Since You Asked
| Professional trader Don Bright of Bright Trading, an equity trading corporation, answers a few of your questions. To submit a question, post it to the STOCKS & COMMODITIES website Message-Boards. | 
Don Bright of Bright Trading |
SEASONAL STOCKS
Are you aware of any actual study on seasonal tendencies among stock sectors? I've heard the general market "sell in May and go away" and "buy tech stocks in the fall and sell in the spring" clichés, but I wonder what the facts are. I've heard that airline stocks are seasonal, for example. There are probably other generalities, which may or may not be rooted in fact. - Steve Butler
There are many adages in the stock-trading world, and yes, most are true - some of the time. I suggest you pick up a copy of the Hirsch Organization's Stock Trader's Almanac, which is a tool I find very helpful. There you will find considerable information about monthly seasonality and other time-related topics.
FUTURES TRADING
I have just started trading futures through a broker in London, after some pretty intense preparations. I use a simple system based on opening gaps.
I am intrigued by your opinion that technical systems often don't work and that tape reading is a key skill. This makes sense to me and I would like to learn how to effectively read the tape. Do you have any suggested reading on the subject, or other ways I might go about learning the skill? I realize the best thing would probably be to attend one of your courses. At the moment, however, I live in Sweden and am not sure when I'll be able to come over to the States. I'd really appreciate some pointers. - Jörgen Rosvall
Tape reading applies primarily to trading listed stocks, not futures. I strongly suggest that no one trade futures off of the trading floor. Since they are the "leading indicator," it's hard to find good entry/exit points, day in and day out. There really haven't been any good books devoted to tape reading, but, as you say, we do cover it in our course. I hope you can make it to the US in the near future (don't lose any money in the meantime).
FUTURES TRADING FOLLOWUP
Thanks for your reply and advice. It's good to get a reality check
now and again. I feel I'm on the right track and doing sensible things:
trading small while learning, using good money and risk management, continually
learning, mentally adjusting to taking losses, finding entry/exit points,
and not paying too much attention to the fact I've made a bit of money
only four weeks into my trading. I'll let you know if I'm still trading
futures in six months' time!
- Jörgen Rosvall
If you must trade futures to begin with, at least develop a basket of stocks that relate to the index you are trading. Name the group, and make a "personal index" of those stocks. Keep your premium/discount box (over and below the day's fair value) right next to the tick chart of the Standard & Poor's 500, e-minis, or whatever you're using as a barometer. Get a dial-up connection to the floor of the Chicago Mercantile Exchange (CME), and pay for a "squawk box" (we use RealtimeFutures.com). This will save you many seconds in time for pricing, and more important, it will give you valuable information regarding the trading floor participants. Be sure to read their glossary of terms so you understand what is being said. After you have all this going on, and fully understand it, then you will be ready to get involved. Of course, if you're trading a different financial future, simply make the appropriate changes.
SPOT MARKETS
I think there are two factors affecting the prices of the futures. One is the supply and demand. The other is the spot market. Who decides the price of the futures? When a big player comes in, will he/she be able to control the price? Suppose I have money to buy 10,000 S&P contracts and I continuously buy. Will the futures move up, even if the spot market is dropping? Can the big players control the futures without controlling the spot market? Thanks! - Steven Ko
Good questions! First off, let me add that there is another major factor in the pricing of the futures, and that is the "cost of money" (current interest rates). This is how we determine the fair value of the futures as compared to the spot price. This ties right in to your point about buying 10,000 contracts. When something like that occurs, the traders will most likely allow the price of the futures to rise, so they end up trading at a premium to fair value. When the traders can sell the futures at a premium, they will look to hedge themselves by buying the underlying 500 stocks, or a representative "basket." This purchase of the stocks will, of course, cause the index to rise and get closer to where the futures are trading.
Here's one way to think about it: If you were able to sell any commodity at a price higher than you could buy its twin (underlying versus future), at a profit, you would probably do it, right? This is what goes on all day long in the futures pit because of the e-minis and other instruments. Understanding the relationship between futures and the spot is key to good trading.
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 September 2002 issue of Technical Analysis of STOCKS & COMMODITIES magazine. All rights reserved. © Copyright 2002, Technical Analysis, Inc.
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