Q&A
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 |
ADJUSTING ENTRY PRICES
How do you go about entering a trade after considering it for purchase
the morning after your nightly analysis, when premarket indicators look
to gap sharply higher, gap sharply lower, moderately higher, moderately
lower, and neutral? Do you adjust your entry price accordingly, or do you
use pivot numbers? --Joseph Anthony
I assume you want to attempt the best possible entry (buy) the next
day. If you see an expected gap up prior to the stock opening, based on
opening indications from the specialist, then I would not buy on the opening.
Remember, the specialist cannot participate on the buy side when there
is a gap up opening; rather, he must accommodate the excess buy orders
by selling. It is never a good idea to go against the specialist. Now,
if you see a gap down based on opening indications, I suggest you double-check
your homework, and then participate with an opening-only order to buy.
This way, you'll be on the same buy side as the specialist (for the reasons
I mentioned).
If you are referring to the opening-only order strategy by itself, I
would adjust one side of the entered limit pricing before sending the order.
For example, if my fair value calculations (you say "pivot points") show
a $31.10 bid and a $31.40 offer, but the opening indication is $32.50-$33.00,
then I leave the buy price alone, but move the short sale price up to around
$32.75. I want to be in the top half of the indicated price, but I do not
want to buy a gap up, no matter the circumstances.
DISCRETIONARY vs. SYSTEMATIC RISK
Discretionary trading on an intraday basis seems much riskier than
systematic trading. Why do you think those outcomes are the way they are?
There is the idea in some circles that those who are older or have been
in the brokerage business do not make good discretionary traders, proprietary
or otherwise. Is there a remedy for that, if in fact that is correct? Would
the overall success rate be higher with a systematic approach or by simply
disengaging from the whole endeavor? Thanks in advance for your insight.
--Craig
The NYSE specialists have been making money for 200 years, and we teach
our traders how to trade on the same side as the specialist. We do opening-only
orders (based on fair value calculations) and we "outside envelope" the
basic markets to take advantage of trade-throughs (price improvements,
guaranteeing we are on the same side as the specialist).
As former exchange floor traders, we understand we make money by responding
to the market. I often use a baseball metaphor, of the batter (trader)
responding to the ball being pitched (by the market/pitcher), wherein we
can't possibly have a systematic approach to an unknown factor (the pitch).
If we were to say we want to swing at a 70-degree angle with a swing speed
of 18 miles per hour (MPH), it obviously wouldn't work, since the pitcher
is throwing the ball all over the place.
There are systems that work for a while, and we have traders with great
black boxes (fully automated reactions to the market), but they need constant
tweaking to stay successful. We have more traders who make money by knowing
what their response will be to a possible variable (Federal Reserve chairman
Alan Greenspan speaking, market breakouts, and so forth), and doing the
same profitable strategies, day after day (opening only, enveloping, and
so on).
If a system worked forever, there would not even be a marketplace, since
everything would be absolutely predictable. Systems work until they don't,
but - as long as we have a free marketplace - discretionary traders will
be able to make money forever.
FLOAT, VOLUME, AND BETA CORRELATION
I'm trying to understand the correlation, if any, between volume,
outstanding shares, float, and volatility beta. I thought there might be
a relation between large volume/small float or small volume/large float
to beta. Am I looking for something that's not there? --Joe Osborn
The best way to look at various aspects of individual stock data is
to think about supply and demand. The more stock that is available via
the float, the less locked stock that is unlikely (but not impossible)
to be traded. A good example is Wal-Mart. A large portion of the stock
is still held by the Walton family and is not likely to be traded in a
short period. This stabilizes the stock and causes a lower beta (stock
movement vs. the entire market movement).
Now to the daily volume, where the supply and demand issue takes over.
If I can buy $50 million worth of stock within a $1.00 range, then the
overall supply is pretty high and able to fulfill occasional demand fluctuations.
If, on the other hand, $50 million worth of buying would cause a stock
to move 20% or so, then that stock has a much higher beta, for the obvious
lack of supply.
E-mail your questions for Bright to Editor@Traders.com, with the
subject line direct to "Don Bright Question."
Originally published in the April 2005 issue of Technical Analysis
of STOCKS & COMMODITIES magazine. All rights reserved.
© Copyright 2005, Technical Analysis, Inc.
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