10 Insights For Professional Traders
From the Trading Desk of Oliver L. Velez
This upcoming December will mark my 21st year as a trader. When I look back, it amazes me how fast this long period of time sped by. When I was a child, I seemed never to be able to stick to anything for any considerable period of time. Initially, a spark of interest would feverishly drive me head-long into a particular activity. I'd devour every book I could find on the topic, read every article, tap every resource and speak to every person even remotely associated with it. I dove into everything with all I had.
And then it would happen...every single time. Boredom! It would begin to creep its way in, robbing me of my new interest little by little. Eventually the crescendoing effort would gradually give way to a stall in momentum, which in turn would transform into complete and utter disinterest. And just like that, it would be dropped, like it never happened....the books, the articles, the people and all. Such is the life and times of most teenagers in today's day and age, but I was particularly aloof and unattached during my early years. And that's the way things went year after year for me.
But that all changed when I found my true love...trading! It was not until I stumbled across the stock market that I began to appreciate the joy of being truly "hooked" on something. It didn't matter that I was horrible at it, either (and boy was I ever horrendous). The fact that trading was so hard is precisely what captivated me. I loved it. Do you understand what I'm saying? Not the kind of love one has for pizza or cars, the movies or roses. No, when I use the word love here, I speak of that "agape" type of love...the love that is synonymous with the term Life! Trading was IT for me. I embraced the hardships it brought, enjoyed the successes, accepted the sacrifices (and there were many) and surrendered to all its demands.
Why am I sharing all of this with you? To tell you that after all the ups and downs of trading over two decades, making fortunes, losing them, only to make them again, I've managed to collect a few truths, devise a few rules, and establish a few guidelines that have been greatly enhancing the daily lives of my traders and students the world over.
Below I share a small sample of the many insights that have come from a lifetime of intimately being with the market. I hope you find this sample as enriching as others have. Just keep in mind that many of these points will not apply to casual traders or investors as much as they will to those who trade actively for small but consistent gains. So click on the pod cast below, sit back and listen to me expound on each one of the 10 Insights for Professional Traders.
10 Insights for Professional Traders Only
1) Be willing to lose money on every trade;
2) Give a stock at least two chances to reward you;
3) Don't be patient when going against a stock's trend;
4) Always buy the first dip after a strong breakout;
5) Stay with winning stock plays;
6) Focus more on charts than the Level II screen;
7) Trade with a keyboard; Not a Mouse;
8) Be familiar with the stocks you trade;
9) Don't focus on too many stocks;
10) Don't be a P&L Trader
There are countless other realizations, laws, epiphanies, truths and such that have emerged from my many years of trading, but this should be a good start. Keep these 10 reminders close to you each day until they become yours. Right now, they are my insights. They need to become your insights before they can begin working their magic for you.
Download | Duration: 00:30:36
Great stuff.
Numbers 1 and 10 are the two biggest things on that list for me
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John:
Thanks for the kind words. While there are more insights that I will publish in the future, the ones I posted here are likley to be applicable to a larger audience. I'm sure you'll find the audio explanations even more insightful, once I publish them. Stay tuned.
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I'm assuming rule No. 7 has to do with the propensity to over trade?
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Sean:
Rule number 7 has very little to do with the tendency of some to over trade. Mouse-driven trading, while convenient, was created more for ease of use than speed. As a professional trader, "speed" of execution is paramount to all else. In short, a keystroke trader will out trade, out smart and out execute a mouse trader any day of the week, any minute of the day.
To demonstrate this point, I'll ask a few simple questions. "If a concert pianist were to use a mouse to select his/her notes or keys, instead of his fingers, would the music sound the same?" No! "Wouldn't you be able to type your name with your fingers faster than you would if you had to select each letter of your name with a mouse?" Yes!
I've never witnessed a mouse-driven trader out trade or outperform a keyboard driven trader in my entire life. This is precisely why our traders are put through intense keyboard-driven execution training via numerous practice drills before they are allowed to officially trade our money. We use a simple but effective hot-key system that dramatically increases the speed and efficiency of the trader's execution skills.
With all this said, I'll leave you with a short story which, once and for all, will drive the point home even more. One of the New York Stock Exchange's most legendary Specialists now trades for my firm, Velez Capital Management, LLC. As a key Specialist for 21 years he controlled much of the action in some of the largest listed stocks in existence (Eli Lilly, Disney, Boston Scientific, just to name a few). Shortly after the crash of 1987, his trading activity during that infamous black Monday when the Dow dropped 500 plus points came under great scrutiny. Why? No one could believe that a human being could place so many trades in a single day. An investigation revealed that from the open to the close on that infamous day, he executed trades at the rate of (get this)...14 key strokes per second. Yes! You read that correctly... per second. From the open, straight through the close. Amazing! So the SEC decided to send an operative down on the floor to personally witness his trading activity for an entire day. That was 20 years ago. He has never heard from them since.
Now, Sean. Try THAT with a mouse.
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Retaking the 5 day lab really helped drive home point #2 & #9. I was in the habit of trying to look at all NASDAQ stocks that met my level 1 criteria. Or if I took a trade and found success or failure I would be looking for another setup on another symbol right away.
Thanks Oliver & Malcolm!
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Shane:
I'm glad these two points were made clear to you during our 5-day live trading session. In baseball, a batter is given three strikes before he's out. In the market we give each stock only two strikes, or two chances to reward us. An initial failed attempt by the stock to move as we expect is often delivered on the second try. Traders who move on to another stock too quickly after taking an initial loss will miss the powerful redemptive tendency that most stocks possess on their second attempt. This ties intimately into one of the trading laws I teach all my traders. The law states that "The Second Move in a Stock is Usually the Biggest." Never forget this.
The above also ties into the other item (number 9) you mentioned. As you've learned being with me, some of our very best traders often "specialize" in trading only 3 to 5 stocks. They may have a list of say 20 or 30 stocks or so that they constantly scan, but their "go to stocks", the main ones usually don't exceed 8, with the norm being 3 to 5. These 3 to 5 stocks are known intimately and are the main source of their gains each day. All the stocks' idiosyncrasies, all their characteristics, their patterns, cycles and players are known well. And this provides them with a valuable edge over those who only trade them casually or in an "every-now-and-then" fashion, like most traders do.
In short, we take the same approach that a NYSE specialist does, or as NASDAQ market makers do, which is to narrow our focus on a small handful of stocks to trade. And while we may miss opportunities in some other stocks, we miss nothing in our special "go to stocks." A NYSE specialist for Disney (DIS) is not trading Home Depot (HD) just because some news recently hit that stock. He sticks with DIS and knows full well that he will get his opportunity to trade and profit too. The point is, you can't be all over the place looking for every possibility out there. If you do, you'll often find that in your attempt to catch all, you've caught nothing.
I'm glad it helped.
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Hello Oliver:
My apologies for another question, but I'm just a little confused. According to your comment for this post, you mention that a trader needs to focus on roughly 8 stocks. With a list scanning 20-30 other stocks.
Now, when you say 8 stocks, are these your core stocks that you are trading on a daily basis to add liquidity to the market and get paid and hopefully making one to two cents a piece? Additionally, the other 20-30 stocks I suppose these are the stocks that we should be familiar in which we will trade using guerilla and micro tactics, can you please confirm.
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Dear Trader:
It appears you are trying to be a bit to specific with my comments which are only meant to serve as general guidelines. This is a common error on the part of those seeking trading success. Nothing in the world of trading can be too specific. General guidelines which provide the framework for proper action and thinking a good portion of the time are all we can hope for. With that said, let me try to clarify.
I feel that most traders attempt to focus on too many stocks. They do this in an honest attempt to try to be everywhere at once, hoping this broad approach will limit the opportunities they miss. While this makes sense theoretically, in the practical world it leads to the exact opposite, an increase of missed opportunities. This is why in the professional trading world, limits are placed on the number of stocks the trader is allowed to focus on. How many stocks does a NYSE Specialist focus on? Only one, right? And how many stocks do you think a single over-the-counter market maker gets assigned to? Perhaps only a very small handful, two, three, maybe five if he's a master veteran and some of the stocks are relatively inactive. Why do you think this is this case in the professional world of trading? Because it works. Instead of trying to create jacks-of-all trades, the major firms attempt to create specialists....Specialists who are trained to miss absolutely nothing in their own little world.
This is why my 800 traders are trained to create a small universe of stocks consisting of no more than 30. It is best if these 30 or so stocks span the vast majority of the key market sectors: semis, retail, gold, oil, internet, etc. You get the point. A few of these thirty stocks will change from time to time, but they represent the trader's personal stock market, his entire world. Opportunities will only be looked for within this universe.
As a trader deals each day with his thirty or so stocks, scanning, studying, trading, etc, a small handful will slowly began to emerge as the trader's favorites. this happens naturally. Maybe for one trader it's 3, for another it's 5 or 8, but a small number will began to rise above all the others as your most traded. I call this emerging list your "go-to-stocks." Why does this happen? It depends. Perhaps it's due to the sheer number of wins accumulated in some, or maybe its the desirable way one or two of them trades, or the price range, or maybe the personal industry knowledge the trader has. In a sense, the reason does not matter. It does not mean you ignore the rest of the list, mind you. It simply means you are likely to trade your favorite ones three times as much as the others...in all the time frames.
But don't force it. Don't force the favorites. As I'm fond of telling all my traders/students, "don't choose your stocks, rather let your favorite stocks choose you." I hope this helps.
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Oliver,
Does the 8dma and 20dma work for daily charts as well as all time frames.
Thanks,
Ernest
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Ernest:
You bet the 200ma works daily charts. In fact it works on all time frames from intra-day to the major end-of-day ones (daily, weekly, monthly). The bigger the time frame, the stronger the price reaction, normally.
Happy Trading!
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Oliver,
I assume #10, P&L, means "profit and loss". But would you elaborate a little on just what you mean with this one. Thanks for all the great advice.
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Yes. P&L does in fact stand for Profit and Loss. I will be recording a podcast very soon that will add a tremendous amount of flesh to each one of the items. You'll be quite pleased with the result. Stay tuned.
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I am very interested in number 7. I have read your books, seen you live, taken the 2 day and am about to take the 5 day. Unless I am mistaken, nowhere is there information on number 7. Can you enlighten me? What can I study prior to the 5 day course?
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Jay:
First of all, let me welcome you to the family. You have joined one of the best growing proprietary trading teams in the country. I also regard my trading team as being amongst the most knowledgeable and educated in the business. You've taken the first step in what I hope will be a long, prosperous journey with us. I will do everything in my power to groom you into a profitable, sophisticated trader.
As for Insight number 7, Trade with a Keyboard, not a Mouse, you will receive a great deal of training on this during your 5-day Live Trading Lab with me. Hot Keys for all the order, execution and destination types will be set up during training, and you will go through a battery of hot key drills that will make you a flawless keyboard trader. If you have not done so as yet, listen to the podcast which I recently posted on the 10 Insights for Professional Traders Only. There is more detail in it. Just so you know, I have never seen a mouse trader outperform a keyboard one...never! It's not possible when speed and accuracy are your goals.
As for what you need to do to prepare, the answer is "nothing". Just come with a rested, clear open mind...so I can fill it up with the trading knowledge you need.
I look forward to seeing you in the 5-day Live Trading session.
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I am ready, willing and able. Your course and teaching has already made a difference in how I look at charts. It is all in the price. I am proud to be part of the team!!!!!!!!!!!
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I'm honored that you have entrusted your education and trading future with me. I will do all in my power to make you empowered to Trade for Life.
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Oliver,
Thank you so much for these ten insights. All were helpful, but I really (only) needed 2,3,4,5,6,9 & 10. My surprise was #6, I can see now that watching the bar charts are much more important than Level 2. Maybe I should get rid of the Level 2. Sometimes I feel that I'm not very bright because I just found this part of the web site. I'm sure that Paul and Malcolm and even you have directed us to this, but I must have missed it or wasn't sure exactly where to look.
Thank You, again
Spencer
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You're so welcome, Spencer. Just make sure you subscribe to the blog. I noticed that you were not as yet. This will ensure that all posts and comments I make will be automatically sent to you. You can do that by simply putting your e-mail in the "Subscribe" space on the lower left-hand side of the blog.
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Oliver,
I have just responded to the offer in the I.B.D and realize from reading some of the past questions that this system will work for most anything trade able! As a mostly option guy, can I expect the system to allow me to execute option trades short term for say days, or weeks as opposed to intra-day? or should I expect the need to be out by the 4:00 bell each day strictly trading options?
thanks !
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Dear Friend:
You are absolutely right in your assumption that the method I teach will work for anything that "human beings" trade, including but not limited to options, bonds, stocks, financial futures, commodities, currencies, real estate, cabbage patch dolls (remember them?) and pet rocks (Now I'm dating myself). And if there were an exchange on which husbands could trade mother-in-laws, it would work on them too (only kidding mom..hehe).
And yes, my friend. The method I teach is universal across all time frames. I teach my traders all the time, that the technique you use to make money in the markets should always remain the same, no matter what window of time you decide to use (intra-day, end-of-day, end-of-week or month). If you find that what you do in one time frame does not work in another, your method is not based on universal market truths that never change, and as a result, when your method stops working, as it surely will, you'll be out of business.
In order to have a method of trading that will never go away, it must be based on the interaction between the only four things that will never go away in the market: Fear, Greed, Hope, and Ignorance. Not earnings. That's a hit or miss game. You might as well go to Vegas. Not Jim Crammer either. You might as well flip a coin. And certainly not brokerage research, upgrades/downgrades or recommendations. Let's be real. Twenty-eight year old Vice-Presidents (yeah right), barely out of school working for firms like Merrill Lynch and Solomon Smith Barney are not true brokers, in spite of their lofty titles. They are salesmen. Period! They get paid for calling people up and pitching them on the next great thing. That's a salesman! Am I wrong?
So be rest assured that once you have the basis of my method of trading down, trading options will literally come alive for you in a bigger way. And yes, you'll be able to day trade them, if you like, swing trade with them, core trade and even buy and hold them (via leaps) should you find the need. Please remember this. The item(s) people trade is not the important thing. The important thing is to understand the "people" who trade those items.
Enough said? I hope so. Welcome aboard!
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Oliver,
Could you please discuss #6 in more detail please. I believe this is my new #1 demon. I am having a hard time letting my winning trades run by becoming hypnotized by the level 2 & time & sales. Thanks in advance!
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Dear Trader:
When I first began trading 21 years ago, Level II data (the data that shows inside and outside bid/ask orders from key participants at multiple price levels) was relatively unknown, and as a result, largely unused. In the early 90s, this started to change. The electronic revolution made this form of data far more prevalent amongst professional traders (day traders in particular) than in any other time in history, giving some the added edge of being able to see "inside" the market, as it were, to discern hidden layers of significant demand and supply. In essence, Level II data offered the trader an inside view that most did not have. As a result, there was a lot of money to be made with that edge and that is precisely what we did back in 1992 and throughout most of the 90s. We used it like one would use a set of binoculars. Those without it relied on the naked eye, while we used binoculars (Level II) which gave us a distinct advantage over the masses.
Today, the edge mentioned above is largely gone, due to significant exchange rule changes and the way large institutions now place a good portion of their orders. Here is a small list of things that have reduced the reliability of Level II data as a true read of supply and demand:
1) New order handling rules, which allowed market makers to display their supply and demand differently;
2) The birth of ECNs (Electronic Communications Networks);
3) Decimalization and the breaking of the penny;
3) The proliferation of black box trading;
4) The move from having humans handle block trades to having algorithms handle them;
5) The emergence of hidden orders, which do not display on the level II screen unless you subscribe to the various books that hide orders;
6) The emergence of Dark Pools (markets) of Liquidity, which give institutional orders complete anonymity. No one sees these orders, which is why they refer to these books as being "DARK," as in no light.
So, in essence, today's Level II data is displaying no more than 30% of the real picture, unlike the old days when it displayed close to 100% of what was really going on in a stock. Success has to come by with great difficulty if the information you rely on is partial at best.
The charts, however, give us all. They represent the closet thing to the truth in markets. Why? Because people bet based on what they really believe. That bet helps form a tick. That tick, or transaction, becomes part of an individual bar on a chart. That bar, along with others, forms the chart. In other words, charts show the flow of real money at work. And in the end, it's money that moves markets.
Sherlock Holmes said it best: "If you want to solve a crime, follow the money." Follow the charts/money more than anything else, including Level II, and you'll be fine. I hope this helps.
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