Q&A
Don Bright of Bright Trading
EXIT SIGNALS
I always believe that entry signals for trading are not so important compared with exit signals. Both "cut your loss" and "ride your profit" strategies are exit signals. What's a good strategy in terms of profit-taking signals? What criteria should I adopt in profit-taking mode?-- K.M. Lim, via e-mail
We try our best to teach our traders to read the tape for both entry and exit points. Since we may go in and out of the same stock many times each day, we use minor intraday changes in our indicators for both entries and exits. Sometimes the best exit is actually a small loss (cutting losses, as you mentioned). As far as taking profits is concerned, we use the same criteria, such as a rolling over of the Spoo (Standard & Poor's 500 futures) or a downturn in the trading sector index. Many times we buy a stock at, say, 51, sell it at 51.50 (it may downtick to 51.25 or so), buy it back for the upturn, and repeat this process.
Another strategy that many traders employ is "flipping" shares.
This means that we may be long 2,000 shares of GE and see a strong potential
for a quick selloff, so we sell 4,000 shares to take the profit and take
advantage of the probable downturn.
UPTICK BID RULE
I feel that a lot of people don't really understand the fundamental differences between the Nasdaq and the New York Stock Exchange (NYSE). Is it true that on the Nasdaq, market makers can raise the price of a stock before they themselves short it, thus suggesting that a rise in price may precede a fall in price? -- Name withheld
The Nasdaq uses the uptick bid rule, which means that if the last trade
was 20 1/2 and it was a downtick, a 20 5/8 bid following would qualify
as an uptick. These rules are subject to change and are often interpreted
differently, but this is how I understand them.
SHORT SALES
If I want to short a listed stock and I put in a sell short market order before the open of trading, will my short sale automatically be executed as part of the opening printÝ or would I have to wait for a sale to go off higher than the opening print? It seems to me that the opening print would be neutral and both long and short positions are part of this print. Also, does your software allow you to see a list of NYSE stocks that have a large order imbalance prior to the opening -- either on the buy side or the sell side? I am interested in obtaining this information. -- Leland, via e-mail
A sell short market order put in as an opening-only order will be filled only if the opening price reflects an uptick from the prior day's close or if the prior day's close was itself an uptick. If the stock were to open lower than the previous day's close, then you would receive an out -- that is, nothing done, order cancelled.
Our software shows NYSE order imbalances that are published by the specialists prior to the opening. And yes, when combined with other calculations that we generate, we do use them for our opening plays (buys and sells on the same issue for many stocks).
PROFESSIONAL TRADING
I just learned that it is becoming increasingly common to obtain a series 7 license in order to seek a job as a trader. As an individual investor, how do I go about this? In order to take the examination, I heard that I am required to be a member of the National Association of Securities Dealers (NASD), however, they require in turn that I have a sponsor or that I work for someone in the industry. How do I break that cycle? -- Roberto Rosenfeld, via e-mail
My article "Professional Stock Trading" in the March 2001 S&C discusses the requirements and qualifications to become a professional trader. The short answer is that you will have to become an associate member of a firm that will sponsor you to take your examination. Bright Trading sponsors all of its traders to take the exam, as do a few other firms. It won't do you much good to simply obtain a series 7 license if you are not associated with a professional firm. I am glad to hear that you are taking trading seriously enough to want to participate at a higher level.
SLIPPAGE
I put in a sell order for two S&Ps at a 1231.90 stop. Then I put in one buy S&P at a 1231.20 limit. Is it possible that my second order would be filled first and then my first after 30 seconds? On my entry order, I took 19 ticks of slippage -- filled at 1230! My broker tells me this is possible with S&Ps. I thought there was a chronological order to executing the order. -- Arcangelo Summo, via e-mail
This is a tough one. First, you must realize that a stop order is simply a triggering device that launches a market order when a certain price is hit. If the chronology were such that the next trade after your stop price was indeed 1230, your order would be executed at 1230. You did not indicate where the S&Ps were trading upon submission of the order. I assume they were trading higher than 1231.90, and thus the reason for the stop order. If you bought first (first report or fill), then sold at 1230 as indicated, you would be entitled to an adjustment on price. If, however, the trigger was actually the 1230 buy (meaning that 1230 was the first trade under 1232.00, say) then your broker's scenario is possible.
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 May 2001 issue of Technical Analysis of STOCKS & COMMODITIES magazine. All rights reserved. © Copyright 2001, Technical Analysis, Inc.
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