From the Boardroom to E-Mini Trading Room

Brice: How did you get involved in the stock market?

Don: About five years ago, I came across the notion that there seemed to be some profit opportunities buying and selling on a fairly short-term time basis. When I first started dabbling -- I won't even call it trading because it does the word "trading" a disservice -- I realized, "Hey, this stuff is moving. How can I find out what's really going on here and position myself to take advantage of those price swings?" Online trading was just starting to emerge. I hooked up with a couple of Internet firms that were fairly intensively involved in teaching traders and eventually got to a point where my trading was fairly consistently profitable. I was fortunate to be taught some very strong fundamentals right from the get-go, with respect to trade management and stops and that kind of thing.

Brice: How did you learn?

Don: I was part of an online teaching room at that time and did a lot of reading (Mark Douglas' books really stand out). I'm one of these guys who just gets in and experiments with what works, what doesn't work -- getting beat up enough times to realize what doesn't work. Ultimately, I was asked to co-run the room. I was making calls; I was known for reading opens; I got pretty good at it. Since then, I've been in another room, which I just left. In both cases, I was a volunteer teacher trying to pass on some of the trading skills and insights that I had developed early on and still continue to develop.

Brice: What are you doing now?

Don: I continue to trade my own account. Again, I recently stepped down volunteering at another site to focus on teaching and mentoring a small group where they have a direct line to me for six-and-a-half hours a day. I spend a lot of time in the after-hours trying to help them develop their skills. I've been at this now for about four years.

I have an accounting/finance background and had been in a corporate career for about 17 years when I started this. I had a flexible schedule so I could trade opens, and once I got good at it, realized the cash flow opportunity and could prove to myself that I could be successful, then I decided to make the switch to doing this full time. The one rough spot I've had -- and the only drawdown month -- I've had as a trader, was the month that I stopped doing this part-time and I started doing it full-time. I had access to the markets for eight hours a day and now needed to put bread on the table, and there were some stresses and breaking of trading rules going on -- and I was teaching at the time, so it was kind of funny. I went through my own personal pain, and I had to realize that I had to focus back on the skill and not the income.

Brice: What is your approach to trading?

Don: It’s evolved fairly recently. For the longest time, I was a fairly heavy scalper, and what I will call an oscillation/reversal trader. I use the Nasdaq futures as an indicator for everything that I do. Entries and exits are all based on the futures -- anticipating a reaction to the futures -- whether they may be trending at the beginning and you can get in on the trend early, or whether it’s providing signals that it’s exhausting and about ready to turn. For the longest time, most of what I did was to look for reversals, and arguably I still do that. For a long time though, I was more of a scalper. The futures would be trending up, there would be some topping formations, they’d be about ready to turn -- I could go short a stock like Juniper. As the futures would move down -- and there’s often just a very subtle lag between the futures and the cash equities -- I could profit quickly, you know, a quarter point, a half a point, three quarters of a point. There was that sort of rhythm.

Lately, with the change to decimalization, I’ve had to change my style a bit. I trade the QQQs a lot more any individual stocks now. The change to decimalization has really changed the rhythm of a lot of the stocks out there. It requires a different type of trading. It’s more purely chart-based, and you have to let time work to your advantage more so than you could in the scalping days. The QQQs move 1:1 with the futures because they just represent the cash value of the same futures index that I’m watching, so I’m in essence a futures trader, trading the QQQs, rather than trading equities. I’m largely looking for changes in trends, oscillations, trading ranges, shorting tops and buying bottoms and doing so in a way where my risk is fairly minimized through trade management.

Brice: What learning curve did you go through?

Don: The biggest adjustment is allowing time to work to my benefit. Looking for very strong chart formations. Finding a good signal and allowing it to work out. It’s really using time as an asset a lot more than I ever had before. I compensate for a little bit of the old scalping mentality by doing a lot of scaling in and out of my positions. Today we caught a nice pullback at the open and I went long. As it starts to move up, and as it’s getting to the first possible point of resistance, I’ll go ahead and lighten my load at that point and leave the rest of the shares in the trade to take advantage of whatever further momentum or trend may emerge at that point. That satisfies that scalping urge that is still in me.

Brice: Do you trade other stocks as well?

Don: Over the past month or so — it’s been a little bit of an experiment -- I’ve traded the QQQs exclusively. I wanted to prove to myself that I could do this and earn the necessary consistent income from it. The volatility obviously is less than stocks, yet the pace is better, so I find I can trade larger shares without increasing my risk to compensate for the lower volatility. Prior to this, I was trading Juniper for several months — that’s about the only thing I was trading. I’m a big believer in, whatever you’re trading, in trading one vehicle, and becoming a real expert at that one. When I was trading stocks, I’d be trading Juniper. Before that it was JDSU and Broadvision -- the stocks that were in vogue at the time. It was always one at a time. I don’t believe in this flipping from stock to stock to stock. I believe in following whatever you’re trading like a river all day long. There’s a rhythm that develops there. If you jump from stock A to B to C, if you’re not carefully following each one of them at the time, you might mis-time every single one of them, as opposed to staying with one single mechanism.

Brice: Do you trade off patterns?

Don: The key signals that I look for intraday include five- and 15-period moving averages, stochastics and Bollinger Bands with a fairly extreme setting. I use a 2.6 setting, which widens the bands. You really have to get to some extreme points in order for those to be approached or violated. Let’s say you have something that’s been trending up for a while, and it’s starting to get overbought — the five-period moving average is getting pretty far ahead of the 15, you’re approaching some resistance areas, some extreme measures, maybe you’re near an upper Bollinger Band — and you pull back a little bit from that and then you pull back off again, so you have kind of like a double top. What I’ll do is measure the stochastic strength on both of those peaks. What often happens is — and it’s been a very strong signal lately — you get that second peak, which is perhaps as high as -- if not higher than -- the former peak, but your stochastic reading is a lot weaker on the second one. Climb, pullback, climb, but in the second climb the stochastics are telling you that the strength just isn’t there, so I’ll take that as a reversal. Typically what’ll happen is that it’ll retrace down to support and many times it will actually cross and really begin a trend on the other side, and I’ll manage that accordingly.

The Bow Tie crosses are very effective. The five- and 15- (moving average) periods very clearly define whether a trend is occurring or not. What I also do is use charts of different time frames. I always have a one-, a three-, and a 13-minute chart in front of me. I’m looking at the same signals on each one, but I’m using them in conjunction, so if I’ve got a three-minute trend, for example, that’s moving nicely to the upside, I glance over to the next higher time frame to see, “OK, let’s see the forest for the trees. This looks really strong here, what’s my 13-minute chart telling me? Well, gee, we’re getting to a pretty extreme point in that time frame, so it’s likely that the three-minute’s going to come under some pressure, and there may be a reversal opportunity there."

It’s blending different time frames and using one with respect to another. Sometimes when you do that, you get some wonderful confirming data in multiple time frames. You may be trending up for a while and your three-minute breaks down a little bit. The trend looks like it’s violated, you break down past the 15-period moving average, and you start to approach the lower Bollinger Band, which is the low end of the trading range. You look at that and say, “We’re getting a bit extreme here. We may get a nice reactive bounce to the upside.” And then you kind of glance over to your 13-minute on a larger basis, and you see, well, lo and behold, you’ve been trending up on that and now you’ve just pulled back right to the 15-period moving average support. So you’ve got support on that time frame, and you’ve got a Bollinger Band extreme on the lower time frame; that’s a pretty strong confirming signal. That’s how I use the different time frames and indicators on each time frame.

Brice: Did you use Level II when you were trading the OTC stocks?

Don: I could go on forever about my thoughts on Level II. Obviously, it’s the biggest poker game out there. Obviously, it’s used to execute the orders. With respect to gauging strength or weakness, I vehemently do not use Level II. In other words, let’s say I’m getting an extreme overbought signal and I’m really getting a strong signal that something’s about ready to reverse, I’ll glance at Level II — let’s say it was JNPR — and all of a sudden I’m seeing these bozos putting 10,000 share bids on Island to kinda make that thing look good for the moment, most likely because they’re sitting on the ask trying to dump right into it. I will short right into that pump. Someone’s got 10,000 shares on the bid, in that case, I’ll say “OK, thank you very much. I’ll take 2000 of those.” It’s having conviction in my signals and my methodology. Most of the time I will do the exact opposite of what’s on Level II. Obviously when you look at Level II, if somebody wanted to buy 10,000 shares of XYZ, they’re not going to advertise it for the world to know. They’re going to be buying it behind the scenes on Selectnet or they’re already paring in the position and they’re likely getting ready to exit on the other side. If anything, I trade anti-Level II. You even see a little bit on the QQQs; Every now and again you see these 30,000-share bids and asks, and it’s kind of funny because it’s right at about these reversal points (laughs). I do use Island exclusively. When I want in, I want in, and when I want out, I want out.

Brice: Can you describe your Trading Platform?

Don: I use MB trading, which uses a Realtick platform. I have a very simple order-execution system. I do have Level II, and the website I have actually has screen prints. There are three monitors — the middle one has my Realtick setup. I also run QCharts/Raven. I’ve got two data feeds coming in to me, and the order-execution system is obviously part of Realtick. I’ve got a few charts. I’ve got my futures chart, my one- and three-minute, and then I have my Level II, which is pretty simple because as far as order routing goes, all I use is Island. I trade Island 99% of the time, assuming I’m trading a liquid stock or something as liquid as the triple QQQs. There’s enough trader interest and activity going on there on Island so that orders are filled instantaneously. As far as order entry goes, it's done primarily on Island. Very rarely will I go off Island. Now that I’m trading triple Qs, it is all Island. So, I never have to monkey with my trading route.

Brice: You mentioned three monitors and two data feeds. Are you on a T-1 line?

Don: Right now I’m using cable modem. I’ve not gone T-1 route. My cable modem is hubbed, so I’ve got three connections. One goes to the family PC in another part of the home, and the other two go to my trading office. I’ve got a Dell 533, which is my main trading station, and then I have a second laptop, which I use primarily to run my intraday audio feed with my group. The main trading station is made up of my Dell with one of the cable feeds, three monitors, the middle one with my Realtick platform, some charts, my order execution, and then on my left monitor the whole Ravenquote and Qcharts setup. I like their charts a little bit better and they have some chart-based alerts. They’ve got pre-market and post-market charting, which I think Realtick lacks right now. Plus I’m a big believer -- doing this professionally -- in redundancy, so I always want to have two data feeds going on at once. In this business, you lose one occasionally.

Brice: What are some of the most important lessons you’ve learned?

Don: How much time do we have?

The need to totally separate the financial implications of your trading activities from the skill. I’m a strong believer in not seeing your P&L during the day, and not seeing your intra-trade P&L while a trade is live because frankly, the market doesn’t care. The market is going to do what it does, and there are going to be signals as to what it’s likely to do at any given point -- the probability is never 100% obviously -- but there’s some likelihood that the market is going to do something, so when one starts making decisions based on his P&L, whether it’s for the day or for the trade, or whether it’s an urge that -- “Man, I need to make so much to make this work” -- totally skews the trading skill. Trading, in my view, is so much like being a professional golfer who is focused entirely on the swing and playing the hole, and what happens when you get in the rough? How do you minimize your loss? And the focus that’s required on every single stroke. If Tiger was out there thinking, “Oh, my gosh, I’m in the woods here. I gotta make a three on this, and the only way to make a three is by going through the darn tree.” He doesn’t do that. What does he do? He chips out, and he minimizes the damage, and he moves on to the next hole. He’s focused on his skill, and he’s also focused on risk management. This is no different. The other analogy I can use is like a surgeon operating on a patient. If the thought of money all of a sudden comes in, whether it’s the risk of lawsuits or how much money the physician is making for the operation, it totally detracts from the skill. You’ve got to separate the two. I went through a rough spot where, for the first time in my life, my ability to generate income was totally dependent on my trading skill. When I got back to focusing on the skill, things turned around nicely.

The other really important lesson I’ve learned is that trading is a business of probability, and the ability to generate an income over time is a collection of a lot of different trades and a lot of different days. Everyone talks about cutting their losers and letting their winners run. I believe this business is all about imperfection, meaning you’re gonna have a lot of days where you make some modest income. You’re gonna have some days where you’re pretty much really in focus, and you’re going to have some pretty decent income. You’re also going to have a lot of trades and a lot of days that don’t work out that are going to be drawdowns, and that’s OK. It should be expected, and it should be part of the business plan. There are times when the market is not conducive to the rhythm that you may trade very well. There may be technical glitches, you name it. There are going to be losses, and they should be expected and managed and budgeted. Small losses, small gains, and larger gains, and what we’re after here is some kind of average of all that which provides an income in a given week or month or year. That’s an important concept. It’s unlike any other career where one has an hourly wage or monthly salary. The income stream in this business is bursty, or spotty, meaning you’re going to have some decent days and some greater days and a lot of days that go against you, and it’s all about managing those times when you may not be in sync. That’s what provides this average over time. People who come to work in the trading world might think, “I’ve go to make this much today.” I don’t think that’s as important as over time. Look at it on a weekly basis, or a monthly basis, what do you need on average to make this work for you. Strive for that average over time. You go into a lot of these chat rooms, and I swear no one ever had a losing trade there, because nobody ever talks about it. This business is all about losing. It’s all about managing and expecting it, managing it, minimizing it, recognizing that it happens, but letting your positive results more than compensate for those activities.

So, separate the financial implications of what you’re doing from the skill itself, because it’s the skills that are going to generate the income. And recognize that the income stream is going to average out fine over time for the skilled trader.

Brice: You’re a teacher. What are some common mistakes newer traders make?

Don: Setting a price-based stop. (Imitating a trader) ”I’m buying Juniper at 50, and my stop is 49.80.“ They get in at 50, the stock moves down to 49.80, the stop gets triggered. Bang, they’re outta there. Gee, what happens? It turns and runs a point. I’m a big believer in stops, don’t get me wrong, but I’m also convinced that the only thing that should trigger a stop is a change in premise, and a change in market conditions compared to when that trade was put on. If nine market signals start lining up at 49.80, and they’re all providing some support and one just happened to mis-time it a little bit, the worst thing to do is go ahead and lock in a loss just because you’ve hit some kind of a stop amount, when everything else is lining up, and Mars is lining up with Jupiter, you know, it’s about ready to turn. That’s one mistake.

They’re trying to develop their stop skills -- it’s a skill that has to be developed; it’s incredibly important -- but in executing it, what you’ll often see is a lot of little stops all over the place.

Another mistake, a related one, is striving to be perfect. Trying to time a top or a bottom. Thinking that this is a business of one clean entry and one clean exit. I see this a lot because I teach a lot of traders. They are constantly thinking, “We’re in, we’re out. We’re in, we’re out.” That assumes that every single entry is timed really well (laughs). With all the market variables, and thousands of traders and investors and fund managers doing what they do, the market is a chaotic event. Nobody can predict the future. You can be darn certain that most of the time your timing is not going to be right on, so I’m a big believer in scaling in and out of positions to make up for that lack of precision in the market. Trying to be too precise -- that’s a mistake.

Brice: Do newer traders have a harder time getting in or getting out?

Don: I would say both. I work with a lot of traders, especially those who have come from scarring experiences. A lot of people come to me because they’ve had it everywhere else, and they really want to learn how to do it right, and some of those people have trigger lock, you know, they’re gun shy. I have several traders who for that reason won’t get in, and I also have several traders who -- because they’re being too precise -- they’re looking for every single signal to line up, when this is a business of “let’s find something that puts probability on our side, but it’s never gonna be 100%.” They won’t get in because of that.

Brice: What advice do you have for newer traders?

Don: Realize that this is a business and a profession, that like becoming a surgeon or a pro golfer or an airline pilot, it will take a lot of training and a lot of experience. I think there’s a misnomer out there that one can learn the business entirely through seminars or through rooms -- and that’s not to discount their importance at all. I think they’re a very important key in the trader’s developmental toolbox -- but it’s going to take time and experience and a lot of learning through mistakes. This business is a lot like telling a 2-year-old to not touch the hot stove, and I can tell that to a 2-year-old day after day after day, but until he or she touches it, he or she won’t realize why I said not to. Unfortunately -- I wish it weren’t this way -- most of the best lessons are learned through a little bit of pain, and the pain gets to a point where one no longer does the painful activity because it’s hurting so much. And that pain can be real financial loss, but it can also be opportunity loss, you know, “the signal’s been staring me in the face 12 times. I haven’t taken it any of those times, and 90% of the time it moves.” This is not something that can be learned in a week or a month or in six months. It’s an evolving process. I refer to it as a layering process. Every day you develop another layer, another coat. Every day you come in a better trader than you were yesterday. It’s the same thing with me; I never stop learning. Every day I learn something else. It gives me another layer, and that takes time. It really is like being a surgeon, being a pilot, being a professional athlete, where time, commitment, perseverance and mental focus are required. The concept of perseverance: The people who are going to succeed at this long term are the people who are able to get up after they’ve been knocked down and knocked down again, and knocked down again. It’s the mind-set of being able to put closure to what happened yesterday, or what happened two minutes ago, closing that off and mentally adjusting for the future.

Brice: Tell me about your service.

Don: It’s basically a virtual conference call -- a platform to interact with the traders. I’m in the guy on the audio and they’re commenting with text. I’m talking about certain chart signals -- here’s what I see is going on. Here’s what I’m looking for as the charts are emerging. Here’s what’s happening, but more importantly, here’s what I’m looking for. I do narrate occasionally to my own trading and examples. This not a “Don’s doing this, and everybody else follow.” Some I talk about live, some I talk about after the fact as good examples in the spirit of teaching. A lot of interaction during the day, a lot of questions and answers -- it’s basically a chart-interpretation/educational forum all day long.