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 |
TRADE ADJUSTMENTS
How do people adjust their trades if the market is expected to open
higher or if the market is expected to open flat or lower? The night before,
I do my research and create a list to trade but don't see how to find a
way to integrate it with the market open situation. Any suggestions?-- Jim
Clark
We monitor the S&P futures contracts (eminis) after adjusting the
spot price to fair value, right before the market opens (see www.stocktrading.
com/Tradinginfo.htm for an example). This gives us the expected percentage
of up or down opening points (extremely accurate by definition). To better
understand fair value calculations, check out www.programtrading.com and
www. indexarb.com.
WHY BETA?
I have been reading some of your online posts, and I am curious what
makes you pick up beta to adjust the price when you play open-print strategy.
And I have noted the value of beta could be different. Which beta are you
using now, or are you computing beta yourself? --daytrader06
We use beta to alter the envelope percentage so we don't get left out
of trades on low-volatility stocks. Our programs go out and check beta
with the click of a button, and I update about once a month. Beta is not
a primary consideration, but certainly helps with the fill rate.
The (automated) opening programs are fluid, and we modify them quite
often, adding stocks, taking some off, looking at news items. Always tweaking
a bit to stay ahead of the game.
THE NEXT BIG THING
Don, I am just trying to get another point of view from the research
I have been doing in online trading applications. What do you see as the
next big idea, innovation, emerging technology that will shape the online
trading community? Do you think it is something like collective intelligence
(predictwallstreet.com, for example), algorithmic trading applications
for the average (nontechnical) person, or something completely different?
Your input would be greatly appreciated.
Pretty tough question, especially since you're asking about online,
retail traders, but I can offer this. Brokers are bringing commissions
down to zero (Bank of America for example), and this will likely bring
in more online participation from the general public. This is not necessarily
a good thing, for a couple of reasons. First off, the average online participant
has not had enough training to understand proper hedging strategies (long
stock vs. short stock), and are stuck with buy-only stockpicking for their
investments. Most brokerages don't even pay their customers' interest on
their short stock sales. Imagine buying $1 million worth of stock and shorting
$1 million worth of another stock, as in pairs trading or mergers &
acquisitions, and the broker keeping all the interest money from the short
sale while charging you interest on the long side. Our traders, for example,
do receive interest on short stock sales of (currently) 5% or so, or simply
don't allow it all.
The retail public has not had a great record with "buy-only" trading
in the recent past. I am not suggesting that retail traders use brokers
or other experts either, don't get me wrong. I am suggesting that online
investors should learn as much as they can about fundamentals, hedging
techniques, and proper technical analysis before diving into the game.
In this day of free information flow, it is easier than ever to learn how
to properly handle your own investments/trading.
I do not see collective intelligence via websites being either anything
new, or of any particular benefit. Anyone thinking that some signal from
a website is going to make them any money should think again. Such sites
as Trade-ideas.com and eSignal offer excellent screening and low costs
to those who have a good grasp of what they're looking for in the markets.
The best tools in the world still need a good mechanic to work well.
CROSSROADS
Hi Don, I read your article titled "Formulating Trading Plans" and
found it interesting. I've already put together a basic list of things
to follow and really need to tweak it. I'm at a crossroads after trading
for six years based on fundamentals and tips. Can you share a generic plan
for swing trading as well as a trend-following plan? I'd get a lot out
of seeing what the plan of someone who is successful looks like. I typically
do swing trading and buying good companies that are about to break
out or resting on a 20- or 50-day moving average. Thanks in advance! --
John Yazinsky
John, first off let me say I feel your frustration. Yes, a trading plan
is critical to success. Here is a STOCKS & COMMODITIES-labeled
link you may use to formulate your basic, initial plan:
www.stocktrading.com/TradingPlanTASC.htm
Please understand that in most cases it takes at least a $1 million or
more to make a good living in this business (there are always exceptions,
of course). Our traders have the ability to use that kind of money with
only $20,000 or so of risk capital put up. We focus on the lower-risk,
higher-reward, capital-intensive strategies we know work. As with all trading
styles, you must work hard to keep ahead of the game. We do opening-only
orders on the Nyse every day. We do a lot of pairs trading and M&A
plays as well. The average retail trader is generally forced to attempt
higher-risk techniques due to capital limitations.
Hopefully this will help jumpstart the next phase in your trading career.
BACKTEST TAPE-READING
Don, is it possible to backtest tape-reading? Most backfill only
has price/volume/time. I found it is much easier to detect the big shark's
move by reading the tapes rather than looking at the historic price/volume
info.--qll
Tape-reading is all-encompassing and includes too many variables to
be backtested. Just for starters, it's hard to backtest the Prem/Disc to
fair value at the time of price volume action vs. the peer (of the stock
in question) and the sector and the overall market. We also check the commodity
of the sector related, and normal things like the depth of the book, and
where the futures sit on a self calibrating tick chart, and so on.
Good tape reading can be shown and explained, but it is still pretty
much an art, and a valuable one at that.
ODDS FOR A BETTER RETURN
Can you buy a stock hoping it will go up so you can short-sell it?
So if the stock doesn't go up you can make money if the stock jumps down
and just cancel the order to buy for long? What about with options? Can
I buy puts and calls on one stock to increase the odds of making a better
return?
If you buy a stock and then short-sell it, you are flat with no position
and a locked-in profit (provided you shorted it higher than the buy price).
Buying puts and calls are separate bets, and both can be very costly. All
you can lose is everything you paid for them, not much consolation in my
mind.
SWEEPING
Hey Don, I'm guessing your guys are taking the other side of the
sweep? If a sweep order come in to wipe the book for 30-40 cents on
the bid, your guys would buy into that to make the 20-30 cents? Or
your guys would go in the flow of the sweep?--traderyin
By having orders generated at the end of a sweep, or having bids/offers
in place, they tend to fade the sweep. I've noticed that at times I may
have a 0.66 bid on, with a 0.75 x 0.78 market, without changing the market,
it goes "hybrid brown" and fills me, and then right back to normal pricing.
And, yes, the guys who always make money are still making money, although
they're adapting once again.
SPOT THAT SWEEP
Is there a specific and reliable method to spot a sweep? And once
you spot it, how can you tell if the sweep has ended? Thanks.--Scalper007
Our RediPlus has the quotes change color when they are "taking over"
for manual sweeps.
SWEEPING REPLY ON REDIPLUS
Thanks, but unfortunately, I'm not using RediPlus for the time being.
Is there any other way to tell when sweeps are starting and ending?--Scalper007
The book will close temporarily and go 1x1 in the size column. We also
have a "slow bid /slow ask" column; perhaps you have one of those.
ALERT FILTERS
Do you have filters set up that will alert you when a book has closed
so you can position yourself for the sweep, or do you monitor several books
at the same time?--javs5150
We have traders with programs that kick in with a five-cent (for example)
move from last. Newer scalpers have bids and offers in at all times on
their "children" stocks (stocks they trade every day). We do what we can
to maximize our entries via sweeps whenever possible.
HEY, HOW DID A FUNDAMENTALS DISCUSSION GET IN HERE?!
From exQQQQseme: I am big on fundamentals. I look for real news --
preferably negative news. I then ask myself if this is something management
can fix quickly. If the answer is no, I do a negative directional long-term
play. When a company's stock is doing poorly, I look at the balance sheet,
particularly the cash position and short-term debt. If the stock is down,
they are sitting on a pile of cash, and short-term debt does not exist,
then I'm long-term bullish.
From Bob Bright: My favorite long-term (six to 12 months) strategy
that doesn't require constant maintenance: Otm butterflies.
From Maverick74: Bob, I don't believe there is an edge trading
off of publicly available information. Most hedge funds that are successful
doing that trade off information that is not public. If everyone has it,
it's not an edge.
From Don Bright: Now for a different perspective from the "Bright
side" (although I do agree about the news comment -- there is nothing that
we're going to learn that someone else doesn't already know). Where my
differing opinion may come into play is in regards to fundamentals and
balance sheets.
My brother, whom I respect greatly (how can you not respect someone
who has made over $100 million with his own trading, never using other
people's money?) is a strong supporter of fundamentals in all his trading,
both short-term and long-term portfolio management. We spend a zillion
hours going through the details of every stock we trade, every pair relationship
(fundamentally), and every sector strength (for relative strength via fundamentals).
Bob says that if you're going to buy a stock for a week, you shouldn't
mind holding it for a year or a decade, especially as it relates to a peer
or a pair. This thinking has made millions (and, yes, I thank Bob for being
the one in charge of our family LLC, where most of my money is kept!).
E-mail your questions for Bright to Editor@Traders.com, with the subject line direct to "Don Bright Question."
Originally published in the April 2007 issue of Technical Analysis
of STOCKS & COMMODITIES magazine. All rights reserved. © Copyright
2007, Technical Analysis, Inc.
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