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. |
Don Bright of Bright Trading |
FACTS OF (TRADING) LIFE
I just started my second year of trading, and while I'm not making
any money yet, hopefully I will be soon. Would you say that a negative
state of mind and the psychology of trading are why so many fail?--pamjoey
As I tell all my traders, "Trading is simple, but the psychology involved
is murder." And the "trading is simple" part only applies if you have taken
the time to learn what the heck you should be doing. I can't believe that
I still get people who think that "trading" is either "picking stocks"
or "choosing market direction" -- and I have to explain the facts of trading
life to them. Most "trainers" and "book writers" want to make the masses
believe they can run their $25,000 account into lots of money with a system
of some kind or another. The working strategies tend to be "lower risk,
higher reward, but capital-intensive" for the most part. Market-neutral
strategies have been working well in recent markets, and made for hardly
a hiccup on the February 27th selloff (down 400-plus points in the market).
PROPRIETARY TRADING: A CONVERSATION
I have a question about prop trading. Are they all daytrading shops?
I know the goal is to make money, but do you have to churn a certain amount
of shares per day? Can you go at your own pace?--magicz
"Going at your own pace" is a must in my mind. Our people do "some"
daytrading, and "some" correlated pairs, "some" market making, engage in
"some" automation, and so forth -- you get the idea. We have people who
trade fewer than 50,000 shares per month, and some who trade 500,000 shares
per day -- it all boils down to your style, training, and comfort level.
Thanks, Don. I was doing a little research on prop firms. Other than
the help with greater leverage (when needed), what does a retail trader
like me have to gain from joining a prop firm, and what does a prop firm
gain from me if I were a profitable trader?
I have a risk-adverse strategy and I use derivatives to hedge all
my stock positions if I own any at that time. Since I am a swing trader
by trade, my horizon isn't day to day but closer to week to week. It seems
my style of trading wouldn't be accepted at a prop firm. I am correct?--magicz
"Leverage" is misunderstood for the most part; I prefer the term "use
of capital." Leverage implies that you are planning on buying more shares
in hopes of "leveraging" yourself into more profits by using more capital,
and this is not the case.
By having access to a couple million dollars, you can engage in different
strategies that work well (lower risk, higher reward) but tend to be capital-intensive
(correlated pairs, opening-only orders with the Nyse specialist, mergers
& acquisitions, market making, baskets, automation, and so on). The
public is pretty much limited to picking stocks or picking direction, or
both. We don't have to be.
As a prop firm, we also collect interest on short stock sales, around
5% or so at this time, which is nice compared with using derivatives at
times (most retail accounts don't receive short stock interest, which makes
it pretty foolish to engage in long/short strategies and mergers, of course).
Longer-term holdings and hedging are both part and parcel of successful
trading. As traders we shouldn't limit ourselves to any particular time
frame.
All that said, the only thing that matters is your bottom line. If you're
able to make good money trading retail, then by all means continue doing
so -- prop trading is definitely not for everyone.
CORRELATED PAIRS DAYTRADING
I've had several questions about daytrading of correlated pairs. Here
is my standard response: By spreading the overall risk by adding more pairs
to the mix, we have the opportunity to snag quite a bit of intraday noise
and are likely to have several daytrades each day in at least a few of
our pairs. A word of caution to retail traders: Check to see if your broker
pays you interest on short stock sales -- most don't. If not, it is normally
not profitable to hold overnight pairs. For example, our traders receive
a good rate from Goldman Sachs (approximately 5%, currently).
By having predetermined entry/exit levels, this activity can be triggered
easily with our spreadsheets. This additional activity has added greatly
to the bottom line of our pairs traders.
In addition, we tend to leave one layer on all the time so we can take
advantage of longer-term trending of each pair that is going in the correct
direction.
Because of the profits that can be made by pairs trading, we have been
including pairs trading in our three-day class here in Las Vegas. By having
access to the database provided by Bright/PairCo, a lot of the grunt work
has been eliminated for the traders, allowing them to focus on trading.
For more details, check out www.stock trading.com/training.html.
E-mail your questions for Bright to Editor@Traders.com,
with the subject line direct to "Don Bright Question."
Originally published in the June 2007 issue of Technical Analysis
of STOCKS & COMMODITIES magazine. All rights reserved. © Copyright
2007, Technical Analysis, Inc.
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