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This posting by Joe DiNapoli is being sent free to our entire list since many of you may have use for this information. We know some of you may not be able to update your client page renewal before markets open. We are swamped here with subscription requests which are processed manually. These requests will be completed as soon as we can. Please do not respond to this by email. Put any responses on our client pages here.
http://www.fibtrader.com/proprietary.html
Events of Sept 11
Contributors to these pages may have died yesterday. My Family lives in Boston and my niece was scheduled to board the flight that struck the south tower. She didn't make the flight but her coworker did. As a frequent world traveler on an American passport I'm keenly aware of the risks. I was under death threats when I spoke on financial matters in a predominately Muslim country several years ago to a studious, attentive, and friendly group who were also predominately Muslim. Since the weapon of choice is typically knives in that country, I lined my chest and stomach area with the morning paper, bunching it securely under my belt. It was a uncomfortable presentation.
Our hearts go out to all those directly or indirectly effected. I guess that's all of us. My hope is that we learn more from this horrific event than the knee jerk reaction of retribution. In my view, it's a bit more complicated than a group of fanatics attacking freedom.
Trading after a disaster
How can we handle extreme emotion in financial markets? Please re-read the disclaimer liberally pasted throughout our web-site and literature. I'll give you my best shot at this but there are no guarantees in situations like these.
I was around in the days of $50 silver, 60 in the Bonds, and some of you know I predicted the 500 point down day in the DOW in 87. While this brings experience to the table it does not mean what I will say below is going to be right. It's just my best shot.
The fact that the markets are closed for a few days is a very good thing. It allows the planners (Fed, market makers, specialists, and exchange officials) to plan and emotions to cool.
Firstly, If you don't have to trade, or you have insufficient experience, don't trade.
Your biggest problem in situations like these is the getting the fill. Regardless of the accuracy of our approach, in times like these, you have to get the fill to make or preserve capital.
You'll likely be ruled to death by the exchanges on any of these markets. If you don't know what I'm talking about see one example of this in an article I wrote entitled: Where is my fill !!(X'd trades) (originally published in Stocks and Commodities Magazine) which is available free on the website.
Usually it's in our Proprietary client area but we've temporarily made it available free on the following link.
http://www.fibnodes.com/xd_trade.html
Difficulty in getting your fill will be proportional with the panic in the market or lack thereof.
Futures pit issues:
Along with X'd or canceled trades mentioned above there's the "up-tic rule". Now I'm simplifying this for brevity but the bottom line is that if prices keep falling without an up-tic you're not "due a fill" as a seller…
Even with a market order. Those standing in the pit will be the ones that are able to sell when bids come in. They will be sure there won't be an up tic until sufficient support is apparent, usually at a very major fib number like the ones we've been talking about for the past year and a half!
Your sell orders will then be filled at the bottom when they want to buy (from you).
Then there's fast market rules which basically say they can do about anything they want down there with your order. You can make money one way for sure, bet with someone crazy enough to take the bet that whatever the specialist, floor trader, etc. do with your order, it will not be in your financial best interest. You'll win the bet but you'll lose on the fill.
Electronic trading:
Depending on the panic or lack thereof, this is a big test for the electronic trading computers and I don't know how it will come out. I do know that those Electronic trading agreements we've all signed are not designed to protect us. Re-read them. I would not count on being treated much better in that medium than any other.
NYSE:
Anyone selling on the 500point down day in 87 was filled at 500points down even if they sold when the market was only 100 points down.
"Orderly market" mandates do not mandate specialists to loose billions in a day getting you your fill-- If you sell in a vacuum you are at their mercy.
Most of you are aware of the up-tic rules when going net short on stocks.
NASDAQ:
Again, those trading in 87 know how market makers treated the public. Yes there have been rule changes but if it comes to Major market makers loosing billions or you getting your fill, guess who'll be the looser.
ECNs will be available to NASDAQ market makers to lay off orders, so the ECNs may not be a haven either. You need a bid to get a fill!
Perhaps the Fed or something else has given guarantees or some such thing to large entities or institutions to keep things orderly. I don't know but I would guess they have.
Lets take 3 orders-- in a market we'll call "WAFTT index" (Where Angels Fear To Tread). The situation may vary depending on the market you trade but the outcome will likely be the same.
1)You're a short seller initiating a position at market. The market last is 20,000. Your filled 10000 lower, at the low, since there's no up-tic.
The market closes 5000 up from the low. You were right, the market is off 5000, but… you Lose!
2)You're a buyer initiating a position in WAFTT, at the market you're immediately filled at 19999. The market trades 9999 lower --you're sold out of your position by your broker for insufficient margin, at the low, a market maker, or local, or specialist takes your sell, he's up 5000 and you're in deficit.
3) You're closing an existing short position at a pre determined DiNapoli profit Objective-- It's a perfect play, WAFTT cover the short at 10,003. The market goes through your buy point by a few points. But you didn't get the fill --fast market, X'd trade, or the order matching computer broke or was overloaded. You can't get reporting on your trade as the exchange is too busy and you don't know until that evening when the market closed that you did not get filled. Or perhaps you've
re-sold, Thinking you were flat, on a bounce and now you're short 2 times the position and the market is 5000 off the lows. Called higher tomorrow. There are many miserable scenarios and yes I'm simplifying possible events but these are real possibilities.
So what do you do?…
If you don't have to trade, or you have insufficient experience, don't trade.
Don't sell or buy into a vacuum. Wait for retracements and place your orders so price action is apt to move significantly through your pre-calculated price points to better ensure your chance of getting that fill.
Record any conversations with brokers. Time stamp all orders!
If you trade electronically have back up phone numbers. Have back up local numbers as well as 800 numbers. Have an automatic dialer!!
Major fib levels should hold--Look for Confluence and Agreement to trade against and trade small in case a position goes against you, so you can hold on to it until you get a retracement back in your direction.
If your retirement accounts are low on equities as we have repeatedly advised since November of 99, now may be the time to get some great stocks, but only at major fib numbers- In the past weeks I have posted some of those key numbers on our proprietary client web pages for the indexes. It's easy for you to calculate them on your favorite stocks. Forget value investing-- P/E ratios and such. Put your orders in ahead of time-- Bonsai in as described in the book Trading With DiNapoli Levels" and hold on to your lunch. It could be wild ride!!
If you feel this would be of value to anyone feel free to pass it along.
-Joe DiNapoli.
http://www.fibtrader.com
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