Looking back at that time, I was really just lucky. I didn't know anything more about the markets than anyone else. What I should have done differently with my time was study other great traders, and learn during that period instead of just trading with such little knowledge.

Eddie: What were your early experiences when you first started trading. What did you learn?

Steven: Really my whole strategy was based on momentum, but I really couldn’t even define my strategy at the time I was trading it. In hindsight, I looked for the most volatile stocks, and after the stock had a volatility contraction-I would wait for volatility to explode again, and when the stock started moving-I would buy. I would exit when the stock started consolidating again. This worked great in the late 90’s. But this strategy was really flawed in several ways. First, and most importantly, I did not manage risk. As a matter of fact, I didn’t even think about risk-let alone manage it. I bought as much as I could, not thinking of the consequences if things didn’t go my way. Secondly, stocks don’t trend as well as they did during that time in the late 90’s--so that strategy worked because it worked for that market which really was an anomaly. But, honestly, if you don’t control your risk, I don’t believe that any strategy will work even if the strategy is extremely robust. Who knows maybe if I quantified the strategy that I used back then and applied the money management principles I use now. It may work well.

Eddie: What strategies were you trying to apply when you first started trading? Looking back on it, do you think those strategies were flawed? If so, in what way?

Steven: I have really evolved through multiple trading strategies, and although I don’t currently trade any of the strategies that I’ve used before, my experience with each strategy is incorporated into the way I analyze the markets now.

Eddie: Over the years, what other types of trading strategies have you used, but then discarded because they either didn't work, or didn't fit your personality?

Steven: Now, in all fairness, my trading success really started when I began focusing on money management and risk control. So, I’m not really sure if the prior strategies that I traded were the problem or the way that I managed my account at the time.

Anyway, after losing a huge amount of money with my momentum strategy. I began studying all of William O’Neil’s books and I subscribed to Investor’s Business Daily. I liked the concept, but I was finding trades 2-3 times per week. I was voracious about looking at charts and numbers in the paper. Well, I just couldn’t resist taking every trade that I found, and I felt that I would be safe taking all of these trades because O’Neill teaches money management and the use of stops. I felt that by just using stops, I really couldn’t lose too much money. I quickly found out what happens to your account when you compound 8% losses. You lose your capital very quickly. But, I was beginning to learn the importance of money management and the importance of capital preservation. Overall though, his style just didn’t fit my personality. It was too subjective, if you look closely enough you can find a lot stocks that fit his criteria--so then I was left with the subjective questions of what stocks to buy and I didn’t like that subjectivity. Also, although he writes about the appropriate time to exit, ultimately it is somewhat subjective--which just didn’t work well for me.

I later turned my attention to just pure technical trading, and I was following the recommendations of Gary Smith on Real Money. This was really another poor strategy--following someone else. You never know what is in that person’s head. You don’t understand their exit strategy, their uncle point, or their exact time frame. I really believe that just blindly following someone without a passionate understanding of their methodology to the point that is your own, doesn’t work. So, I started reading several books on the technical trading to make technical analysis “my own” strategy. For whatever reason, I found that I seemed to be good at the entries, but I could not be consistently successful with my exits. As technical as technical trading is--it also seemed too subjective. I could draw trendlines and patterns to fit the same chart in multiple different ways. We have a similar concept to this in medicine--you can use physiology to explain anything. What this means is that using a basic understanding of physiology, I could explain the same disease process in multiple different ways-even though there really is only one right way. This is how I think about advanced technical analysis-I could draw lots of different patterns on the chart to explain to you what I want you to see. Don’t get me wrong, I do think that there is value to technical analysis, but it is much harder than it appears when you first start learning it.

I eventually dropped these methodologies and went for a more, what I call, a statistical approach to the markets.

"...During those three years of residency,
I turned my small roughly $10,000 account into $500,000..."

Eddie: Did you ever get to a point where you thought seriously about giving up trading? If so, what made you determined to stick it out?

Steven: For some reason, I never felt that I would quit trading. The primary reason was that I kept reading about people who were successful at trading. And, if it was possible for someone else, I knew that it was possible for me. My parents have always taught me to never give up. So despite my early failures, I did what I always do, I continued to study as much as I could about trading and the markets.

Eddie: What do you think was the turning point in your development as a trader? What was that defining moment that enable you to get to where you are now confident that you can trade for a living at some point in the future?

Steven: I can’t say that there was one day that made me feel confident as a trader. I think that if you have one day that makes you feel that you finally got it (trading). You're probably not there. I think I really am still building my confidence as a trader. I feel that being too confident is always a recipe for failure especially in this game. But, I’ve built my confidence by looking at my account on a monthly basis and seeing a large volume of overall trades with a high percentage (75+%) of them being successful with relatively small losses from the losers. But, even more importantly, my performance measures have stayed fairly consistent even in different market environments. To make a baseball analogy, hitting a lot of singles in a lot of different games against a lot of different pitchers.

Eddie: Something I've seen before is where traders go through painful cycle of blowing out their account, saving up some funds, trading again and then blowing it out again. And this repeats itself over and over gain until either you "figure it out" and achieve some level of success? Or you discover that trading is simply not for you and you give it up. Did this ever happen to you?

Steven: Heck yeah, I think that you have to go to rock bottom at least one time to really understand risk--and know what it can do to you. During those three years of residency, I turned my small roughly $10,000 account into $500,000. It then took me about a year and a half to take my account from $500,000 down to $15,000. And, as I tried different strategies, I would continue to overexpose myself (from a risk standpoint) even though I didn’t have any consistency in my trading. I would then lose more money, and then fund my account again, and again, and again. All the while, I would just keep reading anything I could get my hands on, I began keeping a trading journal-and I would look at what I was doing wrong. I was always interested in statistics so I would analyze my account-sometimes it was a nightmare.

Eddie: Everybody knows there is probably a disproportionate percentage of doctors and surgeons who trade. Do you happen to know a few? If so, can you share with us what you know about their trading styles and relative levels of success? Also, what kinds of common themes do you see among your doctor friends in their trading experiences?

Steven: I know several doctors who trade stocks. As a matter of fact, one of the attendings (senior physician) at my residency program was an avid trader. He strictly used a covered call strategy. He actually did extremely well as far as I know. He never used margin and always bought more stock with the proceeds from the sale of his calls. He was really just building a huge portfolio. His trading style didn’t exactly fit me, but it worked well for him. I am also very close friends with two other doctors who trade, and I know several other doctors not as well who trade also. The biggest theme that I see with doctors is that they are reckless. They take on huge risks with little knowledge and try to hit it out of the park with one big winner. On a few occasions I’ve explained that you really just want a lot of small winners, and other doctors have looked at me like I was crazy with responses like, “you’ve got to buy 5000 shares so that it makes a difference.” I’m sure that it eventually makes a difference for most of them because most of them end up not talking about trading anymore, and begin to say things like, “I’m not into that (trading) anymore, I just have a broker take care of that for me now.” Overall, my experience has been that doctors as a group are not good traders.

"...The lesson is that when you are afraid to tell people what you are doing in the markets--you’re doing the wrong thing..."

Eddie: Do you see anything about the similar about the process of being successful at what you do as a physician and what you do as a trader? Has being a doctor and having the mindset of a doctor helped you in your trading? Or has it hindered you in some way?

Steven: Absolutely, one of the main skills about being an emergency physician is filtering out noise (lots of patients, long waits, lots of people demanding your attention) and knowing who the few sick patients are in the emergency department amongst an entire department full of people. In trading, there is also a high stress environment with a lot going on and you must see the few trades that have an edge amongst a whole sea of data bombardment. Both jobs really get much simpler when you realize that there are really only a couple of issues that are critically important despite their being a lot of other stimuli.

Additionally, medical training helped me with trading because it built my confidence in terms of what I could do and learn. After going through medical school, I figured out that one has the ability to learn incredible amounts of information in a short time. So, when it came to trading, I figured that I should put as much time into studying the markets, trading ideology, and traders, as I did into learning medicine.

Eddie: How do you juggle trading while at the same time being a full time physician?

Steven: This really is a tough one, and it’s very difficult sometimes. The real answer here is passion. I’m passionate about medicine and about trading so I make it work. For the most part, I work at night and often on the weekends. When I get home from a night shift, I usually watch the market open-and make sure that trades that I may have put on the night before go through as planned. I then usually go to sleep and set my alarm for 12:15 PT-to see if there are any trades that I want to exit or enter. When I’m done placing trades near the close, I usually go back to bed for a few hours and get ready for work. So the answer is... generally market hours are when I’m off work (which is during the middle of the night (sleep time) in terms of my schedule).

Eddie: Without naming an names, do you have any interesting or funny stories about you or anybody else you know who is a doctor, but who also trades?

Steven: Of course... I have two very close friends Amit and Christopher that I went to medical school with that became traders who unfortunately aren’t trading anymore because they needed the money for other projects. But, we use to have a rule between the three of us, that if you do something in your account that you are afraid to tell either of the other two friends about--you should get out of the position. In other words, it usually means that you are doing something irrational if you are afraid to tell your friends about it. Well, for some reason, two of us would always know if the third trader was hiding something just by the way they were talking. Well, one time Christopher was really talking up Krispy Cream Doughnuts in 2001. He clearly was too into these doughnuts. So Amit and I would keep asking him, “what did you do with KKD?” And, he kept telling us that he had a small position, but we knew better, so we kept asking and he kept his mouth shut. Well, that month as expiration month came to a close, he shared with us his little secret, which he basically filled his account with out of the money KKD calls and it pretty much wiped out most of his account. The lesson is that when you are afraid to tell people what you are doing in the markets--you’re doing the wrong thing. It’s a good litmus test.

Eddie: When you are at work, do you think about trading?

Steven: When I am at work, I think about patients. I’ve now designed my trading strategy so that I place trades at the end of the trading day when I’m not working. So I really don’t think about trading while at work. I really like it better that way. I want to be good at what I’m doing so I need to have my attention there.

Eddie: What is your schedule like? Can you give us a snapshot of what the day is like for you for you. I.E. What's your regular work schedule? When do you have time to do your nightly research? When do you place your orders? How do you have time for a regular family life?

Steven: I work in the evening or overnight. If I work in the evening, I do my trades at the close of the market between 12:30pm and 1:00pm. I then eat lunch and leave for work at around 2:00pm to get to work at 3:30pm. I stay at work until around 1:30am and get home at approximately 2:30am. At that time I will look at charts until around 3:30am-4:00am. I generally don’t do screens because I like to look at each chart individually; it gives me a better feel for the market. I look at about 100-150 charts. I then enter orders. Often, I get up at 6:30am to make sure that there are no problems with my executions. I then go back to bed at around 7:30am, and then wake up at 12:30pm and do the same thing all over again.

Because I have an erratic schedule--I also have a lot of weekdays off, and some flexibility in the number of days that I work in a month. So, when I’m off--this is all moot.

In terms of a regular family life, my wife is still doing her residency and I primarily work nights. Therefore, we only see each other about 3 times per week. We don’t want it this way, but for right now it works.

Eddie: How do you stay in touch with the markets while you're out in the field? Do you ever call for quotes or do you have a handheld device that tracks your position or something like that?

Steven: Actually, this has been one of my biggest frustrations for me until recently. I really don’t need a device like this when I’m at work. But when I leave work in the morning, I often want to check my orders. Or sometimes, I have administrative meetings at the hospital in the day time, and I want to place orders at the end of the day. I recently bought a Verizon EV-DO card for my laptop. It works great. I now get high speed Internet whenever I need it. Sometimes, I even pull over in my car if it’s around 12:30pm PT because I couldn’t get home in time for the market close.

Eddie: What kind of technology do you use? Can you give us a description of your platform?

Steven: I really don’t have anything too complicated. I use an 15” Apple Powerbook G4 without and external monitor. That’s it. I’m sort of a simpleton. I believe that it’s not the equipment that makes you good--it’s you. But, I will say that an external monitor would probably make a huge difference. I’m constantly switching between my trading platform, and my charting program on the screen.

In terms of trading, I trade through Interactive Brokers--they are incredible. In terms of charting, I use Prophet.net. I also use Virtual PC for to access TC NET, but I really use it only once per week for one particular strategy that I trade. Unfortunately, I’m going to have to upgrade soon because I want to start doing some more complex analysis--I’ve sort of prided myself on trading with such a simple set up.

Eddie: What's the biggest mistake you ever made in your trading?

Steven: Where should we start? Well, I have two kinds of mistakes. One is that I just enter the wrong thing because sometimes I’m just tired...a stop instead of a limit, or the wrong price. I just did one of those yesterday. But, those are mere accidents. I’d like to get rid of them, but it’s just part of it.

In terms of consciously making a mistake, the entire time I traded without aggressive position size management for risk control. Period. I believe that risk control affects performance dramatically.

Eddie: What's the biggest success or winning trade that you ever had?

Steven: I can give you a story that impressed me at the time in terms of dollars, but in terms of trading skills is irrelevant. During the 2000 run up, I had 1000 shares of Qualcomm the day it went up 100 points. I believe that was my biggest trade gain, but who cares? It just sounds exciting. My personal biggest success is that I trade one strategy that originated from TradingMarkets, but that I have modified, that I have never had a loser with. I believe that I’ve been trading it for over a year. I don’t know how much money I’ve made doing it--but those are the kinds of things that impress me now. Everything is scalable, so I care more about performance statistics of a strategy... not whether someone made $1 or $1,000,000 with their particular strategy.

"...If I could generate enough money from trading, I would like to spend a lot of time
with my wife practicing medicine in developing countries..."

Eddie: Now let's talk about your current trading strategies.

Steven: OK

Eddie: Who are you heroes and/or mentors?

Steven: From a personal development standpoint, my family. My brother, Anthony really taught me how to look at numbers; he is really a phenomenally intelligent person. He is also very self-less and giving. So, in terms of heroes, he is really the one I think of. I could really go on and on about him. Of course my parents instilled in me an incredible sense of confidence. And, my wife, Zena. She is amazing. She is so supportive of my interests and education because she knows that I really enjoy all of this. I’m constantly educating myself and interrupting the little home life we have with my continued work on improving myself as a trader.

In terms of traders, there are really two traders who have influenced me. First is Larry Connors. Whenever I read about trading, I would always save the data that was in his articles. I was constantly frustrated with traders who would write advice and not back it up with statistical data. How often does it work? What’s the draw down? Average win? Average Loss? As soon as I read any of Larry’s work, I knew that he was looking for a quantitative approach to the markets, which is exactly where I felt market literature should be going. I believe that, “How Markets Really Work” is the best stock book ever written.

This leads me to another trading inspiration for me, Ed Seykota who is also a systematic trader, but seems to have a spiritual angle to trading. He really is ground breaking in terms of applying mathematical systems to the markets.

Eddie: If you were to someone just starting out as a trader came to your for advice, what would you tell him?

Steven: Get a mentor, someone who can help you. One of my biggest mistakes was trying to re-invent the wheel. I read and I studied, but you can’t get inside someone’s head easily from reading their articles. I think that you need someone to talk to who has already done what you are trying to do.

Eddie: Let's now talk about systems and strategies. What type of systems and strategies work best for you? Where have you seen the greatest success?

Steven: I basically trade reversion-to-the-mean strategies. All of my strategies look for short term market inefficiencies to correct themselves. Whenever an individual stock, moves counter to its trend by more than a couple of standard deviations--it is usually an aberration and the market generally fixes that. I look for those situations and buy into those inefficiencies, and get out when the market “rights” itself. I believe that the market is long-term efficient and short-term inefficient. I use a similar approach to the indexes as well as individual stocks. I see the most success on stocks that are already trending well, using the same strategy. This is my trading methodology.

I also use a position strategy, which I believe has an equal effect on account performance as the entries and exits themselves. It is how you put the whole portfolio together. Generally, I use in-the-money front money options for my positions, options reduce risk, and they give me leverage. I use a position strategy that is based on my account size and the volatility of the individual position that I’m taking. I risk between 1-2% of my account value per position. That does not mean that the position size is 1-2% of my account value. I evaluate the volatility and swing moves of the position that I’m taking, and based on the swing moves--I determine roughly what my risk will be in a 7-10 day period (barring any freakish news). I then buy the number of contracts that if the stock moved in its full swing move (meaning high to low over about a 7-10 day period) against me--that the point loss multiplied by the number of contracts would be about 1% of my account value. This basically means that my position size is determined not by how much the position costs, but by how volatile the position is relative to my total account value. I really want to stress how important this aspect of my trading is, and I think should be for everyone who is serious about the markets.

Eddie: Can you give us your definition of what systematic trading is?

Steven: Systematic trading essentially answers the questions that a trader has before any decision that he or she makes. It mechanizes your approach to the markets. The system should tell you what markets you can trade with the system, when to get in, when to exit, and your position sizing. Ironically though, I do believe that even despite using a system, that systems trading is still ultimately discretionary. The trader still decides how much risk to take on, and the allocation of risk towards different systems and individual components within systems. This allocation of risk that is discretionary has tremendous impact on your performance. For instance, I know a trader who is essentially trading the same systems that I am, and has less than 1/2 of my annual performance. I am not saying that I am better than him; in another year, he may have double my annual performance. I’m just trying to point out that even if you trade the same systems as another trader that you can have different outcomes.

Eddie: With all the advertising you see with people making claims about system performance, what criteria do you use to determine whether a system is good or not?

Steven: This is very difficult, but what I usually look for is the volatility of the performance of the system over a period of time. What you want to see is for a system to perform relatively well, and somewhat similarly each year (taking into account overall market performance) over let’s say 10 years or more. In other words, if you see a system that averages 40% per year, does it make about 40% every year or does it have a few great years and a bunch of weak years?” I also look at the average performance of the system relative to the markets performance. Meaning if there is still variability between years in terms of absolute percentage gains can you explain this variability by the markets annual performance. If the system is performing at 20% better than the market each year--that is also consistency. Next, I really look at drawdowns. How long and by how much did the system drawdown before it came back to break even? This really effects how much risk you can allocate towards the system. Because even though a system may have an average of 100% a year gains, if the system has had a 75% drawdown. I would never allocate more than let’s say 10-15% of my account value towards that system. It becomes harder to incorporate and possibly not worth it. These are really the main things that I look at. I will say though that if a system looks too good to be true--take a look, maybe it really is that good, or maybe you can extract some information from that system that may be helpful for another methodology that you are trading.

Eddie: How do you protect yourself from acquiring a system that has been over-optimized? Are there any rules of thumb you can use to avoid curve-fitted systems?

Steven: Two things that I look for are 1) if there are too many rules that are about what positions qualify (not about position sizing or add-ons), I think that is a bad sign. I think over about 6, I would start to get worried. It only makes sense. Imagine if you made a system and it worked most of the time. Then you start adding rules until the performance data looks great--that is how systems become over optimized. 2) If there are any strange rules in there, such as, “never take trades in October”--that is something that the creator just put in to make his/her numbers look better. Be aware of these two things.

Eddie: Do you ever get tempted to second guess your system and overrule a decision that has been made by the rules?

Steven: At times I do get tempted to over-ride the system, but very, very rarely. Once in a while, if you understand the essence of the system, you can see that a position just barely didn’t make a cutoff requirement--in rare instances I will still execute the trade especially if I know that I may not be able to conveniently be at my computer on the next trading day.

Eddie: Can you imagine having to overrule your system if there is every a major world event that has major repercussions in the marketplace?

Steven: This is something that I have really thought of. What would happen in this scenario is that I wouldn’t be over-riding my system; the market would intrinsically be over-riding my system of position sizing. Let me explain. I choose my position size based on the recent volatility of the equity. If suddenly there was a massive explosion in the volatility of the positions, I would essentially have a bunch of positions that were way too big. So, the answer is that if there was a sudden swing in volatility that was so large that most of my positions became 1.5-2.0 times too big, I would right my account, adjust exposure to the appropriate size and continue trading my systems. But, I do want to point out that I don’t think that one’s daily trading strategy should be based on protecting yourself from these once-a-decade market moves. I think that you should be aware of what you will do, but you can’t paralyze your daily trading activity waiting for a disaster (a few people have asked me about this).

Eddie: Do you think it's possible that the systems you use will ever lose their edge? If so, what safeguards do you take to minimize the damage that a string of consecutive losses might cause?

Steven: Yes, I am concerned that any system I trade will lose its edge. The question is, how do you know when that happens? Is it after 1 year, 2 years, or is after a percentage loss 30%, 40%? I’ve decided that once a system performs at a level 2 standard deviations below its mean performance, it is very suspect. That should only happen by random chance 2.5% of the time. So, if it performs 2 standard deviations below the mean for 1 year, I will allocate 1/2 of my account risk that I was giving that system the prior year (so reduce exposure to that system). If the system performs in that range again, I would abandon the system. I will move on.

Eddie: What sort of money management strategy do you follow? You trade so many different types of vehicles. How do you determine what the maximum position size is and what the maximum portfolio risk is?

Steven: The way I try to control for this is in my account (because it will happen) is by trading multiple different systems each with only a certain amount of risk allocated to each system. So when one system starts to fail, hopefully the others will continue to perform well. Another criteria, I look for in a system, is how it performs relative to other systems I trade. Meaning, I want the systems to be out of phase with each other. When one is doing poorly, they all shouldn’t be doing poorly, at least historically.

Eddie: How do you relieve stress? What kinds of outside activities, if any, do you enjoy outside your work and trading?

Steven: During my free time, I like to spend time with my family. I also love to surf, run, swim and travel. All of these things really relax me.

"...Giving yourself to people and making an impact in someone's life is the ultimate rush..."

Eddie: What's your long-term plan as a trader? I heard that you want to trade full-time and help Third World countries.

Steven: I love medicine and I love the markets. I would like to separate medicine from money as much as I can. If I could generate enough money from trading, I would like to spend a lot of time with my wife practicing medicine in developing countries. There is something wonderful about the idea of practicing medicine with less importance on billing/legal issues. Right now these issues are important to me because I support myself with my profession. But I’d like to move in a direction where I could support myself more from my trading and do medicine just to help others. My wife feels the same.

Eddie: How will you know when the time is right to quit your job so that you can trade full-time?

Steven: I don't ever see myself giving up medicine - the glory of life for me is not just making money...yes, I love the markets - I love the mathematical puzzles of the markets and the daily challenges it brings, and if it makes me rich, great! But the real glory for me is when I make a real connection with another human being - and being an emergency physician gives me a unique opportunity to help people in their most vulnerable states and I love helping people in these moments. Giving yourself to people and making an impact in someone's life is the ultimate rush. The market is, in a way, just the little boy in me who is really very passionate about mastering "The Great Game."

Eddie: Steve, we could probably go for another five hours, but I know you have to get some sleep. I want to thank you for joining us today!