For the second interview in the StockTickr Interview Series (RSS feed), we spoke with Dave Landry who many of you might recognize as well known swing trader and author. He is principal of Sentive Trading, a money management firm, a principal of Harvest Capital Management, a hedge fund, and also runs a swing trading stock pick service. (If interested, Dave has offered a free trial to his service for StockTickr users. Just email him at dave at davelandry.com.)
We discovered Dave when a few of his weekly swing trading presentation was mentioned on TraderMike’s blog. He makes his presentations available for viewing for free. We admire Dave’s common sense approach to trading. While most traders get bogged down in technical indicators, Dave keeps his charts free of them – in fact, he doesn’t even look at volume!
We fielded questions from StockTickr Pro subscribers and threw in a few of our own as well.
Read on to find out what Dave looks for in the perfect swing trade setup, what R value he uses for his trades, and why he hopes trading becomes boring for you. Like Jeff did last time, Dave’s agreed to answer questions in the comments – so ask away!
ST: Tell us a little about yourself
Dave: I’m 41, 6’2”, 250 lbs, mostly muscle (laugh). I live and work in a rural area around an hour north of New Orleans. It’s nice being isolated but connected as I want to be through modern communications.
ST: When did you first start trading stocks and how long have you been doing it for a living?
Dave: In the late 80s, I started investing in mutual funds. I used to plot them each night and plaster the charts on my apartment wall. I got bored with this really quick. So, in 1990, I sold an old boat I had for $1000. With the proceeds, I bought 100 shares of a hard drive maker “Quantum” corp. It dropped 1 ½ points the first week I owned it. I thought I was wiped out! Luckily, it soon took off. Within weeks I started trading options and other stocks. I also began trading futures within a few years.
ST: When did you settle into swing trading? Did you start out with other types of trading?
Dave: I tried all types of stuff. By the mid-90’s, I began to settle upon longer-term trend following. Since I was doing a lot of leveraged commodity trading, I found the steep drawdowns were pretty tough. I then began trading more shorter-term. I’m somewhere in-between now—I’ll enter a short-term pattern and stick with the position as long as it continues to work. I like to see myself as “an intermediate-term trader with better entries.”
ST: Do you trade options?
Dave: I actually co-manage a fund that trades options exclusively. It’s not equities (stocks) though. But yes, I do trade options. In the fund, we are trading spreads on bond futures. In my personal trading, I trade more outrights (long puts/calls).
ST: In general, describe the perfect stock for a swing trade in your system.
Dave: I think price, first and foremost, is the ultimate indicator. I completely ignore volume—except that I don’t trade thin issues. I also don’t really use any indictors—well, except for the occasional moving average. I like to see a stock in a trend or obvious transition (sharp change in trend). Ideally, the trend should be persisting and/or accelerating. I then look to enter on a pullback. If StockTickr users would like me to, I can email them a free primer which pretty much describes my methodology in a nutshell.
ST: Most traders do okay with entry points, but many struggle in exiting both winning and losing positions. What is your strategy for taking profits (and losses)?
Dave: I use a very basic money management system and try improve upon it with a little discretion. Essentially, I look to take half the position off when my profits are equal to or greater than my initial risk (R value). I then look to trail a stop on the remaining shares. Barring overnight gaps, this gives you a “free” position with the potential of it turning into a homerun.
ST: Do you find that most traders take positions that are too large? Small? What advice can you offer for money management and position sizing?
Dave: Most traders take positions that are too large. If they are new to trading, they need to remember that they will only be smarter in the future or said more harshly, they’ll never be as dumb as they are now. I think many fail to treat trading as a business—they trade for excitement. I was recently working with someone who was having great difficulties. I told them to reduce their position size down to 1%-2% (if stopped out) of their trading account. He quickly became profitable and consistent. I thought my work was done. I then received an email telling me that trading was now “boring.” If you’re trading properly, it can be boring.
ST: What is your typical R value per trade? i.e. what % of your total portfolio do you risk with each trade?
Dave: I don’t like to risk more that 1 to 2% of my account on any individual trade. This is if my stop is hit, not the total amount of equity/margin required for the position.
ST: Do you change your game as the overall market changes directions? Are there days where you stay on the sidelines?
Dave: I don’t change styles when the market changes. I think this is a big mistake of many. They “chase” the market. When the market is choppy, they try to be a reversal trader. When it breaks out, they are a breakout trader. To each his own, but most aren’t able to switch gears—they end up “chasing their own tail.” I think you’re better off sticking to one methodology and letting the market come to you. Back to your question, yes, since I’m a momentum trader, I trade less or in issues that can trade independently of the market during choppy times.
ST: How do you think the stock market has changed over the last several years?
Dave: Obviously, it was much easier in the late 90s. The trends lasted much longer and you didn’t have to be nearly as selective. Nowadays, trends still exist but they’re not as frequent and don’t last as long. I think that traders—those that survived—are more nimble since the 2000 bear market. I think they aren’t willing to hold on to stocks as long as they used to.
ST: Have you done much to adapt the changes? How?
Dave: One of the things I’ve done to adapt is to develop more transitional–early trend–patterns. I’ve become more vigilant with my money management. And finally, I’ve become much, much more selective.
ST: What is the most common, but easily corrected fault you see in traders?
Dave: What’s amazing is, more often than not, people know their own faults. Before I work with someone, I think, “geez, how am I going to figure out what this person is doing wrong.” I then ask them and to my surprise, they tell me EXACTLY what they are doing wrong. In many cases, there is a very simple solution. For instance, someone who lets a position go against them, past a reasonable stop–can solve this problem by placing an ACTUAL stop in the market. This makes the decision a passive one vs. an active one. Another example is that most people tend to micro-manage—they don’t hold on to positions long enough for them to play out or worse, exit at the first signs of a small profit. Again, the fix here is easy: turn your screens off and let a trailing stop take you out of the position. These are just two examples of how you can improve your performance by letting the market tell you what to do vs. your ego. I can go on and on.
ST: What advice do you give investors who are just starting out?
Dave: Take your time! The markets will ALWAYS be there. You’ll only be smarter in the future–or you’ll never be as stupid as you are now (laugh). People forget how long it took them to get proficient in their current profession. Doctors are the worse. They assume since they mastered their profession, they will learn how to trade quick and easy. They forget that it took them over 10 years of school and interning before they were able to put the knife to someone. I like to pick on doctors, but you could really say the same thing for any other profession.
ST: In addition to your own two books: Dave Landry on Swing Trading and Dave Landry’s 10 Best Swing Trading Patterns and Strategies which 2 or 3 books do you recommend traders read?
Dave: I think a good primer on technical analysis would be a good place to start. Forget about all the indicators though, focus mostly on the chart reading aspects. Pring and Murphy both have good T/A primers. There’s Technical Analysis Explained and you probably should have a copy of The Technical Analysis of Stock Trends by Edwards and Magee in your library. In addition to reading about the markets, I think it’s important to start studying charts. If you want to get good as a musician, you practice. If you want to get good as a technician, you look at charts—lots of charts. I look at up to 1,000 charts daily. This will help you to recognize the reoccurring patterns. If your readers like, I can email them my scans, info on how I chart, and free links to interactive presentations. Sorry, I digressed, back to books, for psychology, read the psychology section of The Elements of Successful Trading by Rotella. Read the first Market Wizards by Jack Schwager and Reminiscences of a Stock Operator (allegedly, about Jessie Livermore). And, EVERYONE should have a copy Oh, the Places You’ll Go! by Dr. Suess. Oops, that’s more than 2-3? Oh well, read all those and I promise you won’t be sorry. If you like, I have a list I can either give you or email to StockTickr users.
ST: Do you recommend backtesting?
Dave: I used to be HUGE fan of it. When I came into this business, I thought my degree in computer science would be my holy grail. I tested everything imaginable. Through the years though, I’ve learned that it’s more important to read charts than to test patterns and indictors. I think we, as humans, are much better at recognizing and trading chart patterns than a computer. We’re certainly better at adapting to changing conditions.
ST: What do you like best about trading?
Dave: I got into this business for the freedom. I quickly found that I was in front of my screens early in the morning and late at night. I love it though. It’s a different kind of freedom. I come to work in shorts and a t-shirt. I only have to shave, put on a decent shirt, and comb my hair once a week for a webcast (or whenever the wife makes me, laugh!). When the hurricane hit, I grabbed a laptop, a CPU, and two monitors. Even though I was out of my office for nearly 2 months, I didn’t miss a beat. Many others were not so fortunate. I like being independent. I like making my own decisions and controlling my own destiny. I don’t think I’d mesh well back in a corporate environment where my performance could depend on someone’s opinion or someone’s lack of performance.
ST: Thanks, Dave
Stay tuned – there are several interviews on the way. You can subscribe to these interviews via RSS feed.
Previous interviews in the StockTickr Interview Series:
Leave questions for Dave Landry in the comments and he’ll answer them.