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 |
OPENING FAIR VALUE
I'm interested in what information or data is needed to calculate opening fair value for stocks, and how the calculations are made. Any help would be appreciated -- Matthew Murray
We use the fair value (FV) number offered at www.programtrading.com (there are other sources, but I find theirs to be right on most of the time). We then find where the spot price of the S&P futures closed, add FV to it, and call this number "Spinx" (this is an actual symbol on some data vendors, like Neovest FirstAlert). We then look to see where the Globex S&P futures are trading prior to the market opening. We simply deduct the Spinx from the futures, and then have a rough idea of where the market should open, percentagewise.
We then calculate the same percentage, up or down, to our list of stocks. It helps to modify your calculations with the beta? for each stock as well. As with any successful strategy, you must work with it for a while, with small share sizes, and keep track of your successes. We generally recommend that you use only Standard & Poor's 500 stocks, and of course they must be NYSE-listed securities (or else no opening-only order strategy would be possible).
A little warning to everyone: Getting in is relatively simple with the above strategy, but getting out takes some practice and should require some on-the-job training.
LIMIT VERSUS MARKET ORDERS
With my style of trading I know whether I want to buy a security within the first 10 minutes after the opening. Knowing I want to buy XYZ on the NYSE one morning, is it better to place a market order or a limit order to try for a better price? -- JJ
When trading NYSE stocks, it is helpful to understand how the trade is transacted on the floor. A limit order can be executed by the assistant to the specialist either at the order price or better. Price improvement is commonplace. For example, if a stock is offered at 52.50, and you try to buy it at that price, but an order comes in to sell at 52.45, then you will very likely get the five-cent price improvement. If you really want to buy the stock, you can place an order a nickel or so above the NBBO (national best bid/offer) and your order will likely be executed, with price improvement, in a more timely manner than if you placed a market order.
Market orders are "batched" -- which simply means that they are given to the specialist to "match up" (buys and sells). This is done every couple of minutes or so, and the delay can often cost you money. The specialist often participates in the market orders, but not always on the side you would like.
This procedure is not widely understood, and yet just knowing about it can save you a bit of money and a lot of aggravation.
MULTIPLE MONITORS
How many indicators or monitors do you feel are best for trading?
For example, I have been daytrading a small account lately to work with
some new strategies. I can watch the Level II, tick, TRIN, time and sales,
and a five-minute chart. I watch the same stock daily, and trade from a
single monitor. Even with this limited number of indicators, there is still
a lot of noise to filter through.
I have read about traders who use as many as four monitors, and I assume it works for them. Any insight would be appreciated -- trdrmac
Since we use the RediPlus platform (with the direct SIAC feeds) for data and order entry, I use a dual-monitor Redi. Since this data is generated from the source, I have no fears about late information. I have a spreadsheet that I pull up on one screen that shows me my tick charts, spreads/pairs with quotes, automated openings, and a quote line. I use the other screen for execution, a messages window, any extra charting, and my quote monitor. The Redi comes equipped with exponential moving averages, average price, median, Bollinger Bands, simple moving averages, volume-weighted average price, moving average convergence/divergence (MACD), stochastics, and many other useful tools built right in. It even includes price-difference charting for pairs trading.
Many of our traders do a lot of filtering, and they can opt to add FirstAlert or Track Data if they like, but I think the trend is going toward "less is more." This is a less-confusing, less spaced-out (looking at too much information) style. It really depends on your own trading style, of course.
For the remote traders: We have been authorized to add a few hundred "Bright-at-Home" remote traders, and they can save a bundle by eliminating outside quote vendors and using the same setup that I use. Hope this helps!
PAIRS STRATEGY
I am curious about this statement of yours: "I keep LLY on my 'pairs'
sheet as well, and when it is not acting well, post-opening, I sometimes
spread it off (which has helped a lot with the overall p&l)." My questions
are:
1. At what point do you consider it "post-opening"?
2. Would you define and expand on "acting well"?
3. When you say "spread it off," do you mean crutch pair it or straight pair (in which case I assume it is a daytrade play)?
4. When you spread LLY, how much, in your experience, are you looking to make on the pair if:
a. It is a scalp?
b. It is a daytrade?
c. It is a longer-term play?
Regards -- Nitro
Here is a more detailed description of this strategy:
1. "Post-opening" is the few minutes after the stock opens. We often look for industry group (sector) strength or weakness during this time frame.
2. "Acting well" is read from the tape as it relates to the overall market -- indicators, group, and so on. For example, if the stock opened down 1% but the S&Ps were down 2%, the stock may be acting well.
3. This would be a crutch pair if it falls within an acceptable range of contraction and expansion for the current week's trading of the pair. We try to always cross the "zero-position" line every three days (this ensures that we are trading, rather than hanging on and hoping).
Regarding scalping and/or daytrades: We treat every trade like any other, once we are in it, looking for proper exit points based our own trading guidelines.
PARAMETER GUIDELINES
When using moving averages, what is the rationale behind the 200-day/40-week parameters? Thanks and regards -- Syed Rehan Ali
This number is simply a "universe" large enough to give relevance to the numbers. When using historical figures to anticipate future results (always a dubious practice), you need to have a sample big enough to make the assumptions valid.
FOREX TRADING
I have just joined an investment bank in the foreign exchange settlement division, and am confused about what a "concept deal" is. Any info would be a great help. Thanks -- Marina Santrizos
You may have me on this one. The only thing that comes to mind relates to the markup or profit added to a customer's deal with an over-the-counter (OTC) trade (like a "riskless transaction"). If any of our readers can explain further, they are encouraged to write.
FUTURES CONTRACTS
It is my understanding that each one-point move in the S&P 500 futures is worth $250 per contract. The NASDAQfutures say $100 times index, so is every point in the index worth $100 per contract?
Also, to figure out how much capital is needed to own one Nasdaq futures contract, would you multiply the index wherever it is at the time of purchase, say 1,560 x $100 = $156,000 and multiply $156,000 by current margin, say 16% -- so $156,000 x 16% = $24,960 to own one Nasdaq futures contract? And, finally, is there a free website where I can find the volume on the NDX and where I can find the overall TRIN? Thank you for your assistance -- pandakis
Your numbers appear to be correct for customer margin. The Chicago Mercantile Exchange (CME) has lower initial and maintenance requirements for Chicago Mercantile Exchange and Chicago Board Options Exchange members. I suggest that you go to www.cme.com to research the volume figures for the various contracts. Trin is available on most quote services (we use Neovest FirstAlert and Track Data).
Note: It is very important when trading these different indexes that you fully understand the cost to carry, as well as the initial costs involved. The NDX moves in $50 ticks (two per point), and your P&L can change quickly. So be aware not only of the costs, but also of the per-tick dollar movement.
TRADING LOGS
How do you keep your trading log/diary? I've been trying to find a log methodology that is easy to maintain, but haven't found a satisfactory solution.
I've tried printing out charts and writing notes on them, but the downside of this is that you can get multiple pages of the same chart (a new chart every day, for example). I have tried taking multiple snapshots of charts and pasting them into Word files, but the files get pretty big pretty quick.
I've also tried putting text directly into my charts, but found that it's a bit cumbersome. It is, however, the best solution that I've found so far. I look forward to your response -- Itz
RediPlus has a cool tool in its charting package that shows your entry and exit points on their daily chart of each stock. We ask that our traders also note the other basic factors (prem/disc/tape, and so on) on a timely basis. We then recap at day's end (can't take time away from watching the tape). I ask traders to plot their entries on a zero x/y graph, plot the exits showing P or L, and then chart out how much further the stock went in their favor (after exiting) before tracing 10 cents back (to see if they exited too early), and vice versa for losing trades (to see if they stayed in too long, or if a reversal was about to take place, meaning that they were "shaken out").
It is always wise to record what you learned from the day's activity as well. You'll be surprised how many times you might make the same trading error without correcting it. Seeing the error in writing a few times usually helps.
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 July 2002 issue of Technical Analysis of STOCKS & COMMODITIES magazine. All rights reserved. © Copyright 2002, Technical Analysis, Inc.
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