Since You Asked
| Confused about some aspect of trading? Professional trader Don Bright of Bright Trading (www.stocktrading.com), an equity trading corporation, answers a few of your questions. | 
Don Bright of Bright Trading |
EXITING TRADES
I've been trading for about a year. I've started using a combination of gray boxes, which keeps me focused and disciplined. My entries have been consistently profitable and timed well, but my exits have not been because I always sell too early. My most profitable system has been to pick the strongest 30 stocks every day, and by strong I mean what doesn't go down when the market is going down -- my gray box then buys them after 2:00 pm Eastern time on a moving average convergence/divergence (MACD) crossover with a midrange relative strength index (RSI). Right now, my exits have been when the MACD crosses back down, but it's not great and I know there's better. What do you look at to exit long positions on strong stocks? What's the best way to use stops?--Joseph Klar
Your entry time is generally a good one, after the lunch hour(s) in New York. I'm going to assume you're daytrading and not keeping positions overnight.
Here are a couple of things I teach my traders to watch for. Choose a couple of peers for each of your 30 stocks, and look for the relative strength between your stocks and their peers. This will give you an idea whether these stocks are strong based on specifics with the stock or the industry group. Be sure to check pivot points on the S&P futures, since these will show you where a slowdown in direction might take place, and/or when a breakout takes place in the overall market. You can check daily pivots here if you like: www.stock trading.com/Tradinginfo.htm.
I post the fair value numbers and other pertinent information on that page as well on a daily basis, premarket. When you see an S&P future reversal based on a negative Prem (discount) to fair value, you generally see the stocks follow. The futures work as an excellent leading indicator, based on overall market mechanics, program trading, and other hedging tactics.
At 3:30 pm, take a snapshot of all the stocks and futures prices. Watch for a drift for the next 10 minutes. This will give you an idea of how the MOC imbalances will be running. You should have the imbalance column on your screen for all your stocks and peers. Some even take a larger sampling (OEX 100, for example) to get a feel for immediate market direction. These imbalances are published again at 3:40 and may be smaller, gone altogether, or actually reverse direction.
If you see sell imbalances on your stocks, I suggest getting out of at least half your shares immediately, understanding there will be some pressure on the stocks for the next 20 minutes. Watch this daily, using snapshots, to see how your stocks react to these published imbalances; not every stock reacts the same.
And all the basics apply -- New York open book, ARCA depth of book, and even a simple Level 2 montage. This will help see where the larger orders are.
I don't generally use mechanical stops; I prefer to use alerts. This gives me a chance to take a quick view of the overall market and indicators to see if I really want to exit now. When in doubt, exit half. Most of this information applies to listed stocks, which is what I primarily trade. I generally get involved with NASDAQ stocks only in my correlated pairs and/or M&A activity.
Hope this helps. Good trading!
MENTORING AND MINDSETS
When I was young I played rugby. At the kickoff, our mindset was to destroy the other team -- mentally, physically, and emotionally and then pile on the points both before half time and after. This meant playing the game in their territory within kicking distance of their sticks, also known as limiting the effects of your own mistakes. Just like trading.
All very simple, and yet difficult to execute under extreme pressure. -- Fearless
Something to ponder. Although I appreciate the rugby example, quite the opposite is true in the case of trading the markets, in my opinion.
When I first started on the trading floor, I too wanted to show the other guys that I was as good as they were -- that didn't work too well.
Then I thought, "Maybe if I try to follow the lead of the best traders in the pit, I could do much better." That's what I did, and it worked much better.
We teach to trade "with" the experienced traders, not "against" them. Trade "with" the market, don't try to "beat" the market, simply because no one will ever really "beat" the markets. Earning a good living is not "beating" anything or anyone, it's simply understanding how market mechanics work. When all is said and done, all we as traders can do is to provide liquidity, and seek out and correct disparities.
Trading is simple, yet trading psychology is not. But first you need to know "what" to do and "how" to do it. Sounds trite, but it reverberates throughout the industry.
Learn as much as you can about what longer-term professionals are doing, and do your best to replicate their techniques and strategies -- but be sure you're attempting something that fits your personality. A serious, calculating guy shouldn't try to "ride the wave" of an intuitive trader, and vice versa.
One last thing: Don't overcomplicate trading. It shouldn't be complicated.
E-mail your questions for Bright to Editor@Traders.com, with the subject line direct to "Don Bright Question."
Originally published in the March 2008 issue of Technical Analysis
of STOCKS & COMMODITIES magazine. All rights reserved. © Copyright
2008, Technical Analysis, Inc.
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