Q&A
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.
Daytrading criteria
What time frame bars and other criteria are used for daytrading? —dafong
Entry and exit points for daytrading tend to be determined by a couple of things. First, we look at the premium (Prem) or discount (Disc) to fair value on a emini tick chart. This will tell us when the money is going after the stocks. When futures houses can sell futures at a high Prem, they will hedge with underlying securities. This can be seen with any spreadsheet.
Then we look to see where the peers are trading, which helps to determine the strength of the stock in relation to others and to the overall market. This helps with “strong vs. weak” stock determination.
After that, we check to see if we are in a trading “trough” (between futures pivot points) or near a support or resistance level (pivot). If just above a support level, then that’s added ammunition for buying and vice versa.
The last, and one of my favorites, is to look at the ticks (net upticks vs. downticks). When near an extreme, usually around 750+ either positive or negative, we see a short-term reversal.
Always be aware of the intraday range of the particular stock from standard deviation moves based on volatility (we call these “bright bands”).
Now, since we tend to trade the same “children” stocks day in and day out (compared to picking a new stock each day), we have a good handle on how to handle daytrading these securities.
Coincidence And Short Squeezes
My question is regarding timing my buys to coincide with a short squeeze. I monitor public sites like https://finance.yahoo.com as they announce twice a month the change in shorts during the prior two weeks. I read this as a leading indicator that the shorts are going to cover in a certain period of time indicated by the short ratio. With the recent volatility in the markets my timing seems to be off, and I can’t tell when to get in.
My two-part question to you is: (1) Are there indicators that tell a short squeeze is coming up? and (2) What is the correct way to interpret and use the shorts data released twice a month?
Thank you for addressing these questions. —Chuck
The short position data disseminated can be misinterpreted due to the extensive derivatives markets, ranging from the basic “reverse conversion” (long call, short put, short stock) to collect interest on short stock money generated, to more exotics and preferred stock hedges. Short stock baskets vs. index futures are another reason to see excessive short positions in certain securities.
Something we use is the “hard to borrow” list that we can get from Goldman Sachs. This has a reverse effect, telling us which stocks cannot easily be shorted. As far as indicators of an upcoming short squeeze are concerned, it’s a bit of an art. When we see major players buying stock with increasing price volume, and no other major news pending, it’s telling. We also look for pending deals — either mergers, company repurchase plans, or even hostile takeovers to generate a short squeeze.
As tape readers as well as followers of both technicals and fundamentals, we tend to respond to the current price action in anticipation of a possible short squeeze. Also remember that price precedes news, so when you see irregular price movements, look for upcoming news that “someone” seemed to know something ahead of time.
Short side or long side first?
In your experience with pairs trading, when you put on the trade, do you put on the short side first or the long side first and what rules do you follow in general? —Jim G.
Good question, and the methodology has changed over the years due to regulatory changes. We used to call the “short side” the “hard side” because we needed to have an uptick (higher price than previous sale price) to be allowed to short a stock. Since 2007, we can pretty much hit bids to get short (as long as the stock is not hard to borrow). Initially, we teach our traders to engage in what we call “crutch pair trading” — follow the market as we do for any order entry, meaning to lean on an offer or a bid, while you’re going with the market direction. We look at the premium or discount to fair value (of the futures), ticks, peers (to see the relative strength of the stock to its peer and its pair), all the basic entry timing indicators.
When the market is going up, buy first, knowing you can hit a bid on the pair if your purchase turns against you, resulting in a predetermined price for the actual spread. We simply sell the initial stock with a profit when it goes in our direction initially vs. pairing off. This locks in actual profits and saves commissions. If it does go against you, then sell the other side (the one leaned on), at the current price or higher.
Correlated pairs trading has proven to be a good way to stay market-neutral while engaging in a “reversal to the mean” type stock-to-stock relationship. This has been particularly beneficial during these times of high market volatility. Carrying positions overnight, when hedged, allows for better sleeping at night versus carrying naked long or short positions. We never know what is going to happen overnight these days. Hope this helps.