Q&A


 
 

Don Bright of Bright Trading

TARGET PRICES: ABSURD?

How do analysts calculate the target price for a stock?
- Doanh Nguyen, via e-mail

That is something the world would like to know. There was an interesting 60 Minutes segment called something like "How Did So Many Get It So Wrong?" that showed how ridiculous it is for analysts to pick price targets. The producers even interviewed Mark Haines of CNBC's Squawk Box, who went into detail about a few analysts and their absurd predictions. (I use that video in the training classes and college courses that I teach.) They don't have a clue. They use targets to entice the unwary into purchasing a stock in hopes that its price will rise. The answer is: Price targets are completely arbitrary.

MARRIED PUTS

I trade a particular NASD stock every day. I just heard that I can purchase a "bullet" that would allow me to short the bid on a downtick. Is this true?
- Greg Timmins, via e-mail

"Bullets" are also called "married puts." They are primarily contracts for long stocks and deep in-the-money puts. Married puts are available to professional traders but as far as I know, they are not available to retail customers.

NO EASY ROAD TO SUCCESS

I have invested a fortune in trading courses and systems and still have found nothing worth using. Is there a daytrading system that works consistently? I would appreciate any advice on this subject - before I give up on trading for good!
- Dan Keeley, via e-mail

No system or software or academy will make you any money consistently - if at all. To be a successful trader, you must thoroughly understand the overall marketplace. You need to know the basics that have been working for professionals such as exchange members for 200 years. Remember, the New York Stock Exchange (NYSE) specialist is the consummate daytrader.

I suggest a hopeful trader spend a couple years on a major exchange trading floor. In lieu of that, attend a professional trader orientation and training class. Trading is definitely not for everyone, so don't feel bad if it turns out not to be for you. My philosophy is: Trading is as simple as you will let it be, or as difficult as you want to make it. But what else would you want to do? Good luck!

GETTING TO KNOW YOU

Brokers request financial information such as yearly income and net worth on applications for stock and options accounts. Are there financial requirements set by the Securities and Exchange Commission (SEC)? If so, what are they?
- Elwood Emswiler, via e-mail

For this, I had to go to our talented and knowledgeable compliance officer. The SEC is not the agency responsible for this aspect of the business. The Self Regulatory Organization, or SRO(s) - the exchange that the firm is a member of, such as the NYSE - requires that a firm "know its customers" before recommending any investment other than a money market fund. The firm needs to make an effort to obtain information regarding the customer's financial status, tax status, and investment objectives in order to determine whether the transaction is suitable.

For option transactions, the firm must seek to obtain the same information, plus employment status, estimated annual income, estimated net worth, estimated liquid net worth, marital status, number of dependents, and age. They also need to know the customer's investment experience and knowledge - how they gauge that I don't have a clue! There are additional requirements for those who want to write or sell options, including the need for the firm to establish a specific minimum net equity requirement. There are no specific dollar amounts written in the rules.

DEFINE CAPITULATION

What is capitulation and how do we know it is happening?
- Paul, via e-mail

The standard Webster's definition is: "The act of surrendering or yielding." As it pertains to the markets, capitulation means basically the same thing. When you see all the bids or offers back away, that means traders are moving to the sidelines until some order is restored. A good example is how analysts, who have been touting a stock at higher prices for months, finally capitulate and put out a sell recommendation when the stock price hits $0.50. Another is the investor who has been holding on to a security on the way down and finally bails out at a very low price.

REAL-TIME TICK CHART

What website provides a live, real-time tick chart of the Standard & Poor's 500 futures accompanied by a digital graphic showing the relationship to the day's fair value? I tried the Chicago Mercantile Exchange's (CME) quote vendor list but still can't find that information.
- Brett Haviken, via e-mail

This configuration is done using the service provided by Neovest/First Alert with data coming from the CME via Hyperfeed Technologies. I set up a basket using the information and simply put in the current day's fair value. To get this information, you must pay exchange fees, as you do for most real-time quotes when trading professionally.

SKEPTICAL OF TECHNICAL ANALYSIS

I'm looking for objective evaluation that validates technical analysis - or doesn't. Technical analysis is a seductive idea: just apply certain rules to historical data, look for certain patterns, invest accordingly, and wait for the profits to roll in. But the very fact that I want to believe it makes me cautious. People have devoted their lives to similar ideas (biorhythms, astrology, gambling systems) with great passion, yet these ideas turn out to be unrelated to any ability to predict events.

What is the objective evidence that technical analysis works, such as in a controlled study? And I don't mean a study based only on analysis of historical data. I mean one where analysis is done, predictions are made, and an objective researcher evaluates the data to see the predictive value of the method. Do you know of such a study?
- Phil Quigley, via e-mail

First, we must define technical analysis. According to Investor Words Glossary, technical analysis is: "A method of evaluating securities by relying on the assumption that market data, such as charts of price, volume, and open interest, can help predict future (usually short-term) market trends."

Now, let's look at the operative word, assumption, in the definition. Using a chart to trigger a response in anticipation of future movement assumes that there will be enough people relying on the same chart to trigger a self-fulfilling prophecy. Most of the traders at Bright Trading do not use technical analysis to make intraday decisions. They are, however, very aware of the basics, such as support and resistance, as well as S&P numbers such as high, low, support, resistance, and pivot points.

Let's discuss that. When a security or an index reaches a support level, is it really caused by the chart, or has it simply reached a price where there has been a great number of buyers? Charting historical data to simplify the viewing of price and volume is beneficial. Using charts to visualize upward or downward trends can be useful as well. The more exotic analysis methods tend to be a bit too esoteric for my style of trading. This is not to say that they do not work for longer-term trading or investing. The best traders use many forms of trading methodology (tape reading, momentum, technical analysis, fundamentals, breakouts, breakdowns, and so on) in their overall attack on the marketplace. They do not get locked into one single concept.

As far as quantative evidence based on real dollars being traded, I am not aware of any. [Editor's note: Carol Osler of the Federal Reserve Bank is defining and measuring the concepts of technical analysis with her groundbreaking research. See our interview with Osler in this issue.]

PROGRAM TRADING

Thank you for mentioning H.L. Camp & Co. in the February 2001 STOCKS & COMMODITIES. We are concerned that one of your readers subsequently complained about his communication with us in the April issue. He asked us to give him some sort of track record or guaranteed rate of return, based on our research.

We have never used any stated or guaranteed rate of return with the general public. Nor do we use a track record or other type of historical information as an inducement for anyone to buy our research or attend our seminars. For our current clients, and most prospective clients, no such marketing inducements are needed. As you kindly indicated, our reputation in Wall Street speaks for itself - and has for 25 years.
- Hank Camp, H.L. Camp & Co., Program Trading Research

I agree. Anyone who tries to draw people into a trading service of any sort by spewing out numbers is suspect. I appreciate the fact that your company is providing a good, qualified service for those who want to understand program trading. People who actually make money trading are reluctant to give out numbers - be wary of those who do. We are in a different situation at Bright Trading. We have to disclose our traders' profit and loss to the regulators, and are proud to say that we have an excellent profit percentage for traders who are with us for over a year.

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 June2001 issue of Technical Analysis of STOCKS & COMMODITIES magazine. All rights reserved. © Copyright 2001, Technical Analysis, Inc.



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