I had a portfolio of 15 stocks in the midcap segment with excellent volume, split across 4 sectors. Every eight weeks, the portfolio is rebalanced.
Normally, when I placed a limit order to buy at yesterday’s low, and if it is not filled by the end of the day, I buy at close.
Now, I’m sure no one will share too many trade secrets, but it would have been interesting to hear some experiences on how to proceed that day when you start buying the shares:
do you only buy at yesterday’s close or low?
do you buy on technical support, and leave the order until it is filled, even if it takes a few days
do you use volatility to calculate limit price, like high \ low, atr
I have two recommendations. The first is labor intensive and the second is not at all.
Before market open, set your limit order at yesterday’s close minus a certain amount based on ATR. If you use our Manage tools you can set a passive or conservative limit order and it’ll calculate the limit price for you. If it doesn’t get filled early in the morning, set a new limit order slightly below the current price. If it still doesn’t get filled, set a limit order at the bid. If it still doesn’t get filled, set a limit order at the bid/ask midpoint. If it still doesn’t get filled, set a limit order at the ask. But if the price moves very much away from you (e.g. if it’s one of the stocks that has moved the most that day), set the order at a reasonable price and forget about it, then repeat the process tomorrow.
Before market open, set your limit order at yesterday’s close. Forget about it. If it doesn’t get filled or only gets partially filled, repeat the same procedure the next day.
I’m sure other people do different things that are equally effective . . . but this is what works for me, depending on whether I want to sit at my computer all day.
Hi Whycliffs, it sounds like you have a good system, although you might want to compare what trading at open, daily average, and end of day does for you in ideal circumstances. I suspect it may turn out that trading earlier in the day is better than waiting until the end of day, but that probably depends on spreads and liquidity also.
As for my part - I’m not good at the trading aspect. I’m slower than I should be both getting in and out of positions because I’m often trying to get a better price on both the sell and buy. That tends to slow things down, often splitting trades across several days. Not ideal at all. Often it seems like everybody’s model is trying to sell and/or buy the same stocks on the same day with price going against me on both sides. I’m mostly in more liquid stocks now, but I do have some cases where I might be 5-10% of the daily trading volume and I’m purposefully slower on entering and exiting those with smaller order sizes over many days. Sometimes I might get a nice pop to sell into, but that is usually not the case.
But yeah, I do have bad habits also unrelated to system and you should probably discount any of my comments because I know they’re likely bad habits - but it may help for me to share some of my bad habits because I wonder if many traders have the same impulses and struggle against them. When I’m looking at adding to positions, especially existing positions, I look at charts and “support” levels. I’m purposefully slower to add to a position where the chart looks ugly. Some recent examples of this for current holdings include JOUT, ATVI, FICO. I don’t know if it helps (backtesting says probably doesn’t help), but stuff that is consistently weaker than the market and has ugly chart causes me to move slower and keep position sizes smaller until it finds footing or falls off the ranking system. This is compounded by reading about the company and trying to understand the selling pressure. For example: I think weakness in both JOUT and ATVI, both fairly highly rated in a couple of my systems, benefitted last year from covid spending. JOUT Johnson Outdoors makes outdoor sporting equipment - boat motors, trolling motors, camping equipment, scuba - and benefitted from a surge in spending for this type of activity vs. what would happen in a normal year - so it’s reasonable to think historical trends may be unsustainable. ATVI Activision benefitted similarly from strong video game market during stay-at-home. FICO Fair Isaac does credit reports - has somewhat monopolistic business in my mind - but has been behaving very badly and while I read the recent conference call I don’t understand that one yet, other than some AI startups with new says of creating predictive data might be changing the competitive landscape in credit reporting. Mgmt comments say business is strong, with some transitional revenue effects from moving to a subscription model like many software companies - but the chart is ugly, ugly, ugly so I’m still moving slow on that one. Maybe now is when I should be piling into these. I don’t know, so maybe that’s just my bad habit and maybe I shouldn’t look at charts or read about my companies at all. Perhaps let my bad behavior be a cautionary tale. Ha! Good luck.
Thanks. And, sure, I agree with you. It is equally essential to learn from the mistakes of others as well as the things that are done correctly.
I tested open, following day close, and average high low. It does not have a large influence on my strategy, but you are correct that the close is the one who performs the poorest.
Because the shares I buy have a lot of volume, I attempt first and foremost to see if I can tweak the approach a little to get in and out at somewhat better prices. It is not certain that it is possible, or that it will have anything to say in the long term.
I’m still experimenting with various ideas:
At noon, the price was lower than today’s low.
If the S&P 500 futures are lower before the open, set the price lower than yesterday’s closing or low.
Set the limit to purchase on technical support, or little above or round numbers, i.e. buy at 57.61 instead of 57.59.
But I’m not sure if it anything of this works. I have also not found any research on the subject. And, as far as I can tell, it is not possible to test on this platform if an order has been filled, so you cant test a good or bad entry og exit strategy.
But, in any case, thanks for the advice; everything is gratefully received.
For companies with lower trading volumes, it seems the mere existence of my buy or sell order changes the market dynamics. You know - you put in an order to split the bid/ask, and the market maker (or someone) often immediately jumps $0.01 above or below your price and all that really happens is the bid/ask moves up or down against you without any trade occurring. I don’t know how one would simulate that other than assume fills won’t be as good as hoped, but in stocks that might only trade a few hundred shares every 5-10 minutes it seems the norm so I just put an order out there and let it sit for a while and hope for a buyer or seller shows up with sufficient volume to hit my order.
On the much more liquid stuff the above scenario is not much of a concern and spreads are tight, but there are a surprising # of companies that seem to behave as described above for much of the day (except during the heavier trading periods at start or end of day when activity is higher).
We don’t have the data to test whether an order would have been filled or not at a certain price. I doubt anyone else does either.
The other thing I do, which I didn’t mention, is to break up my orders into small orders so that I don’t have too much market impact; I also often use conditional orders; and I’ll often fill or empty a position over several days.
I think I get better fills by putting in so much time and effort. But I also think that the improvement I get over just placing an order using an IB algorithm is not huge. I have accounts with IB that perform extremely well without putting in much effort, just using Relative NBBO peg and, if that doesn’t get filled, Relative 0.01 peg. One of my accounts with IB trades much less frequently than my Fidelity account, only uses their algorithmic trades (the NBBO ones I just named), and has gotten much better returns (65% vs 56% annualized since 4/1/19). It’s about 2% of the size of my Fidelity account, though, so there’s less market impact, and it’s much more concentrated, and it avoids OTC stocks, so those might all be reasons for the better returns.
I usually use market orders designed to be small enough that I almost always get order-price-improvement with Fidelity on stocks (not so much with ETFs obviously). And I have spread those out. This is making the order small enough not to have a market impact as Yuval is suggesting. So I definitely agree with this.
I read a book that recommended that you slow-down your buy orders (and speed-up your sell orders) if the ticker is moving downward. And do the opposite if it is moving upward during the day.
This is basically what Spaceman Jones is saying when he recommends generally placing you orders early based on how the market generally trends. So this is good common sense.
For limit orders, if you are getting quick fills with your partial limit orders that would be a sign that you might want to slow down. Maybe move your limit more quickly if you are having trouble getting a fill and you think the ticker will continue to move away from you during the day. If the market keeps trending you will get a better price.
At Fidelity you can place a limit order with percent of volume (POV) at 5%, 10% or 20%. Or really slow things down with a VWAP order. So you can speed-up or slow-down your orders automatically at Fidelity. You can probably do something more complex at IB.
I have placed different POV orders depending on how I think a ticker will be trending during the day. But I have not kept close enough track to determine if this is really helping much. And I do not always have a clear idea on how my ticker will be trending. But I consider this to be a bit of laziness on my part.
While I do not use limit orders a lot, there are some situations where I place my market orders soon or wait based on how I expect the market to move and it can be beneficial.
Maybe. The commissions at IB are a constant drag and are to be avoided if possible. Even when Fidelity offers no other benefit over a particular algo at IB.
You mentioned market impact and I posted because I agree that this is a constant consideration–even for market orders.
My understanding–mainly from reading–is that POV 20% causes some market impact. That is probably why Fidelity does not offer a quicker fill. Likewise POV 5% does not cause meaningful market impact. Probably no coincidence that Fidelity does not have the option of a slower fill–other than VWAP at times.
VWAP is intended to cause the least market impact if you are committed to filling your order in one day. Obviously, you can now cancel the orders and change your order based on what is happening during the day with no penalty.
I do trade some POV. Generally I am like Spaceman Jones and want the order to be filled fairly quickly. I am never in a dire rush so this is almost always POV 5% with minimal market impact. I use this a lot for large orders. For convenience if nothing else.
But there are days where I think the the price will improve near the end of the day. I usually put a VWAP order in then as most of the trading will occur at the end of the day for VWAP orders.
Here is where Fidelity can shine for some members. I am not sure that you would use this however. If you are getting close to the end of the day, tired of adjusting your limit and want to get filled today, there is an option that is safe for Fidelity that will get you filled with what is essentially a bunch of small market orders trading at-or-better than the NBBO (national best bid and offer).
For a buy order you can set the limit high (above the ask) and for sell orders you can set the limit low (below the bid). Set it at VWAP if you do not think the price will improve toward the close. Or POV if you think the price will move against you: POV 20% if it is moving against you quickly for some reason or if you have not gotten many fills and have a lot of ground to make up.
The orders will behave like a bunch of small market orders–spread to reduce the market impact. I have check this closely and your orders will be between the BID/ASK even if your limit is above or below the BID/ASK and there will be some order-price-improvement at Fidelity. That having been said it is difficult to quantitate the order-price-improvement and I cannot say whether it is as good as if you had placed individual market orders with Fidelity. Subjectively, I think maybe the order-price-improvement may not be as good with this method. And there is the (very) rare order that seem to be outside of the BID/ASK. But this is safe at Fidelity–at least for tickers that have a liquidity similar to the ones I generally trade.
Any order-price-improvement defined as improvement over the BID/ASK spread at the time each small order is filled will not be recorded as such by Fidelity. It will not show up in their statistics when using VWAP or POV.
But that is far from the whole story, I think. What other considerations do you have for your style of trading?
FDLM is Fidelity’s automatic order routing method. I generally use it. BUT with limit orders routing to NSDQ CAN work well sometimes, in my very limited experience. Your experience could differ greatly and I would not be surprised if it did. It is my belief that institutional investors have some tricks to move ahead of retail investors on limit orders. NSDQ allows less of this: I went through some of the rules once a long time ago. There used to be tricks like using fractions of a cent etc at some of the ETNs for example.
I do not know anything about Schwab regarding POV and VWAP orders. I am sure they follow the NBBO regulations (Part of Regulation NMS).
NBBO is a SEC regulation that all brokers must follow. Some of what I said above could have been simplified to: Fidelity is following the NBBO regulations for POV and VWAP orders which is probably required for these types of orders (but I am not sure of some of the fine-print on this regulation regarding POV and VWAP orders). This is from Wikipedia:
[i]"National Best Bid and Offer (NBBO) is a regulation by the United States Securities and Exchange Commission that requires brokers to execute customer trades at the best available (lowest) ask price when buying securities, and the best available (highest) bid price when selling securities, as governed by Regulation NMS.
For example, if the offer (or “ask”) price for a stock is $25.00 for 100 shares of a stock on one exchange and $24.50 for 100 shares of the same stock on another exchange, and a broker has a customer who wishes to purchase 150 shares of the stock, then the broker is required to purchase all of the shares available at $24.50 on behalf of the customer before purchasing any of the shares available at $25.00. Additionally, if an order for 150 shares is sent directly to the first exchange, it is required under most circumstances to route the first 100 shares of the order to the other exchange, where the shares are available at a cheaper price."[/i]
Yuval and anyone considering directing an order to an exchange,
I have heard people express concerns about directing an order to an exchange (like NSDQ). Specifically some have expressed concern about the possibility of there being a better trade at another exchange. The second bolded portion of the quote above may address some of these concerns.
Good luck.