TraderTalk Workshop: What It Takes To Make A Living Trading The QQQs, Part 1

This is Part 1 an edited transcript of the live audio TraderTalk workshop held for TM subscribers by QQQ trader Don Miller and Eddie Kwong, on Thursday March 21, 2002. Click here for the audio version. Click here for Part 2.

Eddie Kwong: I have with me Don Miller who is going to share with us how he trades the QQQs for a living. How are you doing, Don?

Don Miller: Very good. How are you doing, Eddie?

Kwong: Great! Don, let's talk about your background prior to when you started trading. From what I understand, you didn't exactly start out on Wall Street, right?

Miller: No, I didn't. I have an accounting degree so I've always been around the financial industry, but from a different angle. I am a Certified Management Accountant (the private industry equivalent of a CPA) and basically I worked my way up through the corporate ranks in a number of positions starting in the financial area -- accounting, finance, budgeting, things like that. Eventually I was overseeing a division for a major telephone company in the Midwest. That was my former life. It seems light years ago.

Kwong: Well, somehow today you are doing something completely different -- you trade the QQQs full time for a living. Tell me, what gave you the itch to become a trader full time?

Miller: Well, I think it was a few things. First of all, the number part of the business -- again, probably because that's how my brain works -- was certainly intriguing. Even more so than that, I was looking for -- "the ultimate entrepreneurial experience." What I mean by that is I wanted to have a bit more freedom. I wanted to get out of the "corporate rat race." I hate to say it because had a very good position and was compensated very well... but something was missing. The challenge that wasn't there. I've been lucky enough and blessed enough in my life to have accomplished quite a few things at a relatively young age and kind of got to a point where I looked around and said, "Gee, is this it?"

When trading really started going more online and off Street, I realized that there were opportunities to profit -- to generate business-like profits on a fairly short-term basis, much like running any other business. It was really that and a desire for some freedom and independence that got me into it. When I started I was able, Eddie, for the longest time, to be able to trade based on the time zone I was in, I could trade opens and I got fairly good at that and developed a record that was consistent enough and profitable enough for me to consider making a pretty big leap.

Later we'll talk a little bit about the one bump I had -- but that's how I got to the point. It was not a "Mr. Binky" decision (if you remember the old Ameritrade commercial). It was documented success and then making a very conscious decision to pursue something that was not only intriguing from an independence perspective -- but it was also challenging. It was something that I knew right away would challenge me, not only when I first made the change but every single day after, and even after the skills were acquired.

Kwong: Let's go a little deeper into that. Did you just start dipping your feet into it gradually and find yourself experiencing some success and decide to transition into it gradually? Or did you just tell your wife, "Hey, tomorrow I'm going to become a full time daytrader!" How exactly did that come about?

Miller: Well, it's interesting because I remember at the time and I remember discussions with my spouse. I know there was a time -- where there was about a year's worth of real consistent performance -- and when I looked at the numbers and I looked at what I was earning in my corporate life, I was convinced that I could at least retain what I was bringing in before and then that left only possible upside beyond that. So I felt I could make the switch from a cash-flow perspective. But there were a couple of times where I waited. I felt that I wanted to make the change but yet I waited. I wanted a few more months worth of data. When I finally made the change, I had enough comfort and enough evidence, if you will, to go ahead and do that. That first month was rough, let me tell you!

Kwong: You had the confidence and the confidence was built up after you had some performance just trading part-time. Nevertheless, it was probably a bit of a challenge, was it not, convincing other members of your family? You know, convincing your in-laws?

Miller: Yes, especially at this time when this whole (I hate this term "daytrader" but I'll use it for the point of discussion) daytrading was just getting a terrible rap -- you know, they were kidding that all these people were going to leave their jobs and go do this thing -- and here this hopefully somewhat sane executive is making the decision. You know, I was very fortunate that I had a very supportive spouse and family from day one in everything that I've done -- my wife was very supportive. We knew the risks going in.

I also felt though that my fallback scenario, frankly, was that if this never turned out, I could get back into the telecom industry, which was an industry I had worked in. There were fallback plans in place. I mean I had cash reserves built up, I had a fallback plan and this, again, was not a knee-jerk and so the numbers were there and it really wasn't that difficult a decision. It's one of those things where if I'm going to pursue this and I'm going to get better at it, I've got to apply myself full time and let's make the cut here.

Kwong: That's interesting. Just as you place stops when you put on a trade -- you put a stop on this whole career change here.

Miller: That's exactly right. It's just like a trade. You put yourself in position where if the potential is there, you are able to take advantage of it, in terms of upside. That's a great way of looking at it.

Kwong: Tell me about that first month.

Miller: Do I have to? (Laughs)

Kwong: Yeah! We talked about this before the whole workshop began -- you're going to tell me about that first month.

Miller: Well, suffice it to say that a lot of things changed that first month. The biggest change psychologically was that all of a sudden I was needing to put bread on the table. I was now looking to this not as supplemental income, not as "Oh gee, let's try this," and "Oh, we're doing really well for a period of time but I still have a corporate job." This was it. That pressure, if you will, a different way of looking at the business, coupled with now being in front of monitors and the market really, for a good six and a half hours each day, as compared to maybe one or two... where I had previously just traded opens and had some methods in place that were working pretty well from a probability basis... Everything went haywire.

It's a month, Eddie, that tested the depths of my soul if you will, because here's a string of things that happened, basically: I stopped doing what worked and I started experimenting. I started doing everything that I would teach now people not to do, things I would never ever think of doing now. For some reason, because the pressure was there, I over-traded, I blew stops, I doubled down, I traded IPOs, I mean, you name it. When you think of "Don Miller" and some of those things, you'd say there's here's no way I would do that -- yet in that first month that happened, and I gave away -- it was in May of that year -- I gave away 75% of the profit that I generated from January through April -- in four trading days.

Kwong: Hmm.

Miller: And so here I was in a position. Not only did I not have income coming in, but I had negative income.

Kwong: That must have made such a big impression on you that perhaps it was that emotional extreme you went through that was the catalyst for your turnaround.

Miller: That, and I got some wonderful advice from someone I greatly respect in the industry and the advice was this (and this was after my worst day)... he asked me, "Do you know what you did wrong?" I said, "Well that's pretty easy. I can name four things right off the bat." He said, "What I want you to do is I want you to write that down on a piece of paper." This was on a Friday.

He said, "I want you to write everything down and I want you to put that in your pocket and I want it to burn a hole in your pocket all weekend long. I want you to think about that every single hour of that weekend. You are going to have the worst weekend you've ever had in your life. And you are going to feel the pain." And I did that.

I didn't know it at the time. I kind of knew what he was getting at but I didn't know at the time. He said, "When you come back, I guarantee you -- I can't say you'll never do any of those things again -- but I guarantee you that you will keep them to a bare minimum down the road." And that, coupled with the strength of my family, the strength of my faith, got me through a very, very rough time and that's what led to the subsequent streak that we referenced a few times. It's not that I planned it that way at all, it's just OK, I don't like to lose. I had proven I could do it before. I had to get back and just let time do its thing.

Kwong: Now you say you wrote these things on a piece of paper and you put 'em in your pocket?

Miller: Yep.

Kwong: Do you still have that piece of paper?

Miller: Uh, I don't know.

Kwong: I'm curious because everybody is wondering... I'm wondering what were the mistakes that you made -- and you mentioned a few of them briefly -- what are the things that I, as a trader -- and all the listening audience -- what are the things that we are supposed to avoid doing? Tell me right now.

Miller: 1. Cut your stops. 2. Don't double down on a losing position. 3. Don't hold overnight. (I'm talking about an intraday trading account -- I'm not talking about a swing trading account.) 4. Don't trade IPOs.

Basically, don't trade anything where you can't manage your risk -- because this business is more about managing risk and cutting losses than it is about gains. Had I -- on the worst trade of all of what happened during that stretch -- had I either not blown my stop or -- even if I had blown my stop -- if I had not given up.

If I'd just said, "OK, that happened. I can't do anything about it. I'm getting a re-entry trigger in the same direction. Instead of just closing up shop and leaving for the day. In that case I was short a stock that had run against me. I blew my stop. I got ticked off. I closed everything up. Had I just re-entered at an appropriate point in time, what was a huge loss would have turned out to be a gain.

So that has taught me over the years, Eddie, to make sure that whatever happened in the past, yesterday, last month, whatever happened the last trade... has no bearing on your next move. I don't care if your system went down and you lost 20,000... it has no bearing on the next move. It's a mental state of closure that I was taught through that lesson that I'll tell you, sticks with me to this day.

Kwong: One more question before we get into the strategies. Is your lifestyle as a full time trader everything you expected it to be? Is it what you've always wanted? Are there negative things about it that you did not anticipate -- or positives that are just icing on the cake for you?

Miller: Well, what's interesting... I've never thought about it in those terms, but you know in terms of the independence and the freedom, I probably have less independence than I expected I would have because I enjoy what I do so much. I find it so stimulating -- not exciting, (but) stimulating, challenging -- and it's a business I love being around. I have a tendency just because of my personality to probably do too much market-oriented stuff and not get away from things. I've done this to gain the freedom -- now I find I have the freedom...

Kwong: I know. You and I have exchanged e-mails late at night so I know that you are still behind the computer.

Miller: But in terms of the entrepreneurial experience, you're everything from the custodian to... System problems? You're it. Money management? You're it. The accounting, the administration --- I mean, that's all you. That's good and bad. It's good if you have the skills and can hold yourself accountable. But if you don't have all those abilities, you have to rely on other people. From that perspective, it actually has met what I was looking for.

Of course I can say this now. I couldn't say that when I first made the change -- I thought I had made the biggest mistake of my life, Eddie. But I'll tell you -- I got through it. And because I got through that, had I not gone through that period, I would not be the trader I am. There is no question I had to go through that. I would not want to wish that on my worst enemy but I had to go through it. And it's led to things that I can do that I never thought I could do.

Kwong: I could probably continue with you for two hours on this subject alone, but let's talk about strategies now. You've got the markets there. How do you make money off the markets? Teach me how.

Miller: Well, I'm a believer that there is not one magical method out there. I mean it sounds so obvious but I think that we're all as individuals wired so differently that I can show you a chart -- we're going to look at this first one shortly -- and I could show you two or three different ways to trade something like this. And this is not after the fact, hindsight stuff -- "here's the chart it looks so clear" -- this is while the market is moving. I write a column midday, as you know, and often have to talk about the market in terms of where it's at now and where it's likely to head.

Kwong: That's what you do in your new course as well. You try to let people see the market as it unfolds, not knowing what is going to happen next and you try to train people to see the patterns the way you do as they unfold. Anyway, go on.

Miller: Well, let's look at the first chart -- a major reversal. It has the A, B, C, D notes on it. What this reflects and I am invariably a large reversal trader -- I recognize that trends don't continue forever and recognize that there is emotion at play, sometimes significant emotion at play on a trend. That emotion, at some time, will turn. Markets don't go straight up; they don't go straight down -- despite what happened in 1999 and 2000. They never will. And it's a matter of timing.

This chart, I think, is a good example of when I say there is no one way to trade. I think what we're going to see here is a balance of how much confirmation premium one wants to pay -- and I'll touch on that as I get through this. This was a 1-minute chart which was post-FOMC mid-last year. And in terms of the reversal, I think this is just outstanding because it shows us several things.

Screen Capture From Tradestation by Omega Research ©2002

Miller: What I look for in reversals, and you'll see me talking about this in the column a lot. One of my first heads up, one of my first clues, is what I call stochastic vs. price divergence, which means the price is doing something that the momentum indicator's not showing, or vice versa. In this case, if you look at the two vertical arrows, up and down around 1437 and 1440 or thereabouts, you've got a double row on the chart. (Now this could be a 13-minute chart, by the way. This could be a daily chart. It doesn't matter. It just happens to be a 1-minute chart.)

You've got a double row, a double bottom if you will -- or a potential double bottom at the time, because you don't know how this is going to evolve. But you have a momentum indicator -- and the one that I choose to focus on is stochastics. You can use a relative strength, a mix or something else, I choose to focus on this. You have a momentum indicator that says well, on the second bottom you don't quite have that same momentum, that same thrust that you had on the first one.

Kwong: Sure.

Miller: And even if the price were lower in this case -- and we're going to look at one later from today, from this morning that shows that even if the price were lower, if the stochastic reading is not as low, it gives you an immediate signal that the momentum is waning. It doesn't mean that a trend has reversed. It means that OK, this is not tremendously strong selling. This might be a few latecomers, very late shorts or maybe folks that went long on the first one and they're getting rid of that or whatever. So, in terms of looking for reversal, it's often a heads up. Now someone could enter there on a long for example, but there's a huge risk there because the trend has not yet reversed.

Kwong: Right. Plus you probably (just to insert here parenthetically) would not advise somebody to trade off of stochastic divergence alone. Many, many people have known about stochastic divergence for years and you'd probably get yourself...

Miller: Well, I'm not a big KD crossover guy, you see the blue and red lines which represent K and D -- a lot of people think about crossovers. I can show you -- I had a column the other day that had about five of these crossovers and the trend never reversed. (Laughs) I want a trend reversal.

Kwong: Yup.

Miller: So if you look at some of these other indicators, B, C and D... B reflects a price cross -- a bar that actually penetrates the 15-period which I use to define my trend line.

Kwong: The 15- period moving average is the red one, correct?

Miller: That would be the red one. So point B is an example of the price crossing, which as we know with price action, we may get wiggled in and out, whipsawed... Is that really trend reversal? Hard to tell. So you could take that entry. You could wait until your more significant trend indicator in terms of having a 5-period moving average actually cross your 15, which provides you a little bit more evidence, a little bit more data that this trend is now correcting itself from... I mean look at that blue line on the way down. Right? And even though the price wiggled a few times... pretty clear on what the 5-period moving average is doing. It's still downtrending, OK?

At point C, though, you get a cross of the two lines, and then at point D, not only a price cross and a cross, you actually have the whole thing crossing and then you pull back toward a new trendline. And I can give you reasons to take any of those entries -- under certain circumstances. Even a divergence alone if, for example, there's another trend right underneath and it's supporting a larger timeframe. You know, it might be worth taking, but it's a risk.

It's a premium issue here. How much confirmation do you want, and how much are you willing to pay for that confirmation? If the trend reverses, point A is the best. OK. If it doesn't, you know, that best price if it does go in the direction could be offset by those times when the trend simply doesn't reverse and you're stopping out. To get the price cross, you're paying a bit of a premium. To get the moving average cross, in most cases you're paying an even larger premium and then to get the full cross and the pullback, you pay even more of a premium.

So depending upon how much risk you want to take on in the trade, there are four different ways you could trade that reversal.

Kwong: Sure. And at the same time there is such a vast amount of information streaming in, you know, from the outside world. There's CNBC, there's different quote screens that you might be monitoring, there's news on individual big-cap Nasdaq stocks which may impact the movement here, there's the S&P Futures...

Miller: Right.

Kwong: Are you keeping a corner of your eye peeled on these other factors? Are you basically making a decision on the basis of the price action and you know, the indicators and the pattern setups that you see here?

Miller: I think you have to always have extra ears, if you will. It's kind of like flying a plane. I've got a method here where I really rely very significantly on three indicators. But like a cockpit on an airplane, there are so many things. I won't say it's "noise" but it's something I take into consideration in terms of just general market environment. Today was a good example with the FOMC minutes and the Fed coming out at noon. A lot of people got short on that and got killed.

So you've got to take things like that into consideration but by and large, I want to keep this business as simple as possible. When I say "simple," I don't mean "easy," because it's far from that. This continues to be the most challenging thing I've ever done. Yet when I say "simple," I mean "very clear." OK, I've got three indicators on these charts. I've got:

• Bollinger Bands -- to define range
• Moving Averages -- to define trend
• Stochastics -- to define momentum

I want to know those three things because I don't care if these are the Qs or watermelon seeds, if you have those three things, and you have a liquid market and you can understand how emotion is reflected in the charts, you can trade anything. And so, the things that you mentioned -- the volatility, etc., as low as they are these days -- I mean yeah, it's kind of important to know at certain points what happens with moves to some extent certainly, but by and large, I would rather trade something that was unencumbered by any of that stuff. And I think it's doable.

In Part 2, Don Miller explains the important role that staying out of the market at strategic times plays in keeping his monthly bottom line positive. Plus...much, much more!