How You Trade Closed-End Funds

The observation that closed-end funds are not ordinarily volatile is

true. However, closed-end funds tend to trend intraday and over

long periods of time. Once you understand this, you should see an

opportunity. One of the reasons scalping has such a high failure rate

is because of massive volatility. While this attracts the speculator

and the get-rich-quick crowd, you do not want this kind of attention.

If you are going to make money trading small fractions of points,

then repeat after me: "Boring is good." Because boring typically

translates into predictable slow-moving trend. Real money is made

quietly in the background, almost unnoticed, trade by trade. In this

kind of trading environment it is quite possible to trade for fractions

of a point because the reward-to-risk ratio is in your favor. In fact,

the very lack of volatility is just what an individual trading for 1/8 or 1/4

point wants. Volatility and attention are the last things you need

when your profit margin is small. Let the day trading cowboys have

all the hype and attention they can get, because they are not going

to make much money. If you are the only one eating your lunch, you

just might be able to enjoy it. But if 20 people are fighting over your

sandwich, you will be very lucky to get even a crumb. I like to eat my

lunch alone and profit from the experience.

Many closed-end funds are traded on NYSE, which means you

will be using the Super DOT system to place your order. This superior

tool is available only to electronic traders. In most cases, you

can place a trade and get confirmation within three to six seconds.

I will address Super DOT and electronic communication networks

and how to use them in Chapter 6.

When you trade closed-end funds, you are looking for a wide

spread between the bid and the ask. This will not go unnoticed by

professional traders, so you must move quickly to take advantage of

the situation. We are assuming there is an upward basis in trend to carry you into a position where you will be able to sell the stock for

a fraction of a point higher than you bought it. If the spread is large

enough, you split the bid and the ask. For example, if the bid is 12

and the ask is 12 1/4, you can place a bid of 12 1/8. If you succeed and are

filled, you now become part of the national best bid or offer

(NBBO). The idea is to turn right around and do one of the following:

You can offer the closed-end fund at 12 1/4 with the crowd. If

momentum is strong you can hold and sell it at 12 5/16 or 12 3/ 8. Most of

the time, you offer stock at a price you know will sell right away. In

this case, you want to sell it at the ask 12 1/4. Closed-end funds and

individual stocks offer a much lower risk factor when trading for

fractions if volatility is minimal. Boring is good.

The problem with all strategies in which you are trying to trade

for fractions of a point is size. By size I am talking about trading

1,000 to 2,000 shares of a specific trading vehicle. Closed-end funds

are no different in this regard than an individual stock. Because the

profit is so small, to make money you have to buy large numbers of

shares. In the example, you will have over $12,000 in one trade. If

this seems large to you, then you should reassess your trading capital.

One of the biggest problems traders face is being undercapitalized.

Capital is particularly important when you are trading for

small fractions (1/16 to 1/8) of a point. Because the profit potential is so

small, you are forced to allocate large amounts of capital to each

individual trade. If this strategy is to succeed, you must use strict

risk and money management principles to control loss.

The observation that closed-end funds are not ordinarily volatile is

true. However, closed-end funds tend to trend intraday and over

long periods of time. Once you understand this, you should see an

opportunity. One of the reasons scalping has such a high failure rate

is because of massive volatility. While this attracts the speculator

and the get-rich-quick crowd, you do not want this kind of attention.

If you are going to make money trading small fractions of points,

then repeat after me: "Boring is good." Because boring typically

translates into predictable slow-moving trend. Real money is made

quietly in the background, almost unnoticed, trade by trade. In this

kind of trading environment it is quite possible to trade for fractions

of a point because the reward-to-risk ratio is in your favor. In fact,

the very lack of volatility is just what an individual trading for 1/8 or 1/4

point wants. Volatility and attention are the last things you need

when your profit margin is small. Let the day trading cowboys have

all the hype and attention they can get, because they are not going

to make much money. If you are the only one eating your lunch, you

just might be able to enjoy it. But if 20 people are fighting over your

sandwich, you will be very lucky to get even a crumb. I like to eat my

lunch alone and profit from the experience.

Many closed-end funds are traded on NYSE, which means you

will be using the Super DOT system to place your order. This superior

tool is available only to electronic traders. In most cases, you

can place a trade and get confirmation within three to six seconds.

I will address Super DOT and electronic communication networks

and how to use them in Chapter 6.

When you trade closed-end funds, you are looking for a wide

spread between the bid and the ask. This will not go unnoticed by

professional traders, so you must move quickly to take advantage of

the situation. We are assuming there is an upward basis in trend to carry you into a position where you will be able to sell the stock for

a fraction of a point higher than you bought it. If the spread is large

enough, you split the bid and the ask. For example, if the bid is 12

and the ask is 12 1/4, you can place a bid of 12 1/8. If you succeed and are

filled, you now become part of the national best bid or offer

(NBBO). The idea is to turn right around and do one of the following:

You can offer the closed-end fund at 12 1/4 with the crowd. If

momentum is strong you can hold and sell it at 12 5/16 or 12 3/ 8. Most of

the time, you offer stock at a price you know will sell right away. In

this case, you want to sell it at the ask 12 1/4. Closed-end funds and

individual stocks offer a much lower risk factor when trading for

fractions if volatility is minimal. Boring is good.

The problem with all strategies in which you are trying to trade

for fractions of a point is size. By size I am talking about trading

1,000 to 2,000 shares of a specific trading vehicle. Closed-end funds

are no different in this regard than an individual stock. Because the

profit is so small, to make money you have to buy large numbers of

shares. In the example, you will have over $12,000 in one trade. If

this seems large to you, then you should reassess your trading capital.

One of the biggest problems traders face is being undercapitalized.

Capital is particularly important when you are trading for

small fractions (1/16 to 1/8) of a point. Because the profit potential is so

small, you are forced to allocate large amounts of capital to each

individual trade. If this strategy is to succeed, you must use strict

risk and money management principles to control loss.