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 |
TRADING JOURNALS
I have often heard that keeping a trading journal is very valuable. I assume we keep track of buys and sells, but what else should be involved? Do you recommend keeping a journal at all? -- Pat Davis
At Bright Trading, we suggest that our new traders keep track of their trades for the first few months in a format designed for tracking the reasoning behind the entries and exits. It doesn't do much good to simply keep track of prices and trade size without knowing why you got into the trade to begin with.
You should know several basics: Where were the Standard & Poor's 500 futures compared with the fair value of the futures at the entry point? If the futures are trading five points over fair value before the opening bell, the market would be expected to open up approximately 40 Dow Jones points (since one S&P point is equal to about eight Dow points).
In addition, where was the "group," the sector in which the stock is included (drugs, oil, and so forth)? Not only that, where was the market trend at the entry point? Those questions, as well as several other factors, are pertinent and should be explored when traders are making trading decisions. Then you should graph (simple square blocks) profit or loss, then see if you are holding losers longer than you are holding winners (95% of all new traders do this). There are many other criteria, too much to go into here -- but this is a start.
TRADE OF THE DAY OR WEEK
I would like to know how to make a trade-of-the-week system: You know, if today is Monday, buy on the opening sell on the close. Is this feasible? -- Patrick Begley
The idea of a "trade of the week" or even "trade of the month" has been bantered about for decades. The problem is, the market doesn't seem go along with the idea. You might try running a daily chart, going back, say, 52 weeks in the stock or sector you are considering trading. Be sure to plot the open, high, low, and close. This may offer some guidelines for you, but I don't recommend you put too much credence to the results.
As an alternative, I might suggest you trade what is referred to as "seasonality." This used to be defined as the last day of the month, plus the first three days of the next month for a bullish move, but like all statistical phenomena, this has been changed due to the market participants who anticipate market activities. Because of that, now it is the last four days of the month and only the first two days of the next month for a bullish move.
Like we always say, "This will work until it doesn't."
STOCK OPTIONS AND STOCK SPLITS
I was wondering what happens to stock options when the underlying stock splits. Does the call's strike price go down? -- James Kramer
When a stock splits, a new series of options is formed. For example: If you owned 200 shares of Xyz stock at $100 and sold (that is, written) two January 100 calls, and there was a two-for-one stock split, you would now have 400 shares at $50 and be short four January 50 calls. In the case of odd percentages -- say, 133 shares for 100 --Options Clearing Corp. will weight the existing options to reflect the additional (or fewer) number of shares. In that case, you would now have 266 shares of stock and be short two $133 strike price calls.
Hope that helps.
DEEP-DISCOUNT BROKERS AND SELL ORDERS
I just started trading from home and use a deep-discount broker. A friend of mine said that they may "sell orders." What does that mean, and is it something for me to be concerned about? -- No Name Given
The practice you are referring to is referred to as "selling of order flow," in which the brokerage firm sells your order to another broker for a fee. This is generally done with market orders, so the other broker can match it against another market order on the opposite side (your sell vs. their buy). Though legal, it is frowned upon by most traders since the time it takes to do this may cost you a quarter point or more. For 1,000 shares, you lose $250 (or more) just to save a few bucks with a deep-discount broker. The Wall Street Journal (and other publications) have published articles detailing this dubious practice.
Don Bright is a principal 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."
Excerpted from an article originally published in the October 2000 issue of Technical Analysis of STOCKS & COMMODITIES magazine. All rights reserved. © Copyright 2000, Technical Analysis, Inc.
Return to October 2000 Contents