Q&A
Since You Asked
| Professional trader Don Bright of Bright Trading, an equity trading corporation, answers a few of your questions. | 
Don Bright of Bright Trading |
NYSE VERSUS NASDAQ 100
I have been reading and enjoying your Q&A comments in STOCKS & COMMODITIES, and I found something that I would like to get further information about.
I am retired from the US Navy and have been swing trading from my home for the last five years. I have been active in the market since the mid-1960s, but avoided active trading until I retired and had good access to the Internet, along with the cheap quotes and lower commissions that made trading versus investing possible for me.
In recent years, I have successfully traded stocks like DELL, RFND, AMAT, RMBS, and SUNW for nice profits. I generally trade one to two thousand shares per trade, and hold for one to five days on average. I use RealTick and Schwab Velocity for my trading. In one of your comments, you stated that you only trade New York Stock Exchange (NYSE) stocks with daily volume of two million shares because of your distaste for market makers. Could you provide more insight into this thought about trading NYSE stocks rather than Nasdaq 100 stocks? Also, don't the specialists at NYSE have control over movements and prices obtained on the NYSE, just as market makers have on the Nasdaq?
Finally, you mentioned a few stocks for beginners on NYSE like WMT and GE. Would you provide a few more prospects for more advanced traders, and explain what you like about these stocks that makes them great trading stocks? Thanks. -Don Green
I personally prefer to trade listed stocks because the strategies I use cannot be performed on OTC issues (opening-only trades, MOC orders, and the like). But we at Bright Trading have many traders who like to trade the Nasdaq. I feel that the market makers have had quite an edge over others in the past (and still do in many respects), but the new trading technology and trading platforms have leveled the playing field a little. We have finally been able to lower costs for our OTC traders down to the same levels as listed, and this makes OTC trading more palatable.
I really cannot suggest stocks to trade, especially in this forum. We
try to teach strategies and techniques that can be put to use in an array
of securities, and I feel that each individual trader should pick his or
her own. I personally have been entering opening-only orders on 13 different
stocks every day, and trade around two to four pairs, all listed. But since
the costs are reduced, and the access is better, I am looking forward to
more Nasdaq trading in 2002.
TICK CHARTS FOR S&P
I am still in the early stages of learning to daytrade the e-mini with consistent success, and I would like to learn more about the use of tick charts. The shortest time frame I currently use is the one-minute chart, but I understand there may be significant advantages to using tick charts as well, perhaps of varying lengths (numbers of ticks). Can you offer any guidance?
I imagine that as a tick chart is constructed from a selected number of ticks (such as 25, 75, 144, and so on), volatility (or do I mean volume?) is effectively built in, as the more trades there are, the more frequently the bars will appear. I have heard the comment, "Now that I use tick charts, I would never use regular time charts again (for daytrading the e-mini)," and I am wondering whether you would concur with that statement. - J-Trade
Tick charts of the Standard & Poor's 500 and the e-minis are a must for any trader (futures or equities), since they give you the immediate "tone" of the crowd. Many traders don't seem to understand that a tick is simply a trade, and in a one-minute time frame, you may have 50 ticks or more. The individual ticks are not as important as the group trend, upward, downward, or lateral. You must also have a premium/discount window to show the trades as they relate to the day's current fair value, or else the ticks lose their meaning.
You can always get fair value from www.programtrading.com (which includes
the difference between long and short money in their calculations). Hope
this helps.
J-TRADE'S FOLLOW-UP QUESTION
Thanks for the answer, but I'm still not clear on one thing: Isn't fair value calculated using yesterday's closing value of the S&P? If the answer is "yes," then what use would it be for intraday trading? The difference between the value of the index and futures will vary all the time during the trading day. The only thing that stays constant throughout the day would be the interest rate and dividend rate (which are also part of the fair-value calculation). - J-Trade
The fair value, although calculated using the previous day's closing prices, is basically constant for the next day's trading. Assuming two points are added to the spot price of the S&P 500 index (to get to "fair value"), then if the futures are trading at five points over the spot price, you see a three-point premium that have to either translate to an upswing in the underlying (500 stocks), or an immediate downturn in the futures. Since the floor traders and institutions are constantly hedging, this result is consistent.
OPENING-ORDER BROKERS
I'm looking for a broker with low fees with whom I can place opening orders. Fidelity is the only broker I have found that has this type of order on its online trading platform. I found another broker who takes market orders prior to the opening, as well as "fill or kill" orders prior to the opening. They say that the specialist will treat this type of order exactly like opening orders. Is this true? Thank you.- JJ
The problem you may encounter is that most brokerage firms will not allow you to put in a buy and sell order on a single stock at the same time. This is the basic strategy that I assume you are referring to. You can always put in a market order, but that defeats the purpose; you will always be on the wrong side of the opening trade. The strategy is to be on the same side as the specialist, and that is usually the accommodating side. When there is a big buy imbalance (more buyers than sellers), then the specialist must accommodate the order by selling stock, and cannot participate by adding to the imbalance.
If you simply want to place opening-only orders (one-sided), then most retail brokers should be able to help you. This is not generally a good idea, however.
Many brokerage houses sell order flow (handing off market orders) to allow for cheap commissions to their customers. Some will let you trade for free, but again, your trade executions will not be as good.
PORTFOLIO-FORMATTED DATA
I am looking for a free or for-fee website where I can enter one or more portfolios of stocks and mutual funds and receive daily updated values of the trailing one-month total return for each stock or fund. Morningstar has the information each evening for funds, but even as a premium subscriber, I can't receive it in a portfolio format. Thanks and keep up the great work. - Rick Petticrew
I really don't know of any service that does exactly what you have asked for, but most data vendors will allow you to "build your own" portfolio analysis. This can be as simple as an Excel spreadsheet updated with live (or delayed) pricing for any issue that has a trading symbol. Some brokers will allow similar portfolio management on their proprietary software. You might try myTrack or Neovest for this.
RELIABLE CHART PATTERNS
Which chart patterns do you find to be the most reliable? Also, do you have any comment on Thomas Bulkowski as a writer for Technical Analysis of STOCKS & COMMODITIES? He wrote a book called Encyclopedia Of Chart Patterns that I purchased recently. - Travis
When I use charts for identifying characteristics of a stock for trading, I try to determine the reason for the pattern's development in the first place. One of the first things I try to teach my college students who are interested in charting and other basics of trading is that patterns develop for a reason, and this reason is the motivation for the pattern formation, not vice versa.
Let me use this example: If a stock is trading in a trough between $35 - 45 for a time period, we would naturally assume that the support is at $35 and the resistance at $45, which will help with the trading decision. Now let's try to figure out why this pattern is developing: The first thing I do is check for dividends, and if there are any, I check to see what the dividend yield was at the lower (support) price. It often turns out that there is a good yield at that level based on current interest rates and other market conditions. When the stock moves up to the resistance level, the opposite occurs; the stock is no longer a good "value" based on the dividends received, and investors may look to move their money to cash or other securities. Keeping this in mind should make it easier to determine which patterns will be of use to your trading strategy.
Editor's note: Coincidentally, in this very issue we are running an article by Tom Bulkowski on throwbacks and pullbacks.
Don Bright is with Bright Trading (www.stocktrading.com), a professional equity corporation with offices around the US. E-mail your questions for Bright to Editor@Traders.com, with the subject line direct to "Don Bright Question."
Originally published in the June 2002 issue of Technical Analysis of STOCKS & COMMODITIES magazine. All rights reserved. © Copyright 2002, Technical Analysis, Inc.
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