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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