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 |
MARKET ON CLOSE
What significance does the 3:40 pm ending order imbalances entail
for daytrading? Also, can you recommend any books that will expound on
the subject? Thank you in advance. -- Marcus
MOC imbalances are fundamental to all types of trading. Suppose you're
trading all day long, and you're long 2,000 shares at 3:30 or so -- you
think you want to get out, but you might wait until 3:40 to see if there
is a buy or sell imbalance. If it's a buy, wait; if it's a sell, sell immediately.
Of course, you'll have to monitor each of your "children" (stocks you trade
day in and day out) during all the time frames near the end of day -- 3:30,
3:40, 3:50 (republish), 4:00 bell, and the final MOC price. I provide my
traders with software to do that for them (with futures as well so we can
tell if price movement is related to an imbalance or simply a basic market
move at end of day). Hope this helps.
BUY IMBALANCE
I know you're busy being in charge of all those traders and boot
campers, but I was wondering if you could answer something. Today there
was a buy imbalance and the market sold off a little. Does the market generally
rally or sell off when there is a buy imbalance? I think it rallies, but
I wanted to ask the expert. -- Tim
In a relatively flat market, your thinking is correct (the tendency
is to go up with large buy imbalances), but when the market is already
up 180 points or whatever, it's much less likely. Time to fadeÝ
the knee-jerk move up at 3:40.
BEYOND THE MENTAL BARRIER
I've been trading for over a year now and I'm finally starting
to see the results, but I'm still having a lot of difficulty taking my
trading to the next level. I made about $6,000 on a recent trading day
on a market rally (on the financial and retail stocks), but I know I'm
a good trader and should have made more had I capitalized on the opportunities
in front of me. I read a lot about the best traders out there and the common
factor I see is that they know how to take risks and are fearless -- and
this is what is holding me back. Can you recommend how I can push myself
past this mental barrier? Do you think it would help if I had more money
in my account? -- Joseph Klar
Being "fearless" causes the downfall of many traders. I don't know what
strategies you're engaging in, but I assume you're speaking of directional-type
holding of positions. If you're making good money, then let your account
build up to where you have $100,000 or so in there, and that alone will
allow you to expand your risk management to a level of comfort that might
allow for more profits. Remember, fear and greed control the market, and
traders need to control both elements.
WHAT AM I MISSING?
I have recently been trading the 2x inverse funds -- Qid, Dxd,
Sds. The price I see at closing sometimes is very different from the final
closing price. For instance, today at the bell my platform showed 48.92,
but the price kept changing for several minutes and finally closed at 49.76.
Is this a result of sorting out the market on close orders? What am I missing?
-- selecto
Moc orders are placed all day long, both buys and sells, and the specialist
must match them. At 3:40, the specialist will publish the imbalance for
everyone to see. If there were one million shares of buy orders and 500,000
of sell orders, you would see a 500,000 imbalance. Specialists do this
because they're looking for help in accommodating these extra shares.
Traders can put in orders to help with the imbalance as long as the
published imbalance is still showing. But at 3:50, they republish based
on the shares entered between 3:40 and 3:50. Most often, at least half
of the imbalance will go away, but many go away completely, and some even
reverse. The Moc imbalance play is one of our most successful, for what
it's worth.
WHO'S MOVING THE MARKET?
It appears to me that all the courses, formulas, technical analysis,
tape readers, and so forth are designed to find and ride the rallies and
declines. So who's left to move the market and how can they accomplish
that if everybody is watching and waiting to pounce? -- Dominick
The basic mechanics of the market are what cause movement. When you
see the Standard & Poor's 500 futures trading over the calculated fair
value for that particular day/hour/minute, the floor traders and other
big players will be selling the futures contracts and most often buying
all the underlying stocks. This causes immediate and longer-term upward
movement. The opposite is true on the downside, of course. Selling futures
at a premium (Prem) simply means that they are selling the equivalent of
all 500 stocks at a price higher than where they are trading currently,
even including the cost of carry based on interest rates and time to expiration.
They reverse the trade when the futures are trading at a discount to fair
value.
Options and other derivatives add to the overall supply and demand of
the equities. When all is said and done, the market moves based on supply
and demand, along with derivative valuations.
E-mail your questions for Bright to Editor@Traders.com, with the subject line direct to "Don Bright Question."
Originally published in the May 2008 issue of Technical Analysis
of STOCKS & COMMODITIES magazine. All rights reserved. © Copyright
2008, Technical Analysis, Inc.
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