The Tycoon Report

Be Careful What You Bid/Ask For

Sunday, May 3, 2009 | Barbara Cohen

Attention daytraders: Whether you are trading stocks, options, Exchange-Traded Funds or futures, be very careful where you place your bid/ask prices ... because you might not want the fill that you get.

Today I want to address one of the most important rules for trading in general and, in particular, daytrading.  That is "Chasing the Market."  Rather, not chasing it, because you might not like the results.

I have spoken with hundreds of traders about this point, which is why I am bringing it up today. I can understand novice traders making this mistake, but I have traded side-by-side with seasoned veterans who do the same thing.  They chase the market.

Here's the scenario ... the trader sees a potentially great opportunity to go long and wants to play.  He offers to buy and enters his price in his desktop trading platform that is directly connected to his broker.  He hits the enter key, but he does not get filled. 

By the time he enters his offer to buy, the price moves higher.  Now, to get filled, he has to buy at a higher price.  

Don't Let Your Money 'Slip' Away

Entering a trade at a higher price than you originally wanted to go long, or entering at a lower price than you originally wanted to go short, is the very definition of chasing the market.  Seasoned veterans have told me this difference between the price they wanted and the price they got is "slippage." 

Hogwash!  There is no such thing as slippage on entering a trade, on the way in.  On the way out to exit a trade, however, you might be in a big hurry because the trade moved against you and you just want to get out as fast as possible at any price.  I can see that as slippage.  But not on the way in.

On the way in, you, the trader, are in complete control of the trade.  You make an offer to buy or short.  If you do not get filled at your price, GO ON TO THE NEXT TRADE.  The idea of moving your price higher (to buy) or lower (to short) allows the market to rob you of your profits. 

Every day, I hear traders going through the "woulda coulda shoulda" syndrome.  "If only I had moved my offer to buy higher, I woulda had that trade."  It's the old "big fish that got away" story. 

So what -- you didn't get filled.  Go on to the next trade.  There is always a next trade.  In the world of daytrading, you may only have to wait another seven to 10 minutes for your confirmations to align before you make your next trade.  Can you wait that long?

When you are daytrading, raising your offer to buy one or two ticks may be your entire profit.  And if you decided to write off your hard-earned money as "slippage," then you just gave it to the market.

Raise the 'Bar' on Your Trading Game

Here's a good rule of thumb to know where to enter a trade.  This is what I generally use for my offers to buy or short ... the closing price of the previous bar. 

For those of you who are novice traders, a bar is any time period you are using on your chart.  For example, if you are looking at a one-minute chart, then a bar is one minute.  Every 60 seconds, the chart creates a new bar.  A three-minute chart gets a new bar every three minutes. And so on.

Say I am daytrading S&P 500 E-mini futures.  The close of the previous bar (the price at which the last trade took place) was 880.25.  Whether I want to go long or short, that is the price I offer.  If I get filled, great -- I get to play.  If not, I'll wait for my indicators to align again before I make another offer.  I do not move my price.

Why use the previous bar's closing price?  Because market traders are funny and they tend to retest their prices before moving on, up or down.   I'll generally get filled on the retest and, if not, then I'll just wait for the next trade.

What's in Store for Us This Week?

This week's trading action is important.  Two things will happen. 

Before we discuss those two things, I want to take a look at what happened last week.  As I told you, Monday and Tuesday would be lightly traded days, and they were.  Everyone waited to see the GDP number and what Fed Chairman Ben Bernanke would say on Wednesday afternoon. 

On Wednesday, GDP came in with a roar at minus 6.1, far worse than projected, but the market overlooked that and went up anyway.  Thursday brought us Personal Income and Personal Spending figures, and both were down; consumers definitely were not in the mood for shopping.  Lack of spending definitely aligned with the GDP Q1 report that showed imports dropped a whopping 34.1%.  At this rate, we'll no longer have a trade imbalance!

So what's so important about this coming week?  Friday is unemployment-data day.  While the number may not be as horrible as last month, don't expect it to tick up any time soon. 

But even more important than that, today (Monday, May 4) the feds plan to release the stress-test results about the country's 19 largest financial institutions.  While they may not tell you just how badly the banks are doing, at the least they will say which firms (if any) need to raise more cash to pass (like Citicorp and Bank of America).

April closed with a bang, with the Dow Industrials up 7% for the month. And, for the first time in a very long time, the S&P 500 is positive for the year. 

But, here's the deal.  Monday could be the end of the rally.  If all or even a majority of the institutions fail to pass the stress test, this could send a shockwave running through the market. 

Right now, it is unclear what time the announcement(s) will be made. Before holding any of these stocks overnight, if I were you, I would wait and see how they fare before taking a long position. And remember, don't compromise in the price you want to pay for any of those long positions -- let it come to you!







Barbara Cohen
Contributing Editor
The Tycoon Report