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In this three-part series, "The Making Of A Daytrader," Todd will share with you how he entered the business and how his mentor David Floyd was instrumental in helping Todd become successful during one of the most difficult daytrading environments in history.
Click here to return to Part I
Click here for
Part III
I spoke with Todd Gordon on the
phone last week, and he was very forthcoming with the events that
transpired as he studied under Dave Floyd in the first days of his training in
Dave's San Diego office. I hope you enjoy Part II of "The Making Of A Daytrader."
-- Duke
Heberlein
Duke Heberlein: Todd, a big part of the method is following the S&P's. Talk about stocks and how they mirror the futures...
Todd Gordon: Well that's just simple. All you got to do is -- obviously you want a stock that mirrors the S&Ps. Everybody knows this. You just want the stocks with the highest S&P correlation. You just want to put as many factors in your favor as possible... you just overlay a 1-minute chart of the S&Ps and the stock. If you're trading a stock that's on its own agenda, obviously you're not putting all the probabilities in your favor. It's just that you want to make the game as easy as possible.
1-minute chart of Home Depot (HD | Quote | Chart | News | PowerRating), one of the many
stocks that highly correlate
to S&P movement that Todd will look at to spot
profitable trading opportunities.
Heberlein: OK. So basically, day one, Dave Floyd comes in. You start looking at your 1-minute charts. He introduces you to his “core” trade set-ups?
Gordon: Right. There are three or four.
Heberlein: And, as you mention in Part I, the first day you are calling out paper trades. You're seeing where you're going to get in, where you're going to get out, where you're going to sell short, where you are going to go long. Correct?
Gordon: Exactly, and the good thing is that Dave is doing his trading, he will call out all his trades. He'll say, "I'm looking to do this. I am doing this... This is what happened." And it actually works well. What he does is he makes you really concentrate and rely on him -- not only paper trading but when you start trading you are used to it -- you have one eye on him. Then what he does -- I might be getting ahead of myself... Once you've become established, then he'll get quiet... you're on your own. So he kind of weans you off of it.
Heberlein: So initially, though, when he's doing this and he's calling them out, is he having you look at the same chart?
Gordon: Usually he is. But the good thing about our style is because it's so S&P based, is you don't need to be trading the same stock. The first criterion you look at is: "What are the futures doing?" If they're set up, OK. Let's look for a stock that's just pulled back, it's no big deal. I don't know if you want to explain to readers just why the S&Ps are so important -- just because our being in the pit, if it's a big enough S&P move, it's going to pull the stocks around. I don't know if you think it's important or not. I interrupted myself... where were we?
Heberlein: You were talking about day one where he's got you looking at the chart and you're calling out trades. So after that, where do you go from that? Is that all you do on day one?
Gordon: Actually, yeah, the first two days you don't trade. The third day you go live.
Heberlein: The third day you're trading already?
Gordon: The third day, you're trading. And this is for obviously new traders in the office. The third day you're trading in one lots,
Heberlein: Just to be clear, when you say one lots...
Gordon: 100 shares.
Heberlein: I just want to clear that up for people at home.
Gordon: Yeah, so trading 100 shares to start.
Heberlein: But you're still doing the 15, 30 cent moves you're looking for, right? At this point, it's not so much to be making money at this point... it's basically just to be risking real money.
Gordon: Yeah, just to be risking real money. That's why paper trading, day trading does not work.
Heberlein: Yeah.
Gordon: It can't be done. That's why it's so important to actually be trading real money. Yeah, if you lose 15, 20 cents, $20 whatever. When you have real money on the line and you're fighting for the fill, that's where you are really going to learn.
Heberlein: I agree.
Gordon: Swing trading you can paper trade, I guess.
Heberlein: I think paper trading has its purpose for daytrading, but basically what it does is show you that you are picking the right stocks. Basically, you're right. You can't really simulate fills, so it's much more difficult. It has its place but I think you're right in that it's a lot easier to do with swing trading than it is with day trading.
Gordon: Absolutely.
Heberlein: You don't have as many problems with the fill and stuff with swing trading, particularly since usually you've got a buy stop in there and you know, the order's sitting there and when it gets traded through, your slippage usually is not much unless you get caught in a big move. If you get caught in that big a move you're usually get a pretty good profit on the first day anyway, so...
Gordon: Sure, sure.
Heberlein: OK, so you start off. You're trading 100-share lots. How long does that go on for?
Gordon:
It's all dependent on each trader's progression.
A rule of thumb is that you need to net $100 a day while trading 100 shares,
$200 a day with 200 shares. Until you can do that consistently, there is no
need to increase share size. I'm trying to remember...
I would say I made the transition within a couple weeks, I was trading
two. Nothing changes. There's nothing really that's added. Maybe another month,
you'll add 5-minute charts and that's where we introduce the
FNs (Floyd Numbers) and Dave's
KTNs (Key Technical Numbers).
That's where we draw our lines and use our support and resistance lines from.
That's a step up. That's more technical analysis for a new trader. And I think
that's about two to three months into it is when... you should be introduced to
5-minute charts. And from there your share size just doubles. What was it? I
think it goes 1, 2, 5 and then 1,000-share lots. With Dave's permission. If he
feels you're coming along at an acceptable pace, he'll say, "Why don't you step
up to 2s or 5s?" And usually it took me -- I don't know -- five, six months to
get up to 5. And then trading that for a while... When was it? Probably March,
April, May, trading died. Traded 1 lots and then when June and July came
around, just as many shares as you could possibly get.
I'll tell you the thing about Dave's style, it's so easy that really nothing has
changed since the first day that I sat down in the office. We're still doing the
same thing. It's just when you sit in front of the S&Ps, and you watch the
market, you get this feeling whether the risk/reward is there for the move and
whether this move is going to take you to the next level, you know, if you're
going to break support or resistance. That's when you know to get in. But if
you're just not feeling it, you know to stay out. But other than that, you
really don't add a lot to your trading style. It's basically what
HVT is.
Heberlein: So basically, you're looking at a minimum of two, three months before you're trading any kind of size at all.
Gordon: Right.
Heberlein: What kind of criteria does Dave use to grade that new trader as to when to move or not? Is it percentage of trades that are profitable or... does he kind of get a feeling for each individual?
Gordon: Dave looks for obviously natural progression as a trader, but the desire to progress must be eating away at that particular trader. He must be foaming at the mouth yet have the proper mindset and Dave will set you loose.
Heberlein: I see. So that's basically it. Once you nail it down and you get going, then you're basically trading whatever size you're comfortable with... and...
Gordon: Right. Once Dave has his confidence in you, you can go... He encourages you and he actually comes down on you if you don't trade large enough size. Which I think, I mean that's showing a lot of confidence in us traders. Just to go back... the biggest thing is just psychology. Dave likes to bring athletes in the office. He likes people who at one point, in college or whatever, were involved in individual or team athletics.
Heberlein: You mean as far as hiring traders?
Gordon: Hiring traders. He likes people that are ex-athletes. Lots of successful traders I know were at one time athletes... you learn a certain mind set in sports. The outcome is strictly dependent on your actions. You can't blame anyone else. I was a was Division One ski racer in college, talk about a sport where you deal with your own deamons; another guy was a tennis player... just single athlete sports, you just learn...
Heberlein: So he likes more individual sports guys?
Gordon: He likes individual sports... right. You can't blame the point guard, or...
Heberlein: I understand.
Gordon: He likes that a lot and I certainly agree. It's like trading in the last two months, June and July, it felt like I was back in ski racing again. I felt like I was at the top of the course again and you've just got to go absolutely nuts. You've just got to step up and trade with no fear. Trade smart but trade fearlessly. A few of those 400 point up days in July where just fierce bear market rallies. I recognized the opportunities and stepped up. A few trades I recall I put in orders for ridiculous amounts of stock, all the stock the specialist wanted to give me,…I wanted to be on board that move that much, that’s conviction. I
Heberlein: I can kind of see where he gets that because there's just a competitive aspect to sports that translates really well to trading. Especially when there's all of us little guys here competing with the Goldman Sachs's and the Smith Barneys...
Gordon: Sure.
Heberlein: So I definitely understand that.
Gordon: You got to have a certain attitude and you've got to be able to take a couple of lumps and you've got to be able to walk away and say, "I can still show my face in the office."
Heberlein: Yeah, it's like two small losses, being down by two runs in a game in the second or third inning. It's not over. You've still got a lot of game left...
Gordon: Exactly, or like a bobble half way through a ski race, you don’t give up and ski off course, you bear down and get after it.
Heberlein: Well, good. I don't think I have anything else...
Gordon: I'm trying to think what else I can tell you...
Heberlein: I think most people think that the training at a proprietary firm is just like this real exhausting, extensive thing where you're like not trading for six months. I think every place is pretty similar in the fact -- and I was surprised by this too -- that even though you might trade small for three or four months, they want you trading pretty soon.
Gordon: They want you trading.
Heberlein: They get you prepared for the first two days or a week or whatever, but then they want you trading -- because that's where you really see who is going to make it and who is not.
Gordon:
Absolutely. And it's pretty evident. One guy was just scared to death -- the one
guy who didn't make it. He was just scared to death to lose 20 cents on 100
shares. You know that he just doesn't have the mentality.
But back to the simplicity -- I was thinking about that. I know a lot of people
are going to read this and just blow it off. How can a methodology so simple
make money?
Dave has been around several traders over the years, and he has noticed one
specific pattern, traders who are always on a quest for the latest and greatest
system, have a system that is too complex or 100% mechanical, never make money
consistently. Trading is based on human emotions, not sterile inputs and
outputs. The people who are in there making money every day -- and
making the biggest money in the office -- are doing the same thing, day after
day, not looking for a new system. Trading is not hard. It's just psychology.
You can't systematize human psychology.
Heberlein: Right. I know Mark Douglas would agree with you. I don't know if you heard our interview...
Gordon: Oh, I know. I study him like it's my job.
Heberlein: You're exactly right. All the indicators in the world are not going to help you psychologically when you have to pull the trigger, when you have to manage that trade that you are in.
Gordon: Would you say that some of the best traders in the world are probably standing in the pit and they don't have any...
Heberlein: Right. They don't have anything... they can look at the order flow and see what's going on. They don't know anything -- or want to know -- about technical analysis. They don't know what a stochastic is, or MACD. They're just trading off order flow and the ones that have survived... they've been there long enough to know what's going on, just based on the order flow.
Gordon: Right, right. And that's actually what I'm trying get at... what I was trying to say earlier. You just have a feeling. You see how the market is moving and you have a feeling that this next move is going to carry you to the next level. So... yeah, but I think that's the biggest point. I mean the three guys in the office who are making the most money have been doing the same thing day after day, not with a different system every week. They find something and stick with it.
Heberlein: That's a really good point you make because I think everyone who is successful has to decide what kind of trader you're going to be. I mean you guys are trend traders, you're momentum trend traders. There are other guys who make money trading reversals. But you have to decide, you know: Are you going to be a trend trader? Are you going to be a reversal trader? Are you going to be a breakout trader?
Flip-flopping back and forth... if you're a breakout trader one day, if you're a trend trader another day, it's really hard to get consistent results.
Gordon: Right.
Heberlein: That's a really good point you make, I think. I think everybody on the site -- they may have different styles but their disciplines... they are very consistent day after day, whether it's Kevin Haggerty, whether it's Larry... they're not flip-flopping back and forth and being trend traders one day and breakout traders another day.
Gordon: Right. I mean Lewis Borsellino is probably not going to suddenly trade copper if the S&P pit dies!
Heberlein: Thanks, Todd.
Gordon: My pleasure!
Click here to return to Part I
Click here for
Part III
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