Q&A
Since You Asked
| Professional trader Don Bright of Bright Trading, an equity trading corporation, answers a few of your questions. | 
Don Bright of Bright Trading |
ON TECHNICAL ANALYSIS
I happened upon the last part of your radio show while I was in Las Vegas recently, and heard you mention STOCKS & COMMODITIES. I picked up a copy and was pleasantly surprised to find that their focus has shifted somewhat from technical analysis. Although I find it interesting, technical analysis seems too complicated at times. Do you trade primarily with technical analysis? - Ray B. Westwood, CA
Since I pass many of my e-mails along to S&C, I want to thank you for reading what is probably the best book in the industry! Now to your question. I personally use what I call a "market-aware" method of trading. Simply put, I combine tape reading, technicals, and quantitative risk/reward analysis to determine entry and exit points. When trading for a living, you must be able to focus on the crucial data while discarding the fluff (company announcements, upgrades, and so forth). I like to say "Trading is as simple as you will let it be, or as difficult as you want to make it" - and then jump aboard with what is working, and bail out when conditions change.
TWO IF BY SHARE
My wife and I have been trading online for several years now, and we have recently noticed it is possible to pay for trades based on the number of shares rather than by the trade. Is this something new, and how do you tell which is better? We make about 10 trades per week if that makes a difference. - Kevin Campbell, Sarasota, FL
There are firms that offer "no ticket charge" trades to their customers. You need to determine which method is better for your type of trading. If you trade only 100-200 shares at a time (many retail customers do this), then you are probably better off paying by the share. If you trade in larger blocks (more than 2,000 shares), then you are probably better off paying by the trade. Take your average number of shares per trade, multiply it by the charge per share, and see if it totals less than the "ticket charge." If it does, pay by the share; if not, pay by the ticket. Note whether the charges are based on limit or market orders; this is a whole different equation. Since you are protected in pricing by using limit orders, many brokerages charge more for limit orders than market orders. Many firms will charge less for market orders because they can trade against your order if they choose to.
TWENTY QUESTIONS (OKAY, FOUR)
Hello Don, I enjoy your Saturday show. Yes, sign me up for the October 17th workshop in Arizona. Absolutely! I want to attend a community college class with one of your associates. Questions: 1) You go into the pre-market with a calculation. What is it? - Daryl Boothe
These orders are based on fair value calculations and take a couple of hours' explanation to assure a full understanding of the concept prior to any trading. Unfortunately, I cannot go into much detail here, but we do a complete overview in both our college courses and our trading workshops.
2) How can I get on the same side as the specialists to trade when the market opens, is most volatile, and gives the best profit potential?
When you have a comprehensive understanding of how the markets work, and how to "read the tape," then it is relatively easy to determine quickly which side the specialist is on. The rules make a big difference. For example: In most cases specialists cannot initiate, only participate, in upticks and downticks. They generally accommodate larger orders rather than join in. In any event, it is a must to have a good understanding of the rules of the game before playing.
3) I want to be a much better trader. Should I be using the AIQ Pro Expert software at home? Can I trade remotely from home with direct market access through your company, or do you have an Arizona trading room?
AIQ is a good software program (I must point out that they are a sponsor of our radio program). Remote trading is not usually recommended until after a time frame is spent within a trading room. There is so much more involved in trading than the hardware/software/connectivity or even the type of market access that it cannot be duplicated as a "hermit trader" effectively. And, yes, we are expanding our Phoenix/Scottsdale location with a new and larger facility.
4) What are the three types of Pares I should trade? I know I must adapt to changing market situations. Will AIQ software help me take advantage of market momentum and volatility?
The types of pairs trading are covered in our more advanced classes and even if I told you the names, I would be doing you an injustice if I didn't spend quite a bit of time explaining in detail the methodologies involved. In trading, as in many things, a little knowledge is dangerous. Even within our own organization we find it destructive when one trader comes in for advanced training and then goes back to his or her own office and assists others in current methods. Since everyone learns differently, it is imperative that each trader hear it directly from the instructors.
See you in Phoenix!
MARKET MAKERS
I enjoy reading your column in S&C. The September 2001 Q&A contains some comments under the headline "Level II Trading." I would like to know which book is appropriate to read about how market makers work and their techniques. In addition, what is the procedure for preparing to become a certified trader? Looking forward to hearing from you very soon. - Dan Valco
Thanks for reading the column! I am afraid there is no book available, nor is there likely to be one, that can explain the poker-playing mentality of traders and market makers. I sit in front of my screen and participate at times, just to get a feel for an individual stock's characteristics (how it handles larger bids/offers, and so forth). If you would like to get a feel for how market-making firms handle their customer orders, and how they use that information for their own gain, you can go to my website (www.stocktrading.com) and click on "Articles of Interest - Nasdaq Market Makers - Wall Street Journal." This article actually quotes one of the big market making firms in reference to reviewing their own customer orders.
The article scratches the surface about how market markers trade and think. This type of approach by other traders (when trading Nasdaq) makes it extremely difficult to make a good living consistently. I usually suggest "If you can't beat 'em, join 'em" - meaning if you want to make a living from Nasdaq trading, why not become a market maker yourself?
Now to your second question. Recently, I gave a presentation at the
Online Trading Expo in Anaheim, CA, that addressed this question. Here's
the basic procedure from that presentation:
1. You must first acquire a good understanding of what trading at this level involves. A solid training course is recommended.
2. Align yourself with an established firm with a history of success.
3. Have your firm sponsor you for the necessary licenses. Study for and pass your Series 7 (additional licenses may be required in certain locations).
4. Determine what type of trader you want to be. Try to elevate to the point where you keep your net trading profits, rather than sharing them with a firm.
Hope this helps!
HIDING SIZE
After attending a recent class of yours I started tradingthe NYSE instead of the Nasdaq. My question is about the bid/ask on the NYSE. On the Nasdaq there is a lot of hiding of size by market makers and electronic communication networks? (ECNs). My understanding was that with the NYSE what you saw was what you got. What I'm seeing is bid/ask, 1x1, but I see size going off for quite some time at the bid/ask. Right now I'm playing SBC. Bid is 1 @ 44.90, but I see bid sales @0.90 of 1600, 18,300, 15,100, and so on, and the bid remains 1. I know you can hide size on the NYSE with an ECN, but I thought the specialist would show the true bid/ask size, especially after it had remained the same price for two or three minutes. Thanks for your help, and I hope all is well with you and your family. - Mike Shannon
Whenever the bid/ask size reflects 1x1 (or similar), that usually means there has been a negotiated number of shares that are being traded at a certain price within the bid/ask range. This occurs when a "block print" (large number of shares at a certain price or price range) is taking place. The specialist essentially "closes the book" for a few minutes. This generally allows for the accommodation of all bids/offers that are entitled to "fills." The bid/offer size will be modified again to reflect actual bids/offers after the current group of trades are "printed." The interesting difference is that the real bids and offers are in one central place where they can be given proper treatment, vs. the Nasdaq where there is no central marketplace and no way to really know who is entitled to the shares being traded (and as you point out, the "hiding" of orders is commonplace). Hope this helps.
AN ELECTRONIC SMOKE SIGNAL
Seeing a Q&A column by Mr. Bright prompted a look at your website. Your invitation to e-mail you directly was accepted, and so, this note.
Are you able to aid or assist the unsophisticated novice, to put it bluntly, in the art of making dough with his dough in the equity game?
With that question, you are probably assuming that you are corresponding with a "real winner," thank you for the compliment. And you are right in that one mustn't just presume that all firms are geared to all individuals. Would that it were so.
So, this will let you know that another guru wanna-be got to your site and is interested in pairing a team to pull the plow, financially speaking.
Thank you for your time and consideration of this electronic smoke signal.
I will watch your hilltop, keeping the fire hot, the blanket wet, and the leaves soggy. - EZStrawberry@aol.com
From your colorful dissertation I was able to deduce that you are seeking help with "making money with money" - or how to invest for profit. My expertise is in the field of stock trading, which ironically is juxtaposed with investing. My suggestion is that everyone should take the time to understand their goals and to be frightfully aware that no one knows anything that you cannot know yourself pertaining to the world of Wall Street. Do not be mystified by the verbiage or the rantings of advisors, analysts, or (especially) brokers, since their goals do not necessarily reflect your own. If you want specifics, I might suggest you look into SPDRs (S&P Depository Receipts) vs. (any) mutual funds if you choose to participate in the overall market. You may want to listen to our radio show (Stocktrading with the Bright Brothers) on the web (go to stocktrading.com on Saturdays at 12 noon Pacific Time) for some current insight. There will be a "US Tour" in 2002, wherein my brother and I will be visiting major cities to help spread the word about professional trading and investor awareness.
If you would still like to make more money vs. simply investing your current stash, then I can be of more assistance via our trading firm and training. In any event, keep reading the magazine and good luck!
Don Bright is with Bright Trading (www.stocktrading.com), a professional equity corporation with offices around the US. E-mail your questions for Bright to Editor@Traders.com, with the subject line direct to "Don Bright Question."
Originally published in the December 2001 issue of Technical Analysis of STOCKS & COMMODITIES magazine. All rights reserved. © Copyright 2001, Technical Analysis, Inc.
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