Q&A - August 2013

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. To submit a question, post it on the Stocks & Commodities website Message-Boards. Answers will be posted there, and selected questions will appear in future issues of S&C.

STILL DAYTRADING?
I have followed your articles and posts all around the web, and I actually met you and your brother [Bob Bright] at a trading expo a few years back. I think you and your brother have set a great example for traders who trade with your firm.

I read something you wrote recently that seemed to imply that daytrading has lost its luster, and perhaps you guys are focusing on other methods of trading. Would you please let me know if you’re still daytrading, or if your traders have forsaken it altogether? — OHinvest

Thanks for the kind words, and I am the first to acknowledge that my brother has always been my beacon, if you will, and has led the way for our firm over the last few decades.

Now, let’s focus on your question about daytrading. Let me assure you that our traders do indeed engage in basic daytrading. However, over the last few years, many of them have focused on longer-term strategies as well. As traders, we must always continue to adapt to the marketplace. We cannot stay stagnant, or we will be eaten alive.

Take a look around. The market bubble has burst, and we must learn how to adapt to the new era of trading the markets. There are new trading platforms, new ways to access the markets, and new products such as single-stock futures (SSFs) and narrow-based indexes. Traders must adapt to the new climate to remain successful.

As a species, traders face the same dilemma that many of our ancestors did — we must adapt or become extinct. Although the penalty for staying locked into a nonworking strategy may not be as severe as the fate of the saber-toothed tiger, poverty is a close second. We must constantly be on the lookout for that edge.

Back then, we had gone through some major changes in the marketplace, thus requiring our traders to adapt to everything from new trading instruments (ETFs, SSFs, and so on), to new ways of analyzing individual stocks. As the Internet grew, so did the amount of information made available to traders. We have grown accustomed to having so much data available that we wonder how we ever got along without it. Allow me the liberty of quoting a bit more from the same article, and then I’ll share what we’re doing differently these days.

After spending more than a decade trading on the exchange floor, and watching the new products turn to old standards with little room for exploitation, I thought that the trading world would come full circle... back into the basics of single-stock equities trading. I shared that with my semi-retired brother, and he shared the feeling. Adapting once again to market conditions and technology changes, trading resumed in the family... this time it was DOT-based (direct order turnaround) electronic trading. The “bug” bit harder than ever with this genesis. Having “single digit”-numbered DOT machines, with the same access to the markets as we had on the trading floors, the electronic trading revolution was begun.

A few short years later, the newly aware public became involved in the world of electronic trading. It was from this short-lived phenomenon that “daytrading” as many of us perceive it was born. (I always smile when I hear people talk about the “birth” of daytrading having taken place in the 1990s, when in truth daytrading has been going on for some 200 years).

You see, even the term daytrading has often amused me. If we buy and sell shares the same day, I guess we’re “daytrading.” We still trade the opening-only strategy, and for the most part, we close those positions the same day. Sometimes we plan on selling shares back the same day, but the market conditions (that is, price, as in we’re losing on the trade) dictate that we take those shares home. In my mind, that’s how swing trading came on the scene — nothing more than a daytrade gone bad!

Our traders are using the openings to enter trades often, and some do exit completely by end of day. Others — and this is where I think you may have gotten the idea that we are not favoring going home flat with no positions — prefer to plan position trades (okay, “swing trades”), or even more likely, well-planned, correlated pairs trading (see my past Q&A columns on pairs trading, available at Traders.com).

In addition, our traders plan out their longer-term trades — whether simple directional plays, pair trades, or even mergers — taking into account such things as cost of carry, seasonality, and other variables. This planning can save the traders a lot of money when done correctly. As a result, they tend to keep a little more money in their accounts to allow for lower interest costs, and so on. Again, the term adapt comes to mind.

The advent of subpennies and high-frequency trading has caused some concern, but after a few years of this, we have simply adapted to these things as well. I suggest becoming immersed in a group of fellow traders to keep up with these things. Hope this helps!

Since You Asked