First an update on the Bloggers for Charity initiative: Frank Restorick, a financial advisor in Mississauga, Ontario is the leading bidder at $250. The winner makes the donation to a charity of their choice and gets to write a blog post here that can say pretty much anything they want (within reason). Click here for more info, or email me to outbid Frank.
This is a guest post from Tusk Trader (check out the newly launched site: www.TuskFund.com), an experienced Bay Street trader who will be writing here until Tusk’s own blog is set up. Tusk had a front row seat to the twists, turns, and almost collapse of our capital market systems a few years ago and provides a unique perspective you won’t find anywhere else. For most people, financial literacy is the elephant in the room. Let Tusk Trader help change that. If you are on twitter, make sure to follow Tusk at @TuskTrader
My “could go higher, might go lower” comment from last week’s piece resulted in a few questions and comments being sent my way (I love comments, keep them coming!). I think the statement explains a lot about how traders see the market. It is not always about direction for traders like it is for investors. Investing and trading are different activities. How a stock gets to its price is as important as the price when viewing the stock from a trading perspective. Trading at its core is about execution. If a trader thinks a stock will rise, he or she needs shares to buy at the current lower price and people to sell to at the higher price to exit the trade successfully. This is why traders love volume and movement. A trader would rather have a market open up 20 points, and then push higher to close up 150 points, than a market that opens up 200 points and just sits there. The latter market would not be a great trading environment overall. There can be a few bucks to be made off the open but then the day would just drag on and result in traders on a floor betting who can eat the most hamburgers in 20 minutes without throwing up for the following 30 minutes. (It’s never about how many you can jam into your stomach, it’s about who can keep them there that is the hard part)
If there are bids and offers all over a trading book (a book is what the list of bids and offers for each stock is called), there are a lot of choices a trader has where he or she can get in and out. Having multiple prices to be able to buy and sell reasonable volume of a stock is a good thing for traders. They have more strategies at their disposal when volume is consistent and high. It creates opportunity and when there is little volume, it takes away opportunity. No matter how good a trader is, he or she can only do so much without volume. It’s like Crosby showing up to a practice with no one else. He can still entertain himself with some pucks, but you never really get to see his amazing skills until the other 11 players show up (or at least 6 more to get some potential action)
Traders are very happy when other traders show up to play with them. There are simply more choices of what they can do irrespective of the direction of the market.