Newbie Questions
Q: Hello all! I have a few of questions that maybe you guys can answer in regards to trading stocks. 1) If I enter a limit order during the night for XYZ stock @ $10 a share, and the thing opens up lower, @ $5 a share, will I get filled at $10 or $5? 2) What is a good volume to look for in a stock where I know I will be able to get in and out of the position quickly (trading ~ 1000 shares)? 3) If a stock has good volume, and not considering size of account, does it really matter what price the stock trades at? I have a pretty simple short term system I'd like to try out, but some of the stocks it has picked are trading in the 1-3 dollar range. They have good volume, but I am not sure if pricing should be of concern.
A:
That depends on whether you're talking about a stock with a real market
(fair and orderly publicly accessible, continuous auction markets such as
the New York Stock Exchange), or whether you're talking about the under
the counter "market" where there actually is no such thing as a "limit
order", but only a bunch of guys looking to rip off t
limit order on a NYSE stock, directed to the NYSE floor, when the thing opens
lower, you get the "price improvement" involved. In this case, execution
is at $5 per share on and under the counter stock, and sometimes even on
listed stocks where your broker has taken "payments for order flow" and
directed your order to some under the counter scalper. Where you get
executed, depends more on how much the scalpers feel like ripping you off
that day, rather than on anything having to do with the real market open.
Hardly a day goes by that I don't see a whole rash of fraudulently priced
"executions" being run across the consolidated tape wildly away from
where the rest of the world is trading the stock on one of the infinity
of "fragments" of the market which the Clinton 'fraudocracy' set up as one
of its efforts to fleece the public. Unless you pay attention to where
your orders are ACTUALLY being sent, you're wide open to anything in
the circumstances described. Oh golly, well yeah, I suppose they
probably will keep the price to $10.00 or less on an open at $5.00, but
that's all the assurance you have with an order directed to a scalper
in the under the counter market.
Back when I was day trading thirty years ago, my rule was that my maximum
trade could never be more than 1% of average day's volume. Simple econ
really. If you get to be too big relative to what everybody else is willing to
trade, and you ARE the guy being pennied out of executions, being front
run in a variety of other ways, being traded against and then clobbered
while everybody else is getting out of the way of something bigger, and
so forth. Since I would suppose you don't really want that kind of
posture in the market, keep your trading within reasonable bounds. My 1%
rule was sensible years ago and I believe it still is. That means you
have to have average daily volume at least 100 times whatever size you
think you may want to be doing.
Bad price range to try trading systems. Things which are "picked" by
systems in that price range are generally a result of "small number
effects" which magnify irrelevant moves into the appearance of being
something. New and small companies get the same kinds of scam going by
showing "growth" on irrelevant or nonexistent benchmark starting points.
All such things are small number effects and should be avoided.
Below $10 per share, you have a whole additional set of problems to
cope with beyond what you get with normally priced stocks. In the first
place, it is cheap enough per share that sizes blocking your executions
tend to be ten and more times what you have to deal with in more
normally priced stocks. In the second place, a whole array of serious
investors and traders have rules which they follow to the general effect
that penny stocks (under $10 per share is how they see it) aren't worth
trading, so you're losing a whole lot of market participants who are
worth trading with. Then there's the real penny stocks which everybody
recognizes (those trading for less than 100 pennies per share) which have
no genuine market at all but only a bunch of pump and dumpers trying to
make something out of nothing. It is true that many international
markets regularly trade nearly all of their stocks in what we would
consider low price ranges, but you are, as you say, asking "Newbie
Questions", so I doubt you would have been thinking about international
markets anyway. All of these comments are "U.S. stocks" specific.