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Strategies & Market Trends : DAYTRADING Fundamentals -- Ignore unavailable to you. Want to Upgrade?

To: Bilow who wrote (2801)	8/14/1999 12:35:00 PM
From: Bilow	Respond to of 18137

This is a note about prices, and the significance of prices. Markets are constructed from limit orders, and humans have a strong tendency to place limit orders at whole (or half) numbers. This is true for both institutions and Joe 6 packs. Traders can take advantage of this habit. First, some evidence that whole numbers are significant in trading. Since you have a question about your fill at 82 on CMGI, we can take a look at the institutional trading on CMGI using the thomsoninvest.net i-watch page: thomsoninvest.net (A great link, I think Sir Francis Drake pointed it out.) Putting CMGI into the stock, setting the 20-minute button, we get a graph showing the times and prices where institutional investors made limit orders on CMGI. (Actually, it doesn't quite show that, it is more of an intentional kind of thing. Sellers are looking for buyers in quantity at specific prices.) The order activity is as follows for today: Buy at 79 Sell at 82 Sell at 82 1/2 Sell at 83 3/8 Sell at 83 1/16 Sell at 83 Assuming my eyeballs are sufficiently calibrated. Of the six above orders, fully half of them are at whole numbers. Given that there are sixteen different Nasdaq fractions that a price could be placed at, it is quite remarkable that three orders would end up at the whole numbers. Retail trade does the same thing. Take a look at the ISLD book for CMGI. This is overnight, so these are presumably the long-term buy and holders getting in and out of their positions: newgritch.isld.com I count share sizes at the various fractions as follows (for the 30 orders closest to the market): 0/16 1136 1/16 2/16 100 3/16 4/16 37 5/16 6/16 225 7/16 8/16 5851 9/16 45 10/16 11/16 200 12/16 13/16 14/16 100 15/16 400 Notice the huge numbers of orders at the 1/2 and whole levels. As another example, the ISLD book for MSFT has 16 orders at 1/2s or wholes, out of the 30 orders closest to the market. This is eight times as many as one would expect. Because of this fact of human nature, the whole and half prices in a stock tend to form resistance/support levels for very short term trading (i.e. scalping). So don't short a stock at 82 unless you are sure you can get the fill (and are therefore prepared to hold the stock while it goes against you for 1/2.) Instead, place your short order at 81 15/16. If the stock penetrates 82, then cover your short at 82 1/16, if you can, otherwise cover at 9/16. If you lose, your loss will be 1/8th, but the gain will be 3/8ths. This is all just another way of saying: Place buy orders just above support, and place sell orders just below resistance. If you can use fractions smaller than 1/16th, go ahead and do that, too. Question. Has anybody ever seen gasoline in the U.S. sold for a price that didn't include 0.9 cents per gallon? Prices are significant, a number is not just a number. The Nasdaq is a wild and wooly place, though, and sometimes a stock will look like it has penetrated a whole number when it really hasn't. The reason is that there will be market makers that are slow to fill orders at the whole number, and scared daytraders will start hitting prices out of the money in order to close their positions. So you have to be aware of this. -- Carl