Interview with Richard Todd

August 1st, 2006

For the next interview in the StockTickr Interview Series (RSS feed), I spoke with Richard Todd from Move the Markets. Richard is doing something many of us dream of: he quit his job and is now trading for a living.

Richard takes a meticulous approach to daytrading and looks for setups in different timeframes to confirm entries. It’s apparently working pretty well for him as July was a good month for him. His Evolution of a Trader articles talk about where he is on his trading journey and where he wants to go.

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.

StockTickr: Tell us a little about yourself, Richard.

Richard: My name is Richard, I can’t believe I’m 29, and I live in Dallas, TX USA. I moved there just out of college to take a job with a government contractor. I helped them build large software systems. I enjoyed the work, but I wanted to try something new, and stock trading has always been interesting to me.

StockTickr: How did you get started trading stocks?

Richard: I read two books in grade school about investing. Maybe 6th or 7th grade. I don’t remember the authors or titles, or even why I read them. One was basically saying that you should buy low P/E stocks that have been beaten down in bear markets. The theory was that they will rebound the most during the next market rally. The other book was about FX trading, and I frankly remember very little about it, other than the author was convinced that yen were going to crush the dollar, long term.

Ever since then, the markets have sort of been in the back of my mind, as something I thought was interesting. But, I never read or thought much about it again until I got out of college and made some money. From out of nowhere, that dormant interest resurfaced. I opened a brokerage account with $2k, and I started buying stocks on that low P/E premise I had read about so many years ago. It was the only strategy I knew, and at the time I’m sure I thought it was all I needed to know. Of course I’ve learned a lot since then!

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

Richard: I’m afraid I don’t really have one horrible story. I’ve always been pretty risk-averse (for a trader, that is!). That’s why I traded a $2k account for several years. I wanted to learn the ropes without getting hurt. I whittled that first $2k account to $1,200 over a couple years. I still have that account, because the portfolio still has two stocks in it worth $0. One day I’ll “sell” them and take the tax loss, but for now I like to go look at them once in a while. $0. It’s good to remind yourself that sometimes they _do_ go all the way down. It’s kind of sobering.

Early in my daytrading, I took a couple 5%-of-equity losses by ignoring my stops. I didn’t like that feeling at all! But, that’s about it.

StockTickr: How long have you been trading for a living?

Richard: I quit my job and made the transition to full-time trading in March of this year. So, about 5 months now. For the four months before that, I daytraded 2 mornings a week, while still working. I had pretty flexible hours at my job, even though I was working 60 to 80 hour weeks at the time. It was rough to fit it all in, but those four months were very important. I wanted hard evidence that I could generate enough income from the amount of capital that I had.

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

Richard: Take the loss. Stop thinking and take the loss! Right Now! Did you take the loss yet? WHY NOT?! TAKE THE LOSS!!!

(or I promise you will take a bigger loss later)

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

Richard: I’m almost exclusively daytrading now. Because I normally take profits too soon (more on that below) I tend to hold stocks from a minute to an hour. I’m working on holding my winners longer.

My style is hard to describe. In my blog, I describe three stages of trading proficiency, as best as I can understand them. I really think the ultimate trader does not have any one style or system, but rather creates styles and systems to on the fly to match market conditions. Because of that, I’m trying to remain as fluid as possible, with regard to setups and conditions that I’m willing to try trading. I keep lots of notes about what seems to work for me, and what seems not to.

StockTickr: What type of charts and timeframes do you trade off of?

Richard: Right now, I look for setups on daily and weekly charts. I’ve written software that helps me do this via daily price data that’s freely available on the internet. I let the software throw out the obviously bad charts, and then I manually go through the charts it thinks may be good. I always use candlestick charts, but lately I have been getting interested in point-and-figure charts, for spotting trends and support/resistance.

Then, once I have those candidates, I daytrade them off 1, 5, and 15 minute candlestick charts. I try to stay at the 15 minute level, but sometimes I want to know more than they’ll tell me. Say you are looking at a 15 minute hammer. Did it jump up from the lows at the last minute with no volume, or did it grind back up from the lows over 10 minutes on consistent volume? The 1 or 5 minute charts can clear that up.

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

Richard: One of trading’s great oddities is that it almost always pays off to do what’s emotionally hard. It’s easier to stay in a losing trade (it could turn around!), and easier to get out of a winning trade (no one went broke taking profits!), but you should really do just the opposite. So, with that in mind:

For losing trades, it’s simple. Get out. Now. Don’t think about it. You should only be in a losing trade for the amount of time it takes to click the buttons to get out. It took me a while to learn that lesson, but I have learned it, and my account thanks me. To me, “losing” means it has crossed my stop. I only place stops at prices where I don’t think the stock will go. Then, if the price goes there, then the stock isn’t acting like I thought, and I have no business being in it. That’s why I think it’s important for your stops to have something to do with your reasons for entry, and not be just a percentage or dollar “uncle” point. It gives you a bit of mental clarity about why you should get out.

Managing winning trades is the aspect of my trading I’m working on the hardest right now. I have a bad habit of taking small profits and running, I leave a lot of money on the table that way. In a lot of ways, getting out of a winning trade shouldn’t be any different than the losing trade–you wait for the stock to go somewhere that invalidates your assumptions and then don’t hesitate. But, it’s harder to learn that lesson because messing up means small gains. Small gains don’t feel bad like big losses do. So, I’m still learning in this area.

StockTickr: Can you describe the process you went through to envision and develop your trading system?

Richard: I have kind of a hodge-podge of trading ideas that I’m still evolving. There wasn’t a lot of envisioning and developing. I think incremental adaptation is a good approach to just about anything complicated. Any system I would have designed when I started trading would be laughable to me now. It’s the same way in software development. You don’t really know what you need to design until you try to implement it. Pain is the best teacher, and motivator. The more pain I have, the more changes I try. It doesn’t have to be pain from losses, either. Some trading styles are just plain boring to me, for example.

StockTickr: How do you use StockTickr?

Richard: Three ways:

I put setups that I’m watching in StockTickr, annotated with the criteria I’m looking to see for entry. It’s nicer than my broker’s watchlist feature. Plus, they are all public, so anyone can go see what plays I’m hoping will be tradeable soon. I’d like it if people would contact me if they agree or disagree with my picks. If someone saves me from a bad trade just once, then StockTickr will have paid for itself for a long time!

Then, if I make a trade, I enter it into the journal. I used to keep a spreadsheet journal, and I had expectancy reports, etc, but StockTickr lets me slice and dice the data more ways than I could before. StockTickr also stores off the charts from your trade entry now, so it’s easy to go back and re-analyze what you did right or wrong.

Lastly, I look around at what other traders seem to be interested in. I also run the aggregate reports and see which traders seem to be having winning streaks. It’s fun to investigate people’s strategies. It also feeds my competitive fire…. I like it when my name shows up a lot in the “Most Profitable Trades” reports!

StockTickr: What 3 books do you recommend traders read?

Richard: There’s lots of learning material on the technical aspects of trading, but that’s such a small part of the picture. So, I like the biographical/anecdotal ones.

I avoided the last one for a long time because it’s so old, but when I picked it up I was surprised how relevant and enjoyable it is. Despite all the technology, some things about trading are timeless, it seems.

And I’ll cheat and add Fooled by Randomness by Taleb. It’s partially about the markets. It’s a bit scary in places, because it asks some hard questions about whether you have an edge, or whether you are just lucky. I have trouble picking three of anything! I’m an avid reader.

Stock Market Wizards: Interviews with America\'s Top Stock Traders Pit Bull: Lessons from Wall Street\'s Champion Day Trader Reminiscences of a Stock Operator (A Marketplace Book) Fooled by Randomness: The Hidden Role of Chance in Life and in the Markets

StockTickr: Other than your own, what are your 3 favorite blogs?

Richard: Like the books, this one’s tough. I’m going to cheat and pick 4 again.

There’s a growing number of video blogs out there, like alphatrends.blogspot.com. I think that’s an exciting development, because you can learn a lot about how other traders think by the way they talk. When they hesitate or backtrack it’s very telling. Some things just don’t come across in print.

In general, I’m most partial to blogs that give insight into a trader’s professional development. What aspects of their trading are they still working on? What mistakes are they making? What success are they having? I’m thinking of blogs like: www.dehtrader.com, www.uglychart.com, and traderx.blogspot.com.

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

Richard: I’ve cut down my R value over time. I started out risking 2%, but recently I’ve cut that down all the way to 0.1% or 0.2% initial risk. This is for three reasons. One, I’ve written a few articles about how risky losses are, no matter what your overall expectancy is. Two, it forces me to wait for good entry points, so that I can still buy lots of shares within my risk profile. And three, for a lot of traders, the majority of trades will balance each other out, wins vs losses. So, your account just fluctuates, and a smaller number of bigger winners propel it forward. Maybe not all trading styles work that way, but a lot do. So, I no longer see any reason to accept all the account volatility back and forth in the periods between those bigger winners. I’m trying ideas, which I’ll be writing about in my blog soon, to increase my profits on the big trades. That way, the 0.2% initial risk doesn’t hold my profits back too much.

StockTickr: What technical indicators could you not live without?

Richard: Give me just a couple moving averages, and the NYSE and Nasdaq TICKs, and I’m good. I use a variety of other indicators at times, but only to confirm what I’m thinking. I think it’s important to understand what a given indicator can and can’t tell you. I’ll give a basic example. A lot of indicators (like typical moving averages and RSI) are computed from closing prices. That means these indicators can’t “see” the difference between narrow and wide-range days. They can’t tell if a stock gapped down 10% and rose to the closing price, or gapped up 10% and fell to the closing price. So, given that, how much does “RSI > 70” really mean? These things tend to get oversimplified, I think.

I don’t know if you’d call it an indicator or not, but I also like keeping Trade-Ideas realtime scans up. I use it both to spot setups for small quick profits, and also as a kind of market mood indicator. When Trade-Ideas feed speeds up, and most of the lines are red, sometimes that’s an earlier warning of a market turn than the TICK is.

StockTickr: What amount of capital do you believe would be enough to start “trading for a living”?

Richard: It really depends on what kind of lifestyle you want, doesn’t it? But, I can say, I am single and living in a decent area of Dallas, and maintain several hobbies. I started with a $65k account while I still maintained a day job. This was my learning period. By the time I quit my job to trade full time, I was holding steady at $50k, and starting to gain some back. Now that I have to subtract living expenses from my profits, I’m breaking even most months, and down a couple hundred some months. That is, I still need to be just a bit more profitable before my account starts growing after living expenses. I’m confident that I can get to that level by 2007.

If you are trying to support a spouse and kids, or you like to buy a new car every couple years, though, you will need more income than I’m happy with. And you better have a spouse that understands that losses come with the territory, or you will be at a big emotional disadvantage.

StockTickr: Do you backtest and, if not, how are you able to instill a belief in your system so that you don’t get shaken out during inevitable drawdowns?

Richard: This is tricky. I wrote a software backtester because it’s not very complicated to write. So, I have it, and I use it. But, I’ve come to understand that backtesting isn’t enough.

You really have to understand why your system is supposed to work. I used to just try out random notions like “uhh, what if you enter whenever it goes up two days in a row, and one of those days had a range larger than 1.5 standard deviations from the norm?” No reasoning…. it just sounded an awful lot like the rules in systems you see in magazines and books, so why not? And it makes money in my tests! But when I tried to apply this system in real life, I had nothing but failure. In contrast, I have an intuitive feel for the market mechanics behind support and resistance levels. When I try and trade those strategies, they seem to work for me.

The other reason to understand why your system ought to work, is the possibility that your system works on all past data by pure chance. I used to think “surely if it works for 20 years of data there’s more than chance involved,” but I’ve seen it happen. Also, as Van Tharp pointed out in your earlier interview, even random entry and exit can show a profit under backtesting, if you use good money management rules.

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

Richard: I would tell a beginner that every time they click on my website’s donate button, the market will turn their way within three days. If it doesn’t go far enough, then they didn’t donate enough. 🙂

Seriously, though, maybe my top 3 are:

  1. try it with real money. If you don’t want to risk a little money getting your feet wet, then trading is not for you. I firmly believe that paper trading is for experts, and have written about it at length in my blog.
  2. Keep a journal of both winners and losers. Learn from your mistakes.
  3. Interact with other traders as much as possible. Get them to comment on your mistakes. Get them to praise you for your successes. If you are lucky enough to know a trader in real life, try to sit with them and observe for a few days. If not, join a trading chat room. It will speed up your development a lot to see real traders in action. Books can’t get this across, and you’ll spend a lot more money figuring it out on your own.

StockTickr: What do you like best about trading?

Richard: It’s got a certain purity to it. Say, you are a business that manufactures something. You convert capital into things like warehouses and personnel and raw materials, and then hope that you can sell your product for more than you are spending to produce it. In trading, you abstract away all those middle steps, and just try to convert $X into $Y directly. The only indirection are pieces of paper that you never even see! That’s purity. The activity and the goal are one and the same: making money.

Now, change perspectives and look at the personnel of that manufacturer. Chances are, they only work there because someone is willing to pay them for their labor. Their goal is to make money, but their activity is shrink-wrapping boxes, or accounting, or sales. A trader’s goal is to make a money, so a trader makes money, and they do it using money. What an elegant solution to the income problem!

StockTickr: Thanks, Richard!

Richard: 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!

6 Comments

  1. Move the Markets » Blog Archives » Interview with… me! Said,

    August 1, 2006 @ 9:28 am

    […] If you read me here, you know my posts can be on the long side… I revised my interview answers once or twice to try to make them short enough … did I succeed? Go read it and decide! […]

  2. uglychart.com » Blog Archive » Move the Markets Said,

    August 1, 2006 @ 1:13 pm

    […] I’ve been reading Richard’s blog. He also just started day trading earlier this year. It’s got a lot of good information. There was an interesting post about the top 50 stocks to day trade, which lists liquid stocks that have a large intraday range. It’s interesting to note how many alpha stocks are on the list. He was also interviewed by Dave for the stocktickr blog. And he has a funny post about how to recover from a loss – funny because it is true: But, when you are down thousands of dollars, and you have bills to pay, and you know that so-and-so is going to ask you how the day went in a couple hours, and they obviously already think you are an idiot for trading stocks in the first place, and you’d really like to impress them… well, somehow your brain manages to blind itself to anything but the possible upside of plans like the ones above. […]

  3. ExEngineer Said,

    August 2, 2006 @ 10:05 am

    Richard,

    Would you elaborate a bit on how you identify trends with point-and-figure charts?

  4. Richard Said,

    August 2, 2006 @ 10:42 am

    ExEngineer,

    I’m not too fancy with them. I let stockcharts.com draw them, with the boxes sized for ATR, and with 2 box reversals. When you think about it, all this P&F chart does is two things. First, it filters out all price reversals that move less than 2 ATRs. Second, it hides the amount of time a stock spent moving in any one direction. So, it’s a specific kind of data de-noising, which many find is particularly well suited to spotting trends and resistance.

    Because of the P&F time warping, it’s interesting that the trends you spot are not necessarily the same trends you’d draw on a candlestick chart. On a candlestick chart, if a stock hangs at one price too long, you would say it “broke” the trend. In P&F terms, all that matters is that the direction doesn’t ever reverse by more than 2 ATRs before resuming. So, it’s not just an easier way to spot the same animal.

    I have stockcharts.com overlay trendlines and price by volume on the chart. Trendlines in P&F charts are all at 45 degree angles, so they are easy to spot. Stockcharts.com does a really decent job of spotting the big ones for you automatically.

    For support and resistance, I look for prices that have relatively high volume against them, and which were the tops/bottoms of multiple lines on the chart. This is really the same as on candlesticks, except that again, you don’t see any small price reversals. Only spots where the direction really changed course for a bit.

  5. 2006-09 Month in Review » Move the Markets Said,

    September 29, 2006 @ 10:02 am

    […] So, 5R isn’t bad, but I spent more this month than I made. If there’s one thing I can’t do, it’s live austerely! 🙂 It’s not really a cause for concern, as long as that doesn’t continue. I’m always making improvements, and am generally ahead of schedule in improving my profitability (I had said in my StockTickr interview that it was my goal to consistently cover my living expenses by early 2007, and until this month I’ve already been doing that). […]

  6. Great Interview :: Move the Markets :: Entries :: Said,

    January 5, 2008 @ 7:00 am

    […] is an old interview with a GREAT trader. At the time of this interview he had recently started trading for a living. Now, he’s […]

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