Jay, this post by Fred Weiss is an excellent place to start or add to your education. I would also recommend that you scour through the other posts in S.I. under Short Term Traders title. You'll find info on what tools people use as well as book reviews.
To: +kenneth weiss (110 )
From: +Fred Weiss
Mar 22 1997 2:37PM EST
Reply #113 of 205
Hi Ken - Are you a long lost cousin?
Just read this entire thread and would like to add my .02.
First of all, spreads are very important. They are indicative of either how liquid a
market is or how the market is being managed by the MM. There are lots of stocks
that, looking at the charts, appear to be range trading and profitable to buy the lows
and sell the highs. Then you watch it in real time and find the MM is running all day at a
spread of 1/2 the range. Example: XYZ Widgets has a range today of 1, with a high of
$29 and a low of $28. But the MM runs a 1/2 point spread. He goes from 28 / 28.5
to 28.5 / 29 and back all day. If you buy at the low of the cycle you pay the Ask of
28.50. But you can't sell for a profit when the stock trades at $29.
The average spread any stock is being managed at represents the loss you must
overcome when you buy it. Assuming you are trading with a flat rate broker, the loss to
the spread is a far greater expense in most trades than commissions. I, personally,
boycott any stock that trades at more than 1/4 point spread.
Whether you're trading on DCBs or any other strategy, the spread should be part of
the screening criteria IMHO.
2) For purposes of day or short term trading, I believe one should only use market
orders. Limit orders only get filled if it suits the purposes of the MM. His objectives are
normally the opposite of yours. Why turn over trading discretion to your adversary? By
trading at market, you are guaranteed an execution and you are waiting for the MM to
tip his hand.
3) Successful short term trading is based on taking advantage of divergences and other
market abberations. These will tend to correct themselves. The assumption here is that
the largest decliner of the day will have declined too far due to over-reaction of the
market and that it will rise to a more reasoned and correctly valued price in a short
period of time. My opinion is that pinning down that time frame to the last few minutes
of the day is a mistake, particularly for purposes of exiting the trade. This due to
afternoon profit taking.
There may be more merit in entering in the afternoon and exiting in the first hour the
next day. The best way to enter and exit is by following real time intraday charts -
Entering on divergences and exiting on correction. Or to refine: Enter on a divergence
and the first sign of a change in direction; and Exit on a correction and the first sign of
a change in direction.
4) Stops are essential to limiting risk. Price movements are generally trendy. Once a
trend is broken the trader is in limbo until the next trend is demonstrated. But stops
should be mental stops, ones you execute by placing market sell orders. Stop loss sell
orders are something MMs go fishing for when a large buy order hits. The MM will
often lower his bid price momentarily on receipt of a buy order he knows will move the
price of the stock up. In this way he adds to his inventory and profit when he fills the
buy order he knows he has. In the mean time you are relieved of your holdings just
before they become profitable.
5) The establishment of a relationship with an effective, reliable broker is absolutely
essential. I am about to try my 4th one in a year (Lombard). ALL internet brokers will
break down or run very slow during heavy trading times (which is when you usually are
trying to exit a trade). It becomes of paramount importance that the broker provides
one or more alternative paths to execute a trade when this happens. This is why I have
never been willing to set up and account with Datek.
Hope I didn't run on too much. Comments are welcome.
Fred Weiss
Hope other GRNO fans also find this post helpful.
Sergio |
