Interview with Alan Farley

May 31st, 2006

For the eleventh interview in the StockTickr Interview Series (RSS feed), I spoke with Alan Farley. Alan is a regular columnist at TheStreet.com and has his own web site called the Hard Right Edge.

Alan is also the author of The Master Swing Trader, a book that’s near the top of many traders’ recommended lists.

StockTickr Pro users got to submit questions to Alan for this interview.

Read on to see how Alan defines his risk (it might not be what you think), what indicators he uses, and if you’re just starting how why you shouldn’t try to make money.

StockTickr: Tell us a little about yourself, Alan.

Alan: I’m 54 years old, living with my wife and kids in Tempe, Arizona. I was born in Brooklyn and grew up on the east coast. We’ve been out west now for over 20 years. I trade full time and write full time. That’s two full time jobs wrapped into one! It’s amazing what you can accomplish when you work more than 80 hours per week.

StockTickr: Most traders have a horror story about losing their shirt when they first started trading. What’s yours?

Alan: I had a losing position on a stock called Trinitech Systems back in 1995. It collapsed and I was forced to take the largest loss in my short career as my wife and I were walking out the door to celebrate our 10th wedding anniversary.

StockTickr: What single lesson did you learn along the way that has helped you the most in your trading?

Alan: Wall Street and technical analysis are both big shell games. You have to see past the lies in both places to make money in the stock market.

StockTickr: Describe your style of trading. How long do you typically hold stocks?

Alan: Of course I’m a swing trader. But I’m a swing trader who winds up day trading all the time because it’s my way to manage risk in dangerous markets. And we seem to have continuous dangerous markets these days.

StockTickr: What’s your exit strategy for winning and losing trades?

Alan: I rarely hold onto positions that move even a little against my chosen direction. I also like to take profits on big white bars, when everyone else is rushing to get into their positions.

StockTickr: Do you scale into and out of positions when they go your way?

Alan: If I scale, it’s usually the same day as the original position. I’m not interested in big buying or selling campaigns these days. I’m much more focused on taking fast profits and getting back to the sidelines. That will change if and when we have a market that trends in one direction for more than two weeks.

StockTickr: Besides your own book, The Master Swing Trader, what 3 books do you recommend traders read?

Alan:

StockTickr: What is your typical risk per trade? i.e. what % of your portfolio do you risk with each trade?

Alan: I never take risk based on percentage of a portfolio. I think that approach is illogical. I calculate how much money I’m willing to lose on a trade, based on its risk characteristics. That rarely comes out to more than four or five hundred dollars per position.

StockTickr: What technical indicators could you not live without?

Alan: Stochastics, RSI and moving averages.

StockTickr: What is the most common, but easily correctable fault you see in traders?

Alan: That’s easy: trend relativity errors. This happens when you take a position in one time frame but trade it in another time frame.

StockTickr: How do you think the market has changed over the last several years? How have you adapted?

Alan: It’s moved from a human based to a silicon-based life form. Program trading now accounts for the vast majority of market volume. I’ve adapted by mistrusting volume, direction and momentum signals. In turn, I play failure signals much more than in the past.

StockTickr: How do you recommend traders handle the inevitable drawdowns that are inherent in trading?

Alan: Many traders should not be trading. They need to use drawdowns as a reality check about their market skills and whether or not they’re able to exercise rigid discipline in their risk taking.

StockTickr: Do you backtest and do you recommend others do so?

Alan: I don’t believe in backtesting. You can make anything lie with optimization.

StockTickr: What advice can you offer traders who are just starting out?

Alan: Trade small and don’t try to make money. Concentrate on playing the game well.

StockTickr: What do you like best about trading?

Alan: I can control my own day, life and destiny without working for the man.

StockTickr: Thanks, Alan!

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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 (RSS feed):

Do you have suggestions for other traders you’d like to see an interview with? Let us know!

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