Reminiscenes of a Stock Operator

[Reyaj]

I would to start a thread dedicated to this classic as it the most recommended book in stock trading.

What does everyone think about this? What are the most important lessons derived from the book?

 

[Bible_Belt]

It's sad that the guy eventually killed himself.

The tape reading methods he used still work to some extent today. Tape reading is about seeing a large institutional order behind its camouflage. It's a chess match between the institutional trader who might be tasked with buying or selling ten million shares of a particular stock and the little guy who is trying to see that order being traded so that he can jump along for the ride. When a trader works a large order, if he is buying, he will buy into dips, ten and twenty thousand shares at a time. As the market dips during the day, stocks which have a large buy order behind them do not dip as much, because the institutional buy order is supporting the stock. It's a poker match, and traders working big orders do everything they can to hide their true intention. They might even go so far as to get on a different terminal and show giant size on the offer. Other traders panic and sell, while that same trader showing offer size is buying into the panic to get a great price for their client. Big wall street firms typically hire young Ivy League grads to be traders, so these are some very intelligent people against whom the small trader must compete to make money. The average client of an on-line broker who attempts to day trade is a sheep amongst wolves.

 

[Reyaj]

Bible thanks for the response. I had no idea this guy killed himself...

I am actually new to the whole stock/investing scene and am trying to learn as much as I can. You seem to know a lot about the market and I would certainly appreciate any advice you could lend regarding investing, whether it would be in the stock market or anywhere else.

I found certain parts of this book hard to understand. Maybe you can help explain a few concepts which seem to be among the most important ones this book is describing.

The Line of Least Resistance and Cornering the Market (<----- does this still exist today, and do I need to be concerned with it)

Regarding your explanation, when you say the market dips during the day, you mean it goes down as a whole? I don't get it because sometime the market goes up right?

I guess you are saying that the big firms control the market fluctuaion, similar to what this book says.... but wouldn't they want us small sheep to get on the ride with them? Why hide their intentions?

Thanks for all your help!

 

[Bible_Belt]

Why hide their intentions?

Think about what happens when traders see 100,000 shares pop up on the bid when there was no previous size. Then, trades start going off at the offer price. Traders see the strong buyer and become bullish. If the sizable bid does not get traded, he might raise his bid price. Then traders see that this guy really needs to buy and he is having a hard time, so the offer will raise in price. Sellers realize that they can now get more for their stock. So the stock goes up a little. Then a 100,000 share print, or maybe ten 10,000 share prints go by at the bid price where there was a 100,000 share bid. Everyone holds their breath to see if the buyer leaves. He does not! Now everyone goes nuts, because if he showed 100,000 and bought 100,000 but still stayed with 100,000 shares bid to buy, then he might have ten million shares to buy. The offers disappear in a buying frenzy. All of this happens in about 5-10 seconds.

Now, turn the tables. Think about being the institutional trader who posted that 100,000 share bid. His boss gave him an order from the client to buy however many million shares. He, in turn, effectively broadcasted this information to the world by the way that he posted size on the bid. If the sellers see a buyer, they raise their price. So the unskilled trader made the stock go up before he could buy. The client pays a higher price, and this is bad for business. A skilled trader will only buy into dips to hide the fact that he is accumulating shares. A skilled tape reader will see the institutional trader buying into the dips. Seeing the big order is money, because size moves the market.

 

[A-Unit]

Re:

If you want to round out your collection, grab: Jesse Livermore: The Greatest Trader Ever (or similar to that title). It covers more indepth HOW he did what he did, during a time of less liquidity.

In a roundabout way, IBD seeks to replicate the Livermore philosophy with their Accumulation/Distribution indicators.

He also points out when going LONG, buy the sectors that are moving, and buying the top company/companies in that sector. When going short, buying the dog in the slow sector. If you find the laggard, you can find the profit.

Jesse emphasized the principle of pyramiding, perhaps being the first or one of the first traders to consciously exercise stops on prices by buying a stock and cutting it if it turned on you shortly after purchase. He would pile on more money on a winning position, and cut quickly any losses.

Jesse Livermore was widely successful. He lost it all, and then grew a larger fortune. At one point, he had the market by the balls and was about to pounce as the "Great Bear," and make billions by crushing the market right around the depression. Approached by Rockefellar (or the President - it's been awhile), he was asked, though he might make immense profits, how might it effect the country in the long-run if he SHORTED so hard and fast? Jesse reneged, didn't short, but worked out some other deal to make more money. He could have pulled the trigger and sent the markets tumbling, but he didn't.

His ex-wife ended up taking quite a bit of cash. Because the divorce made her so bitter, she took all the stock that Jesse had chosen which would have kept her living well for life, and replaced it with bonds and other investments. In the end, she eventually ran out of money. Had she kept the stock, her positions would have vaulted her into the tens and hundreds of millions dollars only years later.

He battled depression throughout his life, but lived during the heydays of America and enjoyed life to the fullest. These books are great, informative, and written very will though they are stock market-type books.

A-Unit

 

[Reyaj]

Bible, again I am very much a rookie at this so I am going to dissect some of the things you and others type like a 6 year old.

First, when you say 100,000 shares pop up on the bid, that means that 100,000 shares have been purchased correct? (Im sorry like I said Im not familar with a lot of stock temrinology)

So my question is, how do traders know this is being done by 1 guy and not a combination of the public traders/buyers out there?

I guess thats my big problem in understanding the market. Who is it that creates the price of the stock? I know that when more people buy the stock goes up.... but is this an automatic process, or do certain people have to manually increase the price?

These are questions I really don't know the answer to and I think it would clear up a lot in my head as to how the market works. While the may seem basic I have asked a lot of people what exactly makes a stock go up, and I never have gotten a clear answer. The only thing seems to be that if more people buy it, it goes up.... but I guess I don't understand the basic science of it....

Other question is.. when you say institutional trader... what does that mean? Does this person work for a trading firm and is just trading some random client of his's money, or does he work for just a large firm in general (of any industry) who is just trading that firm's money in the stock market in general?

But anyway in your counter example if you are saying he already bought 100,000 shares of stock.. how could the price go up before he bought it?

A-Unit

Thanks for the advice. I did read reminessances and I think with all the info I'm getting on here, it is something I am going to reread. While the Jesse Livermore story sounds interesting, I am not interesting in learning how the market works in general, rather than this great trader's bio.

Anyway, in your humble opionion, what kind of market are we in now? Is it a bull markest, or a bear market?

The book stresses to know the difference in trading, and honestly right now I have no clue!

Thanx every1

 

[Reyaj]

bump!

 

[Bible_Belt]

Whoops, I never saw your questions.

When I say shares on the bid, I mean that a bidder is showing a large bid and has not yet been traded. Everyone is seeing the large buyer, which is a bullish sign.

No one knows who is behind what, so everyone has to guess. At a minimum, the buyer at least has an account large enough to post a giant bid order. There would not normally be a combination of traders behind a single bid or offer, but in theory it should not matter anyway - size is size. An 'institutional trader' is trading for a company like Merrill Lynch. A fund manager might decide to lighten up on some stocks and to buy others. Some funds are so big that even a small percentage rebalancing can translate into buy and sell orders in the millions of shares. The institutional trader is the one who works that big order and gets the best price for the firm.

Price action is the natural ebb and flow of the crowd's fear and greed. The greediest buyer out there is the high bid, and the least fearful seller is the low offer. The price changes as orders get matched and a greedier bidder or more fearful seller appears.

As far as the current market, I think it will be more news driven than anything. I would be long defense, oil, and metals.

 

[Reyaj]

Thanks Bible. It is starting to make a lot more sense to me so I appreciate your feedback. You obviously know what you are doing from experience.

My last question is simple I hope. When you say the bidder is showing a large bid that has not been traded.... is this public knowledge?

I use Ameritrade and I always thought that it only shows shares that have been bought. I didn't know we were able to see pending transactions.

 

[Bible_Belt]

When you say the bidder is showing a large bid that has not been traded.... is this public knowledge?

Yes, for stocks it is. The nasdaq level 2 shows the bids and offers. The nyse system is a little different; the inside bids and offers are combined, but everyone can still see the number of shares bid and offered. Novice traders assume that level 2 gives them an advantage, but the institutional traders know the system, too. What they will often do is post a giant bid under their market maker ID, and at the same time use the Instinet terminal to show a small offer, but set the INCA order so that it refreshes every time the share size gets traded. This scenario might look like:

Bid
MLCO 50.25 999,999 shares

Offer
INCA 50.30 1,000 shares

Obviously this would look bullish. There is a giant bid and a tiny offer. Traders will rush to take those "last" 1,000 shares at 50.30

But then INCA refreshes and trades with everybody who wants some shares at 50.30. Thousands of shares go by on the time and sales at 50.30, and the offer does not leave. What is happening here is that MLCO (merrill lynch) has no intention of buying this stock. The giant bid and the small offer are being posted by the same trader. Every trader wants to be on the same side as MLCO, because they are huge and can move the market. So the MLCO traders use this to their advantage by hiding their true intentions and trading via INCA. A skilled tape reader sees through the smoke and mirrors.

 

[Reyaj]

Very interesting!

Now do these instiutions play by a set of different rules than a common trader like me? I always thought I when I bid on stock, I was buying it. How can someone offer to buy a stock, and then decline? I guess thats the part thats still not making sense.

Thanks for being patient by the way, I have learned a lot more than I used to know just by reading these threads...

 

[Bible_Belt]

For limit orders, a bid is an attempt to buy, and an offer is an attempt to sell. A trade requires someone on the other end who wants to trade with you at your price. Sometimes to test a new trading account, I might enter an order to buy MSFT at $5 below where it is currently trading. I can see my bid appear way down the list, and disappear when I hit 'cancel.' That is a live order, but it has no realistic chance of being executed.

You can do the same thing as the market makers, but you have to have the account size to back it up. A trader may cancel any outstanding bid or offer, proividing that no one has already traded with him. But until you get confirmation that the order was canceled, every bid can be hit; every offer can be taken. In my example above, if someone has 999,999 shares to sell and they hit that big bid of MLCO's, then MLCO has to trade with them. So MLCO is smart about it, and they will often post bids at a lower price than the inside. Traders can still see it, but there might be a higher bid that would get traded first, giving MLCO the chance to cancel the bid before it got hit. Or if the big bid is the inside bid, it is usually when the stock is screaming upward and no one is getting traded at the bid price anyway.

 

[Reyaj]

wow thanks a lot, now it clearly makes sense.

I guess since I do market orders I always aquire my stock right away. I can see how that tape reading stuff can work.... but it sure is tough since all you are seeing is the bid and not the actual purchasing of stock...

Do you still play the market at all bible? I mean for yourself? just curious

 

[Bible_Belt]

You can still get immediate fills with limit orders, if you are taking shares off the offer and no one else's order got there first. nasdaq traders hate market orders, but nyse traders use them more frequently. They can get a very bad fill in a fast market.

When you tape read you see bid, offer, and transactions. Trades printing at the offer price is a bullish sign, and trades printing at the bid price is bearish. BUT - if too many trades keep printing at a bid or offer that should have changed its price - that is a big order being executed. Big orders move price, so a tape reader will take the same side of the market as the big order. Nothing is foolproof, however, the big order could always finish getting filled at any time. Controlling risk involves getting out when circumstances change.

I have one more year of law school to finish, but after that I plan to have an e-mini account with the cme. I don't have the $25k to day trade stocks, but even if I did, the stock market is not as great for day trading as it used to be. I think the best trading now is probably futures through the cme Globex system. The cme also has a new system for trading forex that is supposed to go online within the next six months.

 

[Teflon_Mcgee]

Bible_Belt, do you use the tape reading methods use in Reminisences?
After reading that book I became interested in this as a method.

I read a book called "Tape reading techniques" but it didn't go too in depth. Perhaps tape reading is much simpler than modern TA?

Is it really a viable way to help make a favorable trade in todays market?

 

[Bible_Belt]

Yeah, that's how I used to trade, although I have been away from it for a few years. I am interested in trying to learn how to tape read futures.

One of the co-founders of www.realitytrader.com is a very skilled tape reader. His name is Vad. Day trader education is a sleazy business, but the guys at realitytrader seem legit. I have not purchased any services from them, but I have traded emails with Vad for years, and he seems very genuine.

Also, if swing trading, holding over multiple days, is more your thing, Alan Farley at www.hardrightedge.com the man.

 

[dannowillbookem]

i like that thing abbie hoffman did, where they stood above the stock exchange before they closed the little viewing room in and threw down tons of paper money. all these stockies went crazy trying to grab it and it fuccked the whole day up.

 

[Reyaj]

Why would traders hate market orders?

 

[Bible_Belt]

The guy who founded the electronic ECN 'Island' called market orders "licenses to steal" because the trader never knows exactly how much he will pay. Island is thus all limit orders. You can view the Island book of orders for free at:

http://data.inetats.com/#

Island is almost entirely nasdaq stocks. Traders I met tended to trust the nyse specialist system more for handling market orders; market orders are more common on the nyse.

 

[Reyaj]

Thanx Bible.

I actually use Ameritrade. I took a look at that link and am curious how Island compares? I am guessing its more limited since it only trades Nasdaq stocks. Also you mentioned a few times about opening a mini E Futures account or something like that? I am guessing the mini account is just to trade futures and nothing else?

It sounds like Forex and Futures are the way to go these days based on all these comments...