot simply swing the bat at an angle of x
with a velocity of y, and expect to hit the ball. Nor can the trader expect
the market to be predictable to a point of prolonged success.
We try to encourage our people to learn eight basic strategies and combine
them during their decision-making process. We advise that they watch momentum;
be aware of the relative strength of the sector; add in the premium in
the futures versus the spot prices (and understand how they affect the
stocks); and so on. By doing all of these things plus a lot of tape-reading,
you will find that you can avoid the trap of sticking to one method and
watching your money slip away as the market changes.
My best traders respond to the market as opposed to trying to predict
the future. Use all the tools you can find (charts, volatility, fundamentals,
and so on), and be prepared to swing the bat at whatever is thrown at you!
TRADING FROM A NEW POSITION
I've always been interested in the market-making and block-positioning
side of the business. I don't believe in starting off in something with
no experience, so if you could point me toward any firms that are in this
sector or if you have any thoughts on what this business is like, I'd greatly
appreciate it -- Truncheon
Let's start with market making, which comes in two basic flavors. The
first is the exchange floor trader, the option/futures/commodities market
makers. These traders are found on the Chicago Board Options Exchange,
the Chicago Mercantile Exchange, the Philadelphia Stock Exchange, the New
York Futures Exchange, and so on. There are only a few major firms who
actually employ this type of trader, and then it's primarily for off-floor
hedging purposes. There are more firms that work with market makers on
a profit-split basis. You can usually get a list of these firms by contacting
the exchanges directly. You can always buy or lease a membership yourself
and find a clearing firm to back your own financial commitment.
The second type is the Nasdaq market maker, who works for those firms
you find listed on the Nasdaq website. This job is more of an order-flow
business, where you accommodate orders from customers both large and small.
Some of these customers may be entire brokerages.
As far as the second group, block trading desks, I suggest you look
to the single-stock futures exchanges, as well as the New York Stock Exchange
and the American Stock Exchange. Ask them if they have members who might
be hiring or training in off-site trading. These people will often use
market-savvy types to analyze derivative-based trades for banking and other
financial purposes.
RELATIVE VOLUME DATA
Is there a way to get volume data from the exchanges -- that is,
up volume that corresponds to the number of shares traded above the previous
close, as well as down volume? Thanks -- Dan King
Most data services will show you up volume and down volume for the day
and even during the day. My particular service provider uses the symbols
UVOL and DVOL for those figures. A word of caution: be sure that you understand
this relates to the overall volume from the exchange, broken down by simple
up-on-the-day versus down-on-the-day shares traded in the issues that are
up or down from the previous day's close. This differs from the number
of issues up versus number of issues down for the day. Be sure you understand
the significance and distinction between the two.
E-mail your questions for Bright to Editor@Traders.com,
with the subject line direct to "Don Bright Question."
Originally published in the February 2004 issue of Technical
Analysis of STOCKS & COMMODITIES magazine. All rights reserved. ©
Copyright 2004, Technical Analysis, Inc.
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