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.
IMBALANCES
I’ve been watching end-of-day (Eod) imbalances to see what effect they may have on price and I can’t find any pattern. Do market-on-close (Moc) imbalances mean anything? I read recently on Yahoo that in theory, a large buy imbalance would cause a stock to gap up at the closing price to accommodate the order and the reverse would be true for a sell imbalance, which should gap down the stock price. Traders would profit from the move with a buy imbalance by buying the stock right before the close and sending an immediate sell on close order. This way, the buy imbalance is reduced by long traders who are seeking a profit and ease the specialists’ job. But I haven’t really observed this as a reliable pattern. —Donna
Yes, we have been using the Moc imbalances for years in various fashions. There is one benefit for many of our traders who focus on trading the same two or three stocks, day in and day out, in that they may be long or short at the time of the Moc imbalance, and when they see a significant number, they can respond to the close or ride the imbalance if it fits their position. These traders learn how their stocks react to various levels of published imbalances. We provide a spreadsheet to take snapshots at 3:30 pm (Nyse time), 3:40 (first imbalance), 3:50 (second imbalance), 4:00 (end of day), and then the actual Moc price, which usually hits a couple of minutes later. We also track where the S&P futures are trading at those times to see if the price movement is being caused by the overall market, or by the imbalance.
Another thing we do, via spreadsheets, is to track perhaps 100 stocks and sort the imbalance shares and their relation to the average daily volume of the stock. Same thing applies as to time frames. We look for the knee-jerk movement (generally in the direction of the imbalance), have an order sent automatically, and try to extract a dime or so.
Pairs traders like to see the imbalances so they can play those last 20 minutes with the other side of their pair. One thing that has changed is that we rarely use actual Moc orders to close any of these trades. We find that the two 10-minute time frames allow for good trading, but the last tick to the Moc price can be hard to read.
Our RediPlus platform allows for 30-second updating of the imbalance shares as well as the actual regulatory published imbalance, and this helps to see if we can count on a reversal during the last few minutes. We do not blindly assume that the direction of the imbalance will be followed by price. We need to incorporate other factors such as where the overall market is. For example, if the market is up 150 Dow Jones Industrial Average (Djia) points, and we see a big buy imbalance, we generally won’t fall for that expected move. We might even fade the imbalance. Hope this helps.
TOOLS FOR TRADERS
What do you consider as the most important tool for traders? — tikitrader
In my 30 years in the securities trading business, I’ve been asked over and over again, “What is the most important tool in the trader toolbox?” To be honest, my answer has changed over the years (decades). Early on, my answer was to be sure to have access to latest computer- modeling systems. Back in the 1970s and early 1980s, it was important to have that access because that was how we were able to compete. Don’t get me wrong: Having the best trading models (for current instruments) is still very important.
Fundamentals and technicals have always been important, but not always for the reasons that novice traders think. Fundamental analysis compares to reading up on your latest project or task. Technical analysis relates to comparing snapshots of your task versus similar other tasks. Both help in determining such things as relative strength — both to each other and to the overall marketplace.
Execution technology came into the forefront in the mid-1990s. You needed to have the best access and the fastest computer. Both were extremely valuable in those days and still are. What has happened over the last decade or so is that both have become more matter of fact. Nearly everyone has a quick computer and access to most markets. We, as professional traders, understand that these tools are basic necessities, much like an electrician needs a power drill.
Now, how do we get to know these other tools? How do we understand what we’re looking at? By asking questions, by sharing our thoughts, by keeping journals, and most important, by communicating. Why am I writing about this? Over the years, I have interacted with hundreds of traders, from trading floors to training classes. The ones I’m the most concerned about are the quiet ones — those who fail to communicate. I’ve answered the same questions from the same traders multiple times, but I am still glad they continue to ask. If they don’t understand, then I feel I have failed to give them the answer. I have deferred to other traders, to my brother, even to other students to help me make my point — whatever it takes to communicate our thoughts.
As a trading firm, we have tried many methods over the years to open these doors of communication — daily and weekly chats, training classes, chat rooms, and more. Those who participate, even in the most minor capacity, will greatly improve their odds for success. Daily, minute-to-minute interaction is one of the most valuable tools we use.