Interview with Trader-X

July 26th, 2006

For the next interview in the StockTickr Interview Series (RSS feed), I spoke with Trader-X. Trader-X is a day trader that is trading for a living. He has a popular blog where he shows many of his trades from the day with charts showing his entry and exit. Trader-X uses Fibonacci retracements and extensions along with candlestick charts find high probability setups.

When I say “high probability”, that’s what I mean. Trader-X says he gets a win rate of almost 80%! Knowing that kind of a hit rate is extraordinary and that other very successful day traders are perfectly content with 45%, I definitely wanted to probe him about that.

Read on for more about how Trader-X uses Fibonacci setups, how he feels about backtesting, and what he gets hate mail about. Trader-X has agreed to answer questions in the comments on this post, so ask away.

StockTickr: Tell us a little about yourself, Trader-X.

Trader-X: I live in Houston, TX. I lived in New Jersey about 12 miles from New York City for the past several years, and just moved back to Houston at the end of 2005. I am originally from Texas, but have lived in Seattle and San Francisco, as well as the New York City area.

Prior to trading, I was in technology sales. I worked for a few software companies that you would easily recognize – one being the second largest software company in the world.

StockTickr: How did you get started trading stocks?

Trader-X: In college, I started reading The Wall Street Journal (circa 1990). I would see the headlines about a stock moving XX points the day before, and think “if I had only known, I could have made a lot of money! Of course it is not that easy. But I was determined to figure out how to spot these stocks before they moved, and it more or less became an obsession. I went down the same route that most people usually do – penny stocks, options, following a few “gurus.” It has been a long journey (over 15 years), but I am glad I finally ended up where I am now.

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

Trader-X: I don’t remember any specific names, but I do remember getting wiped out a few times on bad option and penny stock trades. Sadly, this is what many new traders do – they look for the cheaper instruments because they do not have a lot of money. But, those are the tougher things to trade – especially with the limited knowledge most of us have as new traders.

I also tried trading earnings a time or two – and in my opinion you might as well go to Vegas (if you are holding into an earnings announcement). Even if the stock blows out earnings the executives could say one negative thing on the call and cause the stock to collapse.

StockTickr: Do you trade for a living now?

Trader-X: Yes! For many years now.

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

Trader-X: I learned to pick a style of trading and stick to it. I think most traders and prospective traders get lost by jumping from strategy to strategy and timeframe to timeframe. If something does not work one day, they are looking for something completely new. Pretty soon they have burned through a few dozen strategies (or different ways to trade) and have not made any money.

So I learned to pick a style of trading (or strategy) and stick to it. And I am always studying, learning, and refining it. In my case, the core strategy is 15 and 30-minute timeframes, Candles, and Fibonacci.

StockTickr: Describe your style of trading. How long do you typically hold stocks and how many trades do you make per day?

Trader-X: Short-term daytrading based on 15 and 30-minute candlestick charts, and Fibonacci. My watchlist consists primarily of the daily gappers, and I go long and short without prejudice or worrying about the overall market direction. My average hold time is probably a few hours, though I may be in and out of a stock in a few minutes. I close all positions at the end of the day (no overnight exposure). I typically have 4-8 positions per day.

I trade with the RealTick platform. RealTick has Fibonacci tools that allow you to select the high and low points, and it automatically plots the 38.2%, 50%, and 61.8% retracements as well as the 38.2% extensions above (below) the high (low).

I do not consider longer term trends – I only go as for back as the previous day’s close. And I don’t make a practice of pyramiding trades, thought I may take a second entry in a stock if it sets-up again at a key level.

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

Trader-X: I always have a target (that is the second most important lesson). I usually base the profit target on a Fibonacci level. And I always have a stop – usually based on the opposite extreme of the trigger bar but sometimes based on an obvious support/resistance level.

StockTickr: What three books do you recommend?

Trader-X:

  • Japanese Candlestick Charting, Nison. I am a big fan of candlestick charts, and Nison is the expert. But, I also “make them my own” – i.e., I may have a few different definitions or actions based on my study of charts.
  • TRADEthemove.com – I call it Fibonacci made simple. They have an e-book that I often credit as giving me the foundation for what I do now (again, I took their stuff, tweaked it, and made it my own).
  • Confessions of a Street Addict, James J. Cramer. Regardless of what you think about Cramer, it is a very entertaining and enlightening book.
  • And, a fourth that has nothing – yet everything – to do with trading: The T.A.D. Principle – in a nutshell, whether you think you can or you think you can’t, you are right. You have to get you mind in the right place to be successful. And that applies to trading or anything else you pursue in life.

Japanese Candlestick Charting - Second Edition Confessions of a Street Addict

StockTickr: What are your three favorite blogs?

Trader-X: Trader Mike, and I cannot prioritize the next two. Take a look at my BlogRoll on the right side of my site. They are all good. There are a lot of talented people out there.

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

Trader-X: I don’t look at it as % of my portfolio. If I held for a longer period, I would. But I don’t hold longer, so I look at the risk per trade instead. I risk a fixed amount per trade, and use that to determine my position size.

Here are my money management rules from my blog:

I risk the same dollar amount on every trade, and adjust my position size based on the distance from my entry to my stop. This approach makes the most sense for me, as I always know my targets and stops when I enter a trade. So, I take the distance from my entry to my stop, and divide that into the dollar amount I risk on every trade – that determines the amount of shares I trade.

Here is a hypothetical example:
$0.40 – distance from entry to stop
$400 – hypothetical amount I risk on every trade
1,000 – number of shares for this hypothetical trade

I usually close 1/2 of my position after a $1 gain. I consider this a “windfall”, and take partial profits. The actual targets I use are based on technical levels (usually Fibonacci) – see the charts on this blog for further information.

StockTickr: You indicate that your win rate is about 80% which is a phenomenal rate. How have you achieved such a high success rate?

Trader-X: A lot of people have trouble with this aspect of my trading. I get a lot of hate mail about it. I have been able to achieve a high success rate through the following factors:

  1. Limit the number of set-ups I take to only the very best – don’t take mediocre set-ups. I have a grading system for each of my set-ups you can read about on my blog.
  2. Close positions and take profits if there is an obvious reversal – i.e., I am short and the stock is falling and then prints a textbook hammer candle.
  3. Have a target, and take profits at my target.

If you do these three things, your win rate will jump. Regarding (1), many people think more positions are better. I don’t subscribe to this theory, and prefer to take only the best. Plus, I cannot give a large number of open positions the proper attention. Regarding (2) and (3), many people don’t follow these rules and as a result let winners turn to losers.

StockTickr: Your blog indicates you rely heavily on Fibonacci retracements and extensions to trade. How do you use Fibonacci in your trading and how did you settle on using that technique?

Trader-X: I started studying Fibonacci in the late 90’s, and I think it is the closest thing to the holy grail. There are times I look at it and think this stuff is magic.

The trick is how do you apply it? I have experimented with many different ways – from the most complicated to the most simple. With my current style, I plot Fibonacci lines over the previous day’s low (or high) to what I call the opening range high (or low). For the most part, I watch the key retracement areas and 38.2% extension for support/resistance and profit targets.

I detail and disclose every aspect of my style on the blog. There is a lot of information there, and anyone can study it and learn what I do and how I do it.

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

Trader-X: I don’t really think it has changed that much. I think traders who make money by luck and quit making money use the crutch of “the market has changed.” In my opinion, it is just not true. The market is the market – every day there are long and short opportunities regardless of whether the indices are up or down 200 points. You just have to learn how to read charts, study price action, refine your style, and trade!

StockTickr: Do you backtest?

Trader-X: Not in the traditional sense. I do study charts manually, and I keep a few months of data so I can look back at my charts and see how this set-up would have done, or what happened after that candle or pattern. But I don’t crunch statistics and do heavy backtesting. Again, to me the market is the market and it really does not change THAT much. If you find something that works, for the most part it will continue to work.

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

Trader-X:

  • Study A LOT of charts – that is where the answers are. Every day I still review probably 100 charts (of stocks I didn’t trade) after the market closes.
  • Don’t get bogged down with indicators – there are hundreds out there, and you can clutter your charts with a lot of them. But, in the end they are all based on price action. So study your charts, and see how price reacts at various levels. Look at your charts naked (the charts, not you) and eventually the patterns will appear. And use candlesticks.
  • Don’t jump from strategy to strategy, timeframe to timeframe – pick something and stick with it! That does not mean you cannot refine it – you SHOULD constantly refine and improve what you do. But that is different from changing things completely.
  • Don’t try to copy someone – even me! Read, study, and learn. And then apply it to your trading. Tweak it, and make it your own.
  • Get you mind in the right place to be successful!!!

StockTickr: What do you like best about trading?

Trader-X: Being in control of my own future, and having my outcome depend solely on my abilities!

StockTickr: Thanks, Trader-X!

Trader-X: Sure, Dave.

Sign up for StockTickr Pro a copy of one of Van Tharp’s books while supplies last – quickly, though, I don’t have many more to give away!

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!

9 Comments

  1. Michael Said,

    July 26, 2006 @ 5:28 am

    X,

    A question on your risk per trade/position sizing. So how do you decide the dollar amount to risk per trade? Does it chage as your account size grows or is it just a number that you feel comforable with? Also, do you let your account grow or do you pull all of your profits out?

  2. Trader-X Said,

    July 26, 2006 @ 8:12 am

    Mike – as I said on my site (and the interview), I have a set $ amount I risk per trade…so, if that amount is $500, then I take the risk from my entry to my stop (for this example, let’s say it is .50) and I come up with my position size (in this example, 1000 shares).

    To answer your question, the dollar amount I risk is what I feel comfortable with. I tend to be a little more cautious, even as my account gets bigger. But it has risen as my account grows, and more importantly as my winning % grows. For years I kept is steady at a lower amount because I hated losing more on a trade…but I also realized I was capping my profits by limiting my position size.

    Regarding pulling money out of my account – I take a set amount out every month (equivalent to my base salary at my last job – maybe it is time to adjust for inflation!).

  3. James Said,

    July 27, 2006 @ 5:15 am

    Trader-X,
    Thanks for your contributions. You mentioned about trying a lot of things, penny stocks, options etc. Can you elaborate about your experience with options and your advice about it ? Do you still use options ? And if positive, which kiinds of options ?

    Thanks for your feedback.

  4. Trader-X Said,

    July 27, 2006 @ 7:25 am

    Hey James-

    I don’t trade options. I think they have a place in an experienced trader/investor’s toolkit, but not for me.

    The problem with options is that most new investors/traders use them as a cheap proxy to trade stocks, and they usually don’t have a good understanding of the core principles such as time decay. As a result, many “newbies” lose a ton of money on options. Sadly, a lot of the “services” and “gurus” out there tout options as a way to make a lot of money starting with a little money, and they really compound the problem and losses.

    If you know what you are doing and you use options as a hedge or trade them as a very small part of your overall portfolio, more power to you. But, if you don’t have a lot of money and are just looking for cheap things to trade, I suggest just adjusting your postition size in stocks (ie – buy less shares). With a sound strategy you will build up your account slowly but steadily, with a lot less risk (than trading options).

  5. Dave Said,

    July 29, 2006 @ 3:01 am

    Hey, X. Just as an experiment, I’ve been trying to overlay the fibonacci extensions during my chart scans during the day. It seems very time consuming!

    I’d love to see how you are able to overlay them while looking through dozens of charts during the day without it bogging you down.

  6. Trader-X Said,

    July 29, 2006 @ 4:42 am

    Dave, I use RealTick as my trading platform and charting software. With RT, you just pick the high and low and their Fibonacci tool automatically plots the retracements and extensions. It literally takes 2-3 seconds for each chart.

    RT is the only platform I have used…I have been using it since the 90’s. I am not sure about the capability of other platforms, but I assume they have similar tools? It would be interesting to hear from others who use differnt software.

  7. jay Said,

    July 30, 2006 @ 7:20 pm

    X, I am curious how your $risk per trade compares to the %capital risk approach. Would it be fair to ask what your $risk has been (roughly) over time in terms of a %capital range? For example, if you started out with a $50K account and your $risk was $250 (250/50K = 0.5%)… and your account grew to $100K and you were then using $1.5K risk (1.5%)… then the range of %capital would be 0.5-1.5%. Thanks.

  8. stocktickr blog » Blog Archive » Interview with Richard Todd Said,

    August 1, 2006 @ 9:15 am

    […] Read on for more about how Richard trades, how he controls his risk, and his advice on making the jump to start trading for a living. Like Trader-X the other day, Richard has agreed to answer questions in the comments, so ask away. […]

  9. jason Said,

    August 13, 2007 @ 3:03 am

    X,thanks a lot! why i can’t get through your BLOG?

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