Today we’re posting the first interview in the Stocktickr Interview Series where we’ll sit down with some of today’s top traders and learn more about them and get practical advice from some of the best. You can subscribe to these interviews by adding this RSS feed to your feed reader.
For the inaugural interview we spoke with Jeff White who is probably better known as The Stock Bandit. Jeff has been trading stocks for over eight years and has been trading for a living since 2000. Jeff maintains a blog (RSS feed) where he posts thoughts from his unique perspective on the markets.
Read on to learn more about Jeff’s approach to trading, how he takes profits, and what R value he uses for his trading journal and why. Jeff has agreed to field questions in the comments of this post, so feel free to ask anything that might be on your mind.
ST: Thanks for talking with us, Jeff. Tell us a little about yourself.
Jeff: I’m Jeff White and I am a full-time trader living in San Antonio, Texas. I grew up in Oklahoma but went to college down here and ended up just staying after getting married in 1998. I’ve always been a details-type of person, taking care of things the best way I know how…..keeping things clean and in order. At the same time I’ve always been independent and wanted to work for myself. I had a job one time as a kid working at a golf course for long hours and little pay, which really reinforced in my mind that the only person to fully appreciate the work I do is myself, so naturally I’m now self-employed and have been since college. I played golf growing up and in high school and on a college scholarship at Abilene Christian University. I had success and ultimately became a 4-time All American so I turned pro. I was able to find sponsors and I played professionally on the mini-tours for three years out of college. Along the way I got better, but not at the rate I wanted. It’s extremely competitive and I was starting to trade on the side, so the move to trading was a good change of direction for me. Plus, the money is a lot better!
ST: How did your trading career begin and how long have you been trading stocks?
Jeff: After getting married, we had some money saved up and we started to invest in mutual funds. This was in 1998 and that summer the market took a dive, and so did our holdings, which got my attention quickly. I would recommend a losing trade or two to any new investor! Nothing else in the market will grab you quite like that and instill in you that damage control should be your top priority. Anyway, after the market sold off, I started watching CNBC, reading the business section of the paper, and trying to understand the market better. This eventually led to watching individual stocks and I started trading them later in 1998. I traded part-time while I was still playing the mini-tours, and did very well in 1999. I then went full-time in 2000 and have never regretted it.
ST: Explain your trading philosophy (types of stocks, trade timeframes, etc).
Jeff: I think the mutual fund experience programmed me to approach trading from a risk standpoint first, and then look at the potential rewards. Since then, I’ve become a pretty selective trader in that I’ll only take trades where I’m confident that I’m only risking maybe 1/3 of what I’m expecting to make if I’m right. Trading this way allows me to not have to be right so much of the time to still be able to make a profit. I learned pretty early on that when you keep your losses small, it only takes one good trade to more than make up for a number of little losses. So that’s the kind of setup that I look for in potential trades.
Timeframe-wise, I’ve changed my style in the last few years. The market moves so much differently now. I remember making 102 points in a Brocade trade, which is unheard of these days. I used to love starting every day in cash and going back to cash at the end of the day. Fortunately I was in cash on 9/11, and that kind of strengthened my belief that a purely day trading approach was best for me. As the volatility bled out of the market, I found it tougher to find good day trades with the narrowing market ranges, just because it changed my intraday risk/reward. Where I used to maybe risk 25 cents to make a dollar, it became more like risking 25 cents to make 40 cents. So I cut down my position size and started holding things for multiple days so that I can manage my risk/reward levels better. I’ve been swing trading this way for a couple of years now, and it suits this kind of market very well. I’ll put occasional day trades on, but the swing trades are where I now make most of my profits.
ST: The Stock Bandit is a catchy name – how did you come up with it?
Jeff: Well, I wanted to start a website and put out a newsletter to interact with more traders once I started trading from home a couple of years ago. I had been trading in a day trading office surrounded by dozens of other traders for a few years, and I missed the interaction. So in keeping with my trading style of managing risk and booking regular profits, I guess “Bandit” was just the right description, with a “take the money and run” slogan! Trading should be fun, and I didn’t want to go with a boring name like “JW’s Newsletter”!
ST: What advice would you have for a beginning trader?
Jeff: I think that starting out, it’s important to trade real money. A lot of people would disagree with me, but keep in mind that I’ve seen a lot of beginning traders make a run at this profession, and many of them make the same mistake. Today’s trading platforms offer a “DEMO” mode with fake money in a fake account which you can trade. My feeling on this has always been that the DEMO mode is for learning the software functionality only, but most people start watching their fake P&L. This makes profits seem so easy, and their expectations are way up because they have no fear of losing fake dollars. Once they go live, they’re trading too large and that respect for the market is gone. So I’d definitely say a beginner should trade real money, but trade small.
Next, I’d encourage any beginner to do all kinds of investigating. There are so many ways to skin the cat, but what’s crucial is finding the one that fits your personality. If you’re impatient and very type-A, become a scalper. If you are willing to leave a position alone for several days and let the trade develop without getting bored out of it, then become a swing trader. Trying to trade one method that your personality resists is just a recipe for losing. Discipline is required for all methods, but after that it boils down to your personality.
And the other thing I’d encourage a beginning trader to do is to get some help. It’s important to have some kind of a support system in place where you’re learning, getting encouragement, and letting others notice your progress. I learned to trade in that kind of environment, so now I try to run my service this way, offering email support to members. Sometimes other traders are able to point out our blind spots, which is a huge help. Plus, you can learn a lot from other traders and their mistakes as well as their successes. Lots of beginners want to know how to make money right this second, but there are also powerful lessons to be learned in knowing what ISN’T working right now. To me that information is every bit as valuable.
ST: Do you believe there is a minimum amount of money that a potential investor should amass before trading stocks?
Jeff: Well the account minimum for a pattern day trader is $25,000. However, I really think it’s necessary to have at least 2 or 3 times that amount if you’re looking to trade full-time. The reason why is not just because you have a bigger pad in case you hit a losing streak. Mathematically, it’s just much easier to turn the profit needed to survive. If a trader wanted to make $50,000 a year and his account is only $50,000, he’s going to have to put up a 100% return for the year as a beginning trader! That’s a tall order. If he started with $100,000, obviously he’d only have to make 50% for the year. Still not easy for a beginner, but far more attainable.
ST: In your mind, what is the most common fault of most traders you come across?
Jeff: The most common fault I see in traders is their unwillingness to accept losing as a part of the game. I get a lot of emails starting out with something like “I’m stuck in XYZ stock, where should I get out?” My answer is almost always “now” because there’s something very beneficial to a trader to wipe the slate clean and start with a clear head. Holding onto losing trades just creates emotional baggage. The best traders in the world are not just the best because they nail some big trades. They also know how to limit their losses and move on. Most traders don’t make it due to their unwillingness to just accept that they will be wrong, not let it affect their ego, and just move on to the next trade. We like to be right, but sticking with your opinion when your P&L is telling you otherwise is a major mistake. You wouldn’t insist during a rainstorm that it’s actually sunny, so when your stock is in free-fall mode, don’t tell yourself that everything’s OK and that it’s got some strength! Trying to argue with price will be your downfall if you make it a habit, and before you know it you’re back at a regular 9-to-5 job. Scary!
ST: Do you trade options?
Jeff: I will occasionally trade options, but only on the most liquid issues. Probably 75% of my option trades are in the ETF’s, simply because I feel like the gap risk is basically non-existent, and they move slow enough that I’d be tying up a lot of capital in them to try to catch a good move in the QQQQ’s or SPY. So in those cases, I’ll trade options. If there’s a wild stock that I still have a strong opinion on but the stock’s volatility makes me think it will shake me out of a position in the stock, I’ll trade the options instead. That way I’m defining my risk and I find it’s easier to stick with the trade than if I owned the stock (like GOOG). I don’t do complicated option strategies, just directional plays like buying calls or puts, and occasionally I’ll short puts in ETF’s when I think the premium is there to bleed off in the final 2 or 3 weeks prior to expiration. Most of the time, I find that I’d rather trade the individual stock than the option.
ST: What are the best 3 trading books that you’ve read.
All 3 of those books have countless lessons, and no matter how many times I read them, I’m reminded of something different every time. I can honestly say that all 3 of those books are still making me a better trader! The interviews and the lessons in them are all timeless, and they are just great reminders to me of what mistakes to avoid and when to press my winning trades. No telling how many times I’ve read them each. I mark something new or underline a different lesson every time I read them.
ST: It seems like a lot of traders are good at entry points and initial stop losses, but terrible at placing stops when they find themselves with a profit. What is your strategy for taking profits?
Jeff: I try to scale out as a trade works. I’ve found that I like to ring the register pretty often, so as my profit climbs, I’ll offer into strength along the way, which achieves 2 goals. First, it lets me satisfy that desire to book profits. Second, it keeps me in at least part of the trade if the stock keeps going, so I’m still able to participate.
Every trade is different, but generally I’ll take a little profit when I’m up about what I originally risked (1R). This way, even if the trade reverses and I get stopped out, I’ll usually about flat the trade overall because of the profit I took. I also have a “Minimum Profit Expectation” level for every trade on my website, and I’ll usually be out of about half of the position at that point. From then on, I’ll trail a stop in case it keeps going. If it’s a real home-run kind of trade and it just goes vertical, I’ll do my best to just watch for signs of exhaustion and then sell my remaining position into gaps or volume spikes. Once the tide turns, I know I’ll want to be out so that I can move on to the next trade.
ST: What is your typical R value per trade? i.e. what % of your total portfolio do you risk with each trade?
Jeff: On my trades, my predetermined R is .5% (Equity x .005). I find that to be a comfortable number for me based on the number of positions I’ll hold when I’m active (up to 10 or 12). When I’ve experimented with a higher R, I find that my buying power is used up faster and I’m forced to hold only a few stocks without using significant margin overnight. While there are certainly times to be leveraged, I only use overnight margin when the market is very active and I’ve been trading well. I’ve also found that during the slower markets when I’m only holding a handful of stocks, I’m not interested in raising my R because there’s less opportunity, so it works well for me at .5%.
ST: Do you try to “time” the market and go mostly long or short depending on the market mood?
Jeff: Well, not necessarily, but my trading usually works out that way. The kinds of plays I look for are in fact dependent on the way the market is acting, but I don’t necessarily say “the market looks weak, I’m looking for more shorts.” For example, if the market is stagnating, I’ll usually just start seeing more reversal plays and pullbacks rather than breakouts. If things start to weaken, I seem to just start finding more bear flags or double tops which has an effect on the trades I take, getting me leaning on the short side as a result. Occasionally, I find that some of the best longs come about when things are choppy or weak, simply because all of the momentum players will flock to the handful of stocks moving higher. In general, though, I pretty much run my scans and look through a lot of charts and the patterns that seem to emerge naturally are those that lean the same way as the market mood is shifting, so it works out well for me.
ST: What is your favorite thing about trading for a living?
Jeff: I’d have to say the freedom. I absolutely love trading, and every day is different. The money can be be fantastic, there’s always some excitement and anticipation, and at the end of the day I’m answering to the guy in the mirror. I know that some days will be better than others, but the ability to do something fun during the slow markets or go somewhere with my wife whenever we feel like it is a freedom I wouldn’t be able to find anywhere else.
The website is my hobby, and it’s been a lot of fun to impact other traders in a positive way. Some of the testimonials that people send me really light me up. I really enjoy helping other traders improve and helping them create an income that allows them to do more of what they want in life, like quit their job. Trading by itself allowed me to benefit but I wasn’t impacting any other cause in a positive way, but with the website and my relationships there, I know that I’m helping people out while still being able to trade for my own account. I’m really lucky!
ST: What one technical indicator could you not live without and why?
Jeff: I am really a simple trader, and price and volume are the only things I watch regularly. On rare occasions I’ll glance at a stochastic or a moving average (short-term), but I don’t make trading decisions based on those indicators. It’s more like they might possibly support what I’m already seeing in those cases, but like I said, those times are rare. I feel like trading is complicated enough that I really like my charts to be clean and simple, so price and volume are my keys. I do watch trend lines closely, redrawing them when necessary, but that isn’t really a technical indicator per se. I just prefer to monitor price action and volume helps to indicate the character of the price action to me as a secondary (but still important) source of info as to how a stock is trading.
ST: Thanks for your time, Jeff!
Jeff has agreed to field any questions you might have in the comments below, so ask away!