Closing questions BPA trading room Q&A: September 3, 2019
Question: “When you became consistently profitable, did people give you a hard time about trading as a career?”
Video duration: 15min 36sec
You’re a young guy, if you’re around in the ’80s and ’90s. Day traders, they were shamed. Back then, institutional traders ruled the world, and they were popping up on television all the time, talking about basically “lowlife scum day traders.” I think the problem was they saw that they were losing control over the market. They could no longer steal from people. The market was becoming much more electronic. They were in denial, not wanting to believe that high frequency traders would rule the world and really good day traders would rule the world.
So 60 Minutes did stories on day trading. It was in the news a lot. A lot of day traders were basically casino-type players, gamblers, back in the ’90s when day trading started to become fashionable. I think there was a sense of shame about being a day trader.
When people would ask me what I did, I would just look them in the eye and say “I’m a day trader” and I would let them think that I was an idiot. I’d just smile, because in my mind, anybody who’s making an honest living is doing something good, and if they’re doing it well, they deserve admiration and respect and not condemnation.
Sometimes my friends, well occasional friend will say something like “Al, you don’t do anything purposeful. You’re not making the world any better. You’re a smart, capable guy, and you’re choosing to be selfish and not contribute to the world.” My answer is – well, my job, you can call me a day trader, but you can also call me a liquidity provider, as you can call any high frequency person, high frequency trading person or high frequency trading fund.
If you get rid of all the high frequency trading – day traders or machines – the volume would probably be 70% less than what it is now. What will happen if you try to sell your house and you get rid of three-quarters of all the potential buyers? What’s going to happen to your sale price? You’ll have far fewer people bidding to buy your house. The bid/ask spread between what they want to buy and where you want to sell is going to be big, and you’ll probably just sell somewhere in the middle, which is probably far below where you want to sell.
As a liquidity provider, I’m just a little guy, right? But if you add tens of thousands of people like me and several hundred high frequency trading firms, we provide a tremendous amount of liquidity. And the result is the bid/ask spreads are very tight. Usually in the Emini, only 1 tick, and since they’re highly arbitraged with all the stocks, stock trading also has very tight bid/ask spreads. That is because there are a lot of trades taking place, and the majority, the vast majority of the trades are high frequency trading firms and day traders.
So I am making a contribution to the world’s economy. It may be a tiny contribution, but what I’m doing is important, and because a lot of people do it and a lot of machines do it, everybody, even investors who might take a trade once every 6 months or every year, get a better price, a better fill.
One common comment was, “Al, you’re making a million dollars a year as an eye surgeon. Why did you ever give it up?”
I say, yeah, I grew up poor. My mother didn’t go to college. Nobody in the family went to college. She told me to become an eye surgeon. I never thought twice about it. My mom wants me to be an eye surgeon, I’m going to become an eye surgeon. So I never paid any attention to what I might want to do. My mother wanted me to be an eye surgeon, so I became an eye surgeon.
At some point in my life I decided that I have one life to live, and the most important thing I can do in this world is be the best me I can be, and being an eye surgeon was not being the best me I could be. So I decided to figure out what I wanted to do, and I decided to trade, and I really like day trading.
So I’ve been doing that ever since, I’m proud of it. I’m not embarrassed. In my mind, what I do is positive. It helps the world economy – in a small way, but if you put tens of thousands of people like me together, it becomes a significant part of the world economy. We tighten the bid/ask spreads for everybody. So it makes markets fairer and makes transactions easier. There are going to be far more potential buyers and sellers if you want to do the opposite.
Nowadays, instead of criticizing me now, everybody’s always asking me for advice. “Al, should I buy this? Should I sell that? How should I structure my portfolio? What kinds of distributions and assets?” So it’s really kind of funny. Everybody knows I’m a day trader, but now nobody looks at me with scorn or makes smart aleck comments. Instead, it’s just the opposite. They’re asking me for advice.
Back to the questions.
Question: “You mentioned a few times some trades not good for small accounts. What size account do you consider small?”
He mentions a few times that some trades are not good for small accounts. It’s all relative. It’s pretty hard to trade if you have less than $3,000 to $5,000. But if you do have $3,000 to $5,000, you can trade micro Eminis and just go for 4 point trades. So once the market is 4 or 5 points below the open today, you just buy a single micro Emini and maybe put a stop 10 points below and just hold on until you get back here. I know you don’t make a lot of money if it goes up 4 or 5 points, but at least you’re learning how to trade.
In general, I think traders should try to risk no more than 1% or 2% of their account when they’re trading. If you have a smaller account, $10,000 or less, you’re probably going to have to risk 3% every now and then. So 3% of a $10,000 account is $300. If you are buying above a bar that’s 10 points tall and you put your stop below, that’s $500. You cannot take that trade, because then you’re risking 5%.
So think of it in terms of that way. If a trade requires you to risk more than 3% of your account, then your account is too small for that trade. If you can buy calls or buy puts or buy or sell micro Eminis, and then have much less money at risk, then you might be able to take your trade. So a risk of 5% in the Emini is a risk of 0.5% in a micro Emini, and therefore a trade that you might not be able to take with the Emini, you can take with the micro Emini.
Question: “Ok, what are the rules that you use to ‘trade stupid’?”
I don’t have any specific rules, but in general, sometimes you’ll hear me say “just trade stupid.” You just turn your brain off, take the trade, use the appropriate stop even though it’s far away, and then just sit there, hoping that the market’s going to go your way.
Anywhere on the way down here, especially once we’ve broken above the bull Micro Channel – a “trade stupid” type of trade would be just buy the market, put a stop below the low of the day, go to Walmart. I have a limit order to get out at the open of the day so your reward is about the same as your risk, but the probability is 60% that you’ll make your money before you get your stop hit.
And when I say trade stupid, I mean don’t overthink and don’t look at too many things. Don’t go flipping around different timeframes, different markets – NASDAQ, SPYDR, JP Morgan, Apple. Just look at the chart in front of you and don’t worry about all the things that you’re not seeing.
Even though I might see 50 reasonable scalps on a typical chart like this, if I really wanted to, I could flip around to different timeframes. I could have a giant monitor with a 1-minute chart, 2-minute chart, 3-minute, 4, 5-minute, 10, 15-minute chart. Then you could have tick charts. 1000 ticks, 2500 ticks, 5000 ticks. Volume charts. I could have range charts. I could have 15 different ways of looking at the Emini. Instead of having 50 setups a day, I could probably see 100, 200 setups a day, even though there are only 81 bars on the Emini.
To me, trading stupid is just looking at one chart and not worrying about anything else. Just try to look for the setups here and then try to figure out if I can structure a trade that makes sense mathematically. Will the trader’s equation be good? You’ve got to deal with risk, reward, and probability. Is the probability that you’re going to make money times your reward greater than the probability that you’re going to lose money times your risk?
I know I’m not really answering your question, but when I say trade stupid, I simply mean don’t overthink. You see where the buy is, you see where the stop is, you know where you’re thinking the target is. Just take the trade, and if you find yourself micromanaging it and exiting early, especially exiting early with a loss, take the trade, put in your stop, put in your profit-taking order, OCO (one cancels the other), and go out and do an errand and come back in 30 minutes or an hour or so.
Question: “If you had sold the 21 close, how would you have managed the trade? What’s the best strategy for trading in a triangle?”
Big range today. Let me go back to the first part. If you sold the triangle and close, what do you do? For me, if I sold that triangle and close – I would not have, but had I sold the triangle and close, you always hear me say, general rule. If you’re short and you get a decent bull bar, you get out 1 tick above. So you could either – you’ve got two ways of handling it. You sell the 21 close and either get out with a tight stop or a wide stop. The worst thing is a skunk stop somewhere in between.
By that, what I mean is this. If you sell the triangle and close, you get out above 22 and take the loss, whatever it is, 4 points. Or you use a very wide stop, like maybe above the high of the day, and not get out above 27 or something like that or above 18. So you either get out above 22 or you’re looking to use a wide stop, betting on a trading range, and then selling more below a bear bar. So you sell the triangle and close, you sell more below 29 or below 30, and then either try to get out in between your two sells or at your original sell and breakeven on your first sell and with a profit on your higher sell.
Get back to the question: “What is the best strategy for trading in a triangle with quite a big range like today?”
In general, if you’ve got bull bars near the bottom, I tend to buy below, like below 50 or 52. If you have bear bars near the top, I tend to sell above. But today I thought we never went back to always in short, so I’m less interested in the sells.
But selling above 39, or you look for a small bear bar to sell below. I kept saying the sell signals just don’t look all that good. Or you look for a small bull bar to buy above, especially if you get a second signal. You could argue 38 is a second signal, but you had to risk 4 points to make 1 or 2 points. 44, a second signal as well.
But at that point I kept saying, “Eh, I don’t know. We’re in that 10:00 to 11:00 window when the market tends to trap traders into doing the wrong thing, and then it tends to run stops and reverse.” So if you’re buying above 44, you probably need a wide stop down here, thinking that it might go below 22 and reverse – which is what it did.
So a triangle is just a trading range. In all trading ranges, I’m looking to buy low, sell high, scalp. I can buy low with stops or with limit orders. I can sell high with stops or with limit orders. If I’m entering with stops, I want good signal bars, and if the leg down is strong, I’d rather wait for a second signal bar. If a leg up is strong, I’m looking to sell. I’d rather wait for a second sell signal bar. So do I sell below 27 or below 29? 29 is better.
Here, this was a credible buy, but only if you could use a wide stop. And then here, not a good buy, 56 or 58. But a second buy, 60, third buy, 62 or 64. Getting pretty high up. Not ideal.
Further to the question: “When you’re in a triangle, do you avoid stop entries completely?”
No, it depends. If I think it’s mostly a trading range type day, a lot of trading range price action, and I can see traders making money with limit orders – buying below things, selling above things – then I’m going to buy below things and sell above things. I prefer stop entries or market orders or buy or sell the close, because that’s trending type behavior, and it requires less thought because if it’s in a trend, you’re not constantly wondering, is it going to reverse. You’re pretty confident that it’s not going to reverse. So mentally, it’s easier. Plus it’s more fun.
But on a day like today, when you see it reversing every 2 or 3 bars all day long, lots of overlapping bars, sideways for 3 or 4 bars at a time, very prominent tails, I end up taking a lot of limit order trades and a lot of backwards type trades. So instead of looking to sell 21, I’m looking to buy either the 21 close or a reversal up from 21. Instead of looking to buy 28, I’m either looking to sell the close to 28 or looking to sell a reversal down.
Okay, still sideways, 60-minute chart. We still have the midpoint. Here’s the 5 week trading range. I still think we might have to hit the middle of the range before we go up. So right now I think we’re going above the top of the range, failing, and then going down here. But we may not go straight up. We may have to go below the pink line, the midpoint of the range, and then go up and then go down.
Predicting that many moves, the probability of it being right is small. But when I look at it, if you ask me what the market’s going to do, of all the things that it could do, that’s what I think it’s going to do. A buy signal bar, a bull bar, a pullback on the daily chart, but a doji and a magnet below. So, not a very good looking buy setup. So, I still think we probably have to get below the pink line, the 50%, the midpoint of the 5 week range.
All right. Hope everybody has a good night.