For the ninth interview in the StockTickr Interview Series (RSS feed), we spoke with Smita Sadana who has been trading for a living for ten years. Smita is a rarity in the trading world: she is a female in a male dominated industr.
Read on to hear why Smita thinks there are so few women in the trading profession, how she takes profits, and how strict money management is her key to success.
StockTickr: Tell us a little about yourself, Smita.
Smita: I am 35, a full time trader by profession. I live in Austin, TX with my husband and children. I started trading from my home office, after my Masters in Economics, in 1995.
StockTickr: How did you get started trading stocks?
Smita: Honestly my aim wasn’t to trade full time; I merely started out as a ‘custodian’ for my husband’s portfolio. He was enamored with the Stock Market and I thought it would be interesting to be able to have a decent conversation with him, about this. Well, the stars just lined up and I realized that I really liked the challenge and the freedom. Later, even when I had the opportunity to go out and work, I chose to trade full time.
And yes, now I do have a decent conversation about stocks with my husband 🙂
StockTickr: Most traders have a horror story about losing their shirt when they first started trading. What’s yours?
Smita: I don’t have an individual stock horror story per se, but the first year of trading wasn’t profitable. When everyone was making money picking out stocks just by throwing darts, I actually managed to lose money, cut my portfolio by 20%! It was a wake up call, since I realized that not only was I underperforming the indexes, I was also wasting all my time and energy on a losing proposition.
Trading is the fastest way to lose money unless it is done right, with a set of rules and disciplined adherence to those rules. In a way, I am thankful for that lesson learnt during my first year since it led me to conduct a detailed diagnosis of what went wrong and subsequently introduced me to technical analysis. Since then, I have had 10 straight years of positive returns… In fact, my account has beaten the SP-500 by double digits on an average annual basis, over this decade.
StockTickr: Do you trade for a living now?
Smita: Yes, I have been trading for a living for the last 10 years. I have had the ‘trader-status’ with the IRS since 2000. It is a business, a profession like no other. Unlike other professions, past performance is really no guarantee of success. Even if you have been successful earlier, well, you don’t automatically get promoted! You still have to work as hard, stay grounded and be vigilant at all times.
StockTickr: Why do you think there are so few women in the trading profession?
Smita: Money management has been dominated by men since they were the ones who traditionally earned it! The notion out there that managing money is all about arcane finance, number crunching and complicated formulas precluded many women from entering this field. Also, trading is not a very ‘family friendly’ profession. Long hours, arduous work and demanding education take time away from family.
But the times are changing… Just like in `North Country’ and `Against the Ropes’, women are transforming the old schools of thought, breaking traditional rules, and expanding their horizons. Women are working on Wall Street as analysts, hedge fund managers, and investment bankers. I am sure there are many traders like me, out there as well. Trading is a profession primarily manifesting discipline; so what difference should age or gender make?
StockTickr: What single lesson did you learn along the way that has helped you the most in your trading?
Smita: The ability to take losses and to completely ‘let go’ of the losing positions! Even when I started taking losses, the stock which caused a loss seemed to stay in the mind and evoke further bad trades in that very stock, since I wanted to make the money back, to somehow ‘get back’ at it.
It took me a while to realize that it is my account value that matters at the end of the day, not if an individual stock position made or lost money. What difference does it make which stocks lead and which stocks lag as long as your account is making new highs. Losses are an integral part of this business and the key is to realize that, take losses and move on. In trading, tomorrow is truly another day.
StockTickr: Describe your style of trading. How long do you typically hold stocks?
Smita: I am a very active position trader, with an average holding period of 3-5 days. I use several fundamental and technical stock selection criteria. My aim is to have the money moving in sectors/ stocks which are doing well. I try to stay away from stocks under $10 and stocks with average daily volume less than 500K shares. I have set up several scans in Worden Brothers’ TCNet which identify numerous trade candidates based on specific criteria. I go through these diligently every night. I also have a very strict set of trading rules that I try to adhere to. For example, I always sell stock before its earnings are announced, I don’t hold small companies short over the weekend for risk of Monday-morning merger announcements, I get out of losing positions for a fixed dollar loss, and I keep on successively reducing my stock exposure during those dreaded lean periods, which every trader goes through etc.
I trade on both the long and the short sides of the market. Some of my favorite set-ups include stocks breaking out of congestion on heavy volume, shorting stocks after bad earnings, when they rally on low volume and so on.
StockTickr: What’s your exit strategy for winning and losing trades?
Smita: I have two different exit strategies: I bail out of individual stock positions either when they hit my fixed dollar stop loss or when they meet the price target initially visualized. But I also have something I call an `account stop’. On days when the market seems to have a meltdown, I try to cash out if my account goes down about 1.5%-2%. If it’s a result of just one or two story stocks I just sell those. This helps me re-evaluate the market with a dispassionate mind. Also, when the portfolio goes down around 2% in a day, it signifies a general weakness in the market, which usually carries over to the next few days. The aim is to minimize drawdowns and to preserve your capital. Earlier in my trading career, I would handle drawdowns of 10-20% and then climb up all that and more, but now I endeavor to always have the account highs in spitting distance. As a matter of fact, currently, I am 3% away from my all time high.
StockTickr: What 3 books do you recommend traders read?
- Trading for a Living by Dr. Alexander Elder and its sequel Come Into My Trading Room. I think it is a must read for every trader just starting out or as the name suggests, trading for a living.
- The New Market Wizards by Jack Schwager
- Methods of a Wall Street Master by Victor Sperandeo
A trader eventually finds the way s/he is most comfortable with, but these are all excellent books. I also like the daily ‘Worden Reports’ for TCNet subscribers, since I learnt a lot from the daily notes of Don and Peter Worden when I was starting out.
StockTickr: What % of your portfolio do you risk with each trade?
Smita: My usual position, depending on the volatility of the stock, is about 4-5% of my account. However, depending on the market conditions and my portfolio performance, I have also had positions of about 10-15% temporarily, with tight stops. These are mostly index positions, at market turning points. I rarely hold these unusually large positions overnight.
StockTickr: What technical indicators could you not live without?
Smita: Price, volume and Moving averages. I do have a very comprehensive set of indicators but my primary way for picking stocks is through price and volume patterns, not indicators. I don’t trade solely on indicators; I use them for confirmation only. I also have a wide array of market indicators that I like to keep an eye on, like put-call ratio, A-D line, TRIN etc.
StockTickr: How do you think the market has changed over the last several years? How have you adapted?
Smita: The markets are very dynamic and are continuously evolving. Lately, for example, there has been a lot of churning in the market, with underlying weakness while the index has been going up. When moves don’t follow through, and solid patterns seem to fail for no apparent reason, it does get frustrating, as many of my fellow traders will attest.
But the one thing I’ve learnt is to never take the market for granted. It always has a way to surprise and humble even the best. The way to be in step is to continually adapt. I just keep on doing what I am doing; going long when I see more favorable set ups and going short when I see more weak patterns. I try not to `argue’ with the charts and impose my longer term reasoning on short term trades. After all we all know that “markets can remain irrational longer than we can remain solvent”.
StockTickr: Do you backtest and why or why not?
Smita: I don’t backtest the indicators as such since I believe trading is as much an art as it is a science. If there were that one indicator, that one formula that could just churn out money for you, trust me, with billions of dollars at work and some of the most brilliant minds at the helm, it would have been done already. What I do backtest are the execution strategies and money management techniques. The analysis is easier, but the conclusions are harder to adhere to. I consistently work on this: the number and the magnitude of losses that got away, the way a particular stock behaved in certain market conditions and the number of times there were drawdowns in the portfolio etc.
StockTickr: What do you think is the most common, but easily corrected fault in traders?
Smita: Most people jump in the ring without any idea of trading. Sometimes people give more thought to deciding what to order for dinner or which color sofa to buy than what to trade! Many people buy on gut-feel or tips. Since most traders do not have any set of rules, they don’t know what to adhere to. They end up trading with their hopes and fears rather than a trading methodology.
The key, as I can attest to, from my personal experience, is to have a strict money management system. It is the most important part of trading and traders always scramble for that one indicator, or various types of analyses, rather than utilize money management techniques. It is imperative to educate oneself and to trade with prudence. That, I believe is the only way to thrive in this profession which has such a high failure rate.
StockTickr: What advice can you offer traders who are just starting out?
Smita: For all the aspiring traders out there, trading for a living is possible. As a matter of fact, I believe that no one can look after your financial interests as you can. But you’ve have to work, and give it all you got. Read, take a few courses, do whatever it takes to feel confident. Make a record of all your trades and analyze them thoroughly. Once you get your footing, do aim to beat the index consistently, otherwise it is honestly better to put your assets in the market index and do something else with your time. You’re in it not for thrill!
Also, trading is a very ‘lonely’ profession; you have to like your own company. You make these important solitary decisions and hence your set of mind is very important. You’ll see your emotions getting reflected and impacting your trading decisions. So, learn to be passionate about trading but dispassionate in trading.
Along with your fears and greed, do remember to check your ego out the door, as well! Markets have a way of humbling the best. There are financial reasons as well for this; fear makes you gun-shy, and pride makes you complacent.
And finally, trading has a way of taking over every moment of your time and filling every nook and cranny of your mind. So, do have a life beyond stocks!
StockTickr: What do you like best about trading?
Smita: The challenge, definitely! Which other profession makes you consistently test and reinvent yourself? I certainly, wouldn’t trade my profession for any other 🙂
StockTickr: Thanks, Smita!
Stay tuned – there are several interviews on the way. You can subscribe to these interviews via RSS feed.
- Bill Cara
- Van K. Tharp – Free autographed copies of Van’s book still available! Get yours now!
- Brett Steenbarger
- Eyal Maoz
- Gary B. Smith, the Chartman
- Nusair Bawla (alibawla on StockTickr)
- Dave Landry, Swing Trader
- Jeff White, the Stock Bandit
Do you have suggestions for other traders you’d like to see an interview with? Let us know!