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 |
ON PIVOT POINTS AND DAYTRADING
Is there any relationship between pivot points and daytrading?
I believe there is, but I do not know what it is. Could you give me some
help?--robinxing
We use the pivot points of the futures in our entry/exit decisions during
the day in this way: We consider the trading troughs between pivot and
R1 or S1, S1 and S2, and so on, to be "mini" support/resistance levels.
(We use resistance levels 1, 2, 3, and 4, and support levels 1, 2, 3, and
4.) They tend to be a self-fulfilling prophecy, since the large futures
traders on the floor (and off) tend to stall at these levels.
We don't necessarily use the individual stock pivot points; we merely
consider the overall market trading range or level along with other indicators.
BUY/SELL ENVELOPE PRICING
You say: "When the market is opening up four or five S&P points,
it's a good idea to have a wider buy envelope and a narrower sell envelope.
I used 0.65% buy and 0.3% sell, for example." But why? Would it not be
more logical that the sell envelope was wider and buy a narrower envelope?--Sheik
First, since I have already adjusted the selling price to reflect a
much higher opening (FV estimated opening price already up, based on futures
prices), I don't want a wider sell envelope because it would put the short
sell price so far away it would have little chance of being filled. The
FV calculation has already moved the price up.
Second, I widen the buy side to keep it below the previous day's closing
price. I don't like to buy anything barely above yesterday's closing price
when the rest of the market is opening sharply up. If it can't open up
with the market, I don't want to be stuck long the darn thing!
FORECASTING IMPLIED VOLATILITY
Can you tell me a way to forecast implied volatility? --crgarcia
Forecasting implied volatility (IV) would be a wonderful tool, and many
have come up with models that attempt to do just that. However, by definition,
one cannot accurately forecast future events such as the actual IV of options.
IV is determined solely by the actual pricing based on supply and demand.
My decade or so on the options floor was spent, in great part, trying
to get the "implied" (actual pricing) as high as the market would bear,
and then reversing back to historical volatility (or lower) based on the
Black-Scholes models.
According to Investopedia.com, the Black-Scholes model is one of the
most important concepts in modern financial theory. Developed in 1973 by
Fischer Black, Robert Merton, and Myron Scholes, it is still regarded as
one of the best ways of determining fair prices of options.
The Investopedia entry goes on to say that there are variants of the
original model. By about the mid-1980s, everyone had the same computer
programs, so most of the edges were diminished. Conversions were priced
close to fair value based on current interest rates.
The same techniques (straddles, strangles, butterflies, condors,bull
spreads, bear spreads, synthetics, and so on) were used by most traders
on the floor back then, and some are still being used -- but it all comes
down to who has the best forecast at what next month's actual volatility
will be. Selling reverse conversions (long call, short put, and short stock)
was great when we would collect 15% or so interest on millions of dollars
of short stock sales.
NEW STRATEGIES
I have been trading for six months, with a proprietary firm out
of Manhattan. I follow sectors -- gold, silver, copper, oil, and transports,
with the same stocks for each group. I buy what doesn't go down when the
market goes down; I'll buy when and if that sector turns and sell what
doesn't go up when the market goes up. So I follow these sectors with their
index or exchange traded fund.
I incorporated this strategy into a trading system I made where
I use a stock's moving average convergence/divergence (MACD), relative
strength index (RSI), and volume, so whenever all three indicators give
a buy signal (about once every two to four days) within a 20-second
period, I'll look to buy if that stock meets my strategy but not always,
because I'll often get a strong signal from a few stocks in the same sector
at the beginning of a rally. Basically, my strategy tells me when to buy
and sell, and when not to buy.
I would love to hear your thoughts on this strategy. I think it
is good, but I'm not making money because I don't have much to begin with
and that creates fear, which is affecting my trading. --Joseph Klar
What you describe is a single part of our multipart, all-encompassing
tape reading that our traders use. You need to add prem/disc to FV (of
futures, the leading indicator), be aware of which trading trough you're
in based on daily pivot points, and be sure you're always "outside enveloping"
to ensure you get caught up in the sweeps on the hybrid system on the NYSE.
Be aware of each stock's standard deviation move based on historical volatility
(we call this "Bright Bands"), and be aware of the "engine of the
day" -- the driving force such as oil prices, interest rate changes, mergers
& acquisitions activity, and so on. Then you should get involved in
trading correlated pairs and doing the opening-only strategy on a daily
basis (you can search STOCKS & COMMODITIES for explanations of these
strategies).
You should not attempt to trade a stock within a sector without keeping
track of its pair(s) and its peers. Doing so is a recipe for disaster.
Fundamental analysis, along with technical analysis, is required for proper
pair selection and trading. Good luck and hope this helps!
E-mail your questions for Bright to Editor@Traders.com,
with the subject line direct to "Don Bright Question."
Originally published in the August 2007 issue of Technical Analysis
of STOCKS & COMMODITIES magazine. All rights reserved. © Copyright
2007, Technical Analysis, Inc.
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