Interview with JC, the NYSE Scalper

September 7th, 2006

For the next interview in the StockTickr Interview Series (RSS feed), I spoke with JC from NYSE Trader. Do you consider yourself an active trader? How many trades per day makes you an active trader? I used to think 1 a day was pretty active. JC is a scalper, the ultimate in active trading. He made 2,241 trades – not last year or last quarter, but in the month of August!

JC’s site caught my eye because it gives you a window into the life of a scalper. What makes them tick? What type of profits are likely? And, my goodness, how can you possibly overcome the costs of commissions? (Hint: he only pays 18.5 cents per trade regardless of share size.)

Read on for more about how JC got started trading, how he trades the markets, and what type of person it takes to be a scalper. JC has agreed to answer questions in the comments, so ask away! (Although if you ask a question during market hours I have a feeling he won’t get to it until later.) 😉

Richard from Move the Markets (and now StockTickr) submitted a few great questions as well.


StockTickr: Tell us a little about yourself, JC.

JC: My name is JC and I live in Toronto, Canada where I grew up. I’m 28, married with no kids (yet). I finished university with a computer science degree and started working for a public transportation company as a programmer analyst, then as a systems analyst.

Worked there for three years where I decided that writing documentation, debugging code, and sitting in meeting after meeting wasn’t really for me and I had to make a major career choice. I then decided to make the switch to trading and I’m so glad that my wife was supportive of my decision.

StockTickr: How did you get started trading stocks?

JC: I remember when I was younger in grade school my father helped me purchase some stocks on the Toronto Stock Exchange with some money I had made doing some odd jobs here and there. Everyday I would snatch up the newspaper to see how those stocks were doing.

My father took care of the stock picking and he would tell me about so-and-so company and how their fundamentals look good or how their new products will raise the stock price through the roof. At the time, I hadn’t a clue as to what my father was talking about…all I cared about was whether the stock would go up or not!

I also remember that during the summer months when school was out, I’d leave the TV on the stock channel, which at the time, simply consisted of several lines on the TV screen that would refresh to show the last trades made on the Toronto Stock Exchange. Every time I saw a stock I had, I’d get all excited to see the last price it was trading at. Talk about a boring summer eh?

Well that was my introduction to trading stocks and as I got older I read as much as I could about the topic.

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

JC: Back in 2004 I had made quite a bit of money trading options on stocks. Following Will O’Neil’s system in the book How To Make Money In Stocks, I subscribed to Investors Business Daily, and I managed to profit off of his system by trading options. I started with $5,000 in my trading account and I turned it into $25,000 over the course of a year.

Well, coming up to the 2004 U.S. elections, I read somewhere that the overall markets usually go down whenever a new president is elected. The numbers showed that Kerry would win, so I loaded up and bought puts on the QQQQs, expecting a Kerry win and a market tank. I guess you know what happened – Bush got re-elected, the markets rallied.

I remember thinking at the time that things would come back down and as a result I kept holding on to my position. Well eventually the premiums on the options went down to near zero and I let them expire worthless.

It took me over a year to accumulate all those profits, and I practically lost it all overnight. In that trade, I had lost about $25,000, which was everything in my trading account.

What did I learn from this? One – never get yourself in a big position just before a major news announcement. Two – “hope” is bad; I should have sold my puts to at least claim some money back. Three – never put 100% of your trading capital in one single trade!

StockTickr: Do you trade for a living now?

JC: Yes. I currently trade with a prop firm with its head office in Toronto.

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

JC: I’d have to say controlling my losses. At the beginning, it was so easy to say and everybody kept telling me this, but I found it rather difficult to do.

It didn’t really click until I read about an experiment where they had a bunch of traders square off against a system based on a coin flip with heads meaning go long, tails meaning go short. The coin flip system had very firm exit rules and a firm stop loss rule. I was quite surprised when they found that the coin flipping system did better than the traders. They found that the strength of the coin flip system was based mainly on the fact that it cut losses short.

From this I realized I could randomly get into a position and if I had a good exit strategy for taking profits and more importantly, a good exit strategy for losing trades, I should come out on top.

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

JC: My bread and butter trades are those in which I react off the movements of the ES (e-mini S&P Futures). I look for stocks that have been moving well with the ES and when the ES makes any sudden movements either to the upside or downside, I’d get into the stock either long or short. Many stocks, but not all, will move when the S&P Futures move and so, I try to take advantage of that.

I typically hold onto stocks anywhere from a few seconds to a few minutes. Since I’m in and out so quickly, I only use 1-minute charts.

I also tend to trade higher volume stocks – the likes of Ford, Motorola, and Hewlett Packard because they allow me to get in and out fast with a fair sized position.

Some of my other “quick” scalp trades involve thinner, more volatile stocks such as AMD, and Exxon Mobile and what I usually do is I look for a price level that has fairly big size on either on the bid or ask. Usually when these kind of price levels break, there is some follow-through on prices. What I do is I wait for these price levels to break and I’ll hit or punch the size with a smaller position. My aim is to simply take a few cents on these kinds of trades.

StockTickr: Scalping probably seems crazy to a lot of people – even daytraders. What made you think it was something you wanted to try?

JC: I think it had more to do with the kind of person I am. I am very lacking in patience and I cannot fathom to think of waiting too long for a trade to continue moving in my favor or even worse, going against me.

It also pains me to see a profitable position retrace and slowly give back some of the profits. I figure if I take my profits right away, I can always get back in if the stock continues in the direction of my original trade.

Scalping seemed to work for me the best, given my characteristics.

StockTickr: Describe your evolution as a trader – have you always scalped? Did you go through some other systems before the one you use now?

JC: When I first started at the prop firm where I work, I already had intentions on doing more swing or trend trading. It was a lot easier when I was working at my previous job because I would simply put in an order, go to work and not worry about it until I came home.

Well it’s a lot different if all you’re doing is watching it! Every little bounce and every little jiggle of the price had me on the edge of my seat.

It took me a while to realize what my weaknesses as a trader was and from these weaknesses I started to build trading rules and strategies that would work for me. This resulted in me becoming a scalper.

I sincerely hope that being a scalper is a case of “two steps forward, one step back”, because I really do wish to hold on to trades much longer to be able to capture more of a move. I’ll continue to work on my weaknesses and hopefully I can evolve into the trader I hope to be.

StockTickr: What type of person do you think makes a good scalper?

JC: I believe you’ve got to be quick and decisive and you must know immediately when you’ve got a loser on your hands. It does no good if you take several 3 or 4-cent winners, then take a 20-cent loser.

I also think patience is a great benefit – patience in waiting for a good high probability trade and patience when it comes to holding on to winners.

Finally someone who can keep his or her emotions in check would also be ideal. Since scalpers are in and out so many times during the day it becomes mentally draining fairly quickly and emotions will tend to cloud judgement, which can ultimately lead to revenge trading and trader blow-ups.

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

JC: My trading strategies are set-up in such a way that I expect my position to immediately go in my favor as soon as I’m in. During the initial move, I’ll take about ¼ of my position out for a few cents and hold the rest. From there, I’ll keep a close eye on the Futures and the stock – if either of these look like they are stalling, I’ll take the next ¼ of my position out. As for the rest of the position, it’s more of a judgement call on my part, though I have rules about how long I’m supposed to hold the last ¼ of my position.

The last ¼ I’m supposed to hold on it until I see the first candle that is lower than the previous candle on the charts if I’m long, or the next higher candle if I’m short.

Since I usually expect my trades to immediately go in my favor once I’m in, I will usually punch out for even or a 1-cent loss if it doesn’t. Unless there is some support behind my trade in the form of size on the Level II, I usually cannot tolerate seeing a losing position in my blotter and I have a tendency to get out immediately.

Richard: Why only NYSE stocks? Do you plan to expand to Nasdaq stocks at some point?

JC: That’s an interesting question. When I first joined my prop firm, I was fully prepared to trade Nasdaq. But instead they started us off trading NYSE. The first stock they had me trade was Wal-Mart.

Soon I got a feel for how it moved and I started trading other NYSE stocks. I remember looking at a Nasdaq trader and saw what he had on his screen and I thought, “That looks a lot different than what I’m used to”.

Then a little later on, the prop firm had some Nasdaq traders try to trade NYSE and the response was more negative than positive. Some were saying they didn’t like the way NYSE moved or that they found it impossible to trade because orders sometimes got filled or cancelled a lot slower because of the specialist.

It was because of these negative responses, I got the feeling that the difference between trading NYSE and Nasdaq were like night and day, at least for scalping anyways. I decided to stick with what I know, which is NYSE.

As for whether I’d trade Nasdaq? I’m not quite sure. I’ll see how much profits I can squeeze out of NYSE first and then maybe I’ll expand to Nasdaq.

Richard: Can a profitable scalper make more consistent profits than a slower trader? In other words, a losing streak for a swing trader might mean a couple down weeks, while it seems like a losing streak for a scalper might mean a couple down hours. Is that accurate?

JC: I would say that that statement is fairly accurate. Why?

Assuming we are comparing a profitable scalper and a profitable swing trader, let’s say that both have 60% of their trades as being profitable. Now, lets assume the swing trader does one trade a day. This means that during the week, the swing trader will be negative on two days and positive on three days.

And what of the scalper? He/she should be profitable everyday assuming he/she does enough trades during the day.

If both the scalper and swing trader encounter a losing streak, then the swing trader will have to feel the pain a lot longer than the scalper. Assuming the losing streak is not caused by outside factors like stress, family problems, etc, let’s consider a losing streak of 20 trades. The swing trader will be negative everyday for a whole month. But for a scalper, that losing streak lasts only for a portion of the day.

Now, of course, I’m just talking about probabilities and statistics here – there are a lot of other factors involved. As for who makes more money? That’s a different story – but if we’re just talking about consistency, then the scalper wins.

Richard: Do you find scalping to be more stressful than slower trading?

JC: I think so. When I’m scalping, I don’t have the luxury of setting up automatic stops, which means I’ve got to nurse my position from beginning to end. The profits or losses will be entirely up to me, whereas in slower trading, one can use charts to determine and set up an automatic stop loss, a trailing stop loss and even profit targets.

I think the most stressful or most nerve-wracking part of a trade is when you initially get in and you watch to see if the position will go your way. A slower trader may have to go through this 2 to maybe 5 times a day, whereas a scalper may have to go through this 50 maybe 100 or more times a day.

That being said, I think trading can become stressful if you let it become stressful. A lot of the traders at my firm are almost robot-like in their trading, since they are in and out so much during the day. For them, if something doesn’t work out, they’ll just punch out for a loser and wait for the next opportunity since they know there will be 100’s of other opportunities that will present themselves during the day.

Richard: How do you see through all the Level II tricks and misdirections? Do you show the true size on your orders?

JC: I’ll usually observe the Level II in the morning and if I see more tricks than usual, I’ll either be cautious when trading the stock, or I’ll simply watch another stock and maybe come back to it later.

Of course, sometimes I’ll fall for some of the tricks being played on the Level II, but the key is to know when it’s happening and to avoid falling for the same tricks again.

I find that tricks become more prominent when the markets are slow in general like during the lunch hour or on low volume days or on days in which volatility is low. The best thing to do when these tricks are going on is to simply not trade.

As for whether I show my true size on my orders? For now, yes, but now I’m starting to trade bigger sizes and it’s getting more and more difficult to get filled on the whole position, so in the future, I may have to resort to reserve orders, where I only show a size of 1 on the bid/offer that will keep refreshing until my entire order is filled.

StockTickr: What 3 books do you recommend traders read?

The book that really got me interested in doing this for a living was one of the first real books on stocks I had read: Trading For A Living by Alexander Elder.

The next set of books is more for inspiration than anything else: it’s the Market Wizards series by Jack Schwager.

Lastly, I’d recommend Trading in the Zone by Mark Douglas. This book really helped me to understand the psychology of trading and helped me to get a better understanding of everything from fear, to risk, to consistency as a trader.

Trading for a Living: Psychology, Trading Tactics, Money Management Market Wizards: Interviews with Top Traders Trading in the Zone: Master the Market with Confidence, Discipline and a Winning Attitude

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

The first has got to be TraderMike. It has a wealth of resources and links. If I had the time, I’d probably spend hours going through all of the links to articles he has there.

Second is Move the Markets. It features daily scans that I use to look for new potential stocks to trade. There is also some commentary posted from time to time, which I find to be of great help.

Last is Alpha Trends. I always set aside some time to view the daily videos he has posted there, mainly to just get a sense of where the overall markets are going.

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

JC: I don’t really measure my risk in terms of R-value. Since my timeframe for my trades are small, I mainly determine my risk by the size of my position. The size of my position is based on how easy it would be to get out of it IF it were to go against me.

As an example, if I were trading Motorola or Ford, then I’d use bigger share size like 10,000 shares because it’s very thick and easy to get my entire position out if I had to.

On the other hand, if I were trading a fairly thin stock like AMD or Johnson & Johnson, then I’d use 2000 or 3000 shares.

To determine position size, I usually ask myself “If this position were to go against me, would I be able to get 50% or more of my position out for a 1-cent loser without any problems?”

StockTickr: What technical indicators could you not live without?

JC: I don’t really use technical indicators per se. The only thing I use is a 20-minute EMA line, which I use mainly to determine the overall trend of both the stock and the ES. I also have volume displayed on my charts. I mainly trade off of the price action and Time & Sales.

StockTickr: Do you backtest and if not, how do you instill a belief in the system you’re using?

JC: I find that being a scalper makes things a little difficult to backtest. There are so many other variables that come into play like how well the stock has been acting that day, how well the ES was moving, the strength of a particular move, the mood of the markets on a particular day, the size of the prints that go off on the time and sales – all of these factors make it difficult for me to backtest.

Instead, my system is based on trial and error and as long as I’m profitable, I’ll stick to it. I usually always trade the same core stocks day in and day out and there will be times when a certain stock becomes stagnant, in which case, I’ll switch it out for another stock.

If I find things are not working as well or that my system no longer works, that’s when I begin changing things a little here and there and so the trial and error phase begins again.

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

JC: My advice to traders who are starting out is to come up with a real plan as to how you are going to approach trading. You’d be surprised at how many people I see come in, push some buttons everyday, get random results, then come back and do it all over again and hope they get lucky and make some money the next day.

StockTickr: What do you like best about trading?

JC: I like the fact that you are your own boss. There are no deadlines, no meetings, and you don’t have to “pretend” to be busy whenever the boss walks by.

I also like the fact that your earning potential is not capped. At my old job, I could work 110%, but yet get the same pay as the lazy guy in the next cubicle. I believe in trading, the harder you work on either yourself or your approach to trading, the more rewards you get.

Richard: What are the advantages and disadvantages of working at a prop firm?

JC: One of the advantages of working at a prop firm is that they give you more capital and more buying power than one can usually afford to trade. At the prop firm I work for, I didn’t have to deposit or use any of my own money to trade with them.

Another advantage is that they offer very low commissions – of course it varies from firm to firm. I can exit a trade for a 1-cent winner and still have a profit after all commissions.

I’d say another advantage to working at a prop firm is that the capital you are trading with isn’t yours. I find that some people would act or make trading decisions a little more differently if it were their own money. I know some people take it more personally whenever they make a bad trade and that their emotions are at a higher level when they use their own money to trade. Come to think about it, it may also be a disadvantage, after all, some people might feel even more nervous knowing that the money they are trading is not theirs!

The disadvantages? Depending on what firm you work with, you have to obey their rules. Some firms are stricter than others, so one will have to do their research before joining.

Another disadvantage is that they’ll take a cut of whatever you make. Of course, this is the trade-off for their lower commission and letting you use their office space, trading software, and their computers. The cut will vary from firm to firm as well.

The last disadvantage is more something you should ask yourself and the prop firm: what if you lose a dump-truck load of money…are you going be responsible? Again this varies from firm to firm so those who are interested let me make this clear: DO YOUR RESEARCH!

StockTickr: Thanks, JC!

JC: Sure, Dave.

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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!

3 Comments

  1. John Said,

    January 6, 2007 @ 8:32 pm

    FYI

    HI JC,

    I see your post is a bit dated.

    You certainly have a way of describing your trading weaknesses and what you intend to do about them.

    Learning = enormous challenge for day traders, new and old – myself included.

    Check out this Web site – totally unique approach, system, and strategies to learn to consistently win.

    Get back to me with feedback after your visit.

    John

  2. Claude Said,

    January 12, 2007 @ 9:57 pm

    Does anyone have an email address for JC NYSE scalper ?

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