Interview with Tim Knight, Prophet.net

March 20th, 2007

For the next interview in the StockTickr Interview Series (RSS feed), I spoke with Tim Knight, who founded Prophet.net way back in 1992. I’ve followed Tim’s blog after seeing it in TraderMike‘s blogroll. Tim has also just released a book called Chart your Way to Profits (Wiley 2007).

Tim is an outspoken perma-bear and proud of it. I think anyone would be if the first trade you ever made was on Black Monday! I guess that would skew your thinking to the dark side.

I have to say that I think this interview ranks up there at the top of all the interviews in the series. Read on for more about how Tim trades the markets, some excellent advice on “just sitting there”, and the most interesting “what do you like most about trading” answer that I’ve come across yet.

Tim is eager to answer your questions in the comments of this post, so ask away!


StockTickr: Tell us a little about yourself, Tim.

Tim: My name is Tim Knight, and I live and work in beautiful Palo Alto, California, which is at the northern end of the Silicon Valley. I am the Senior VP of Technology at an investment education firm, and I’m also an active equity and options trader.

Most of my adult working life has been entrepreneurial. I founded Prophet in 1992 and, over the course of thirteen years, built it into what is recognized as the world’s top technical analysis web site. I sold the company in January 2005 and have been happily working for the purchaser here ever since. I am still very actively involved in product development.

StockTickr: How did you get started trading the markets?

Tim: I’ve always had an interest in charts. One of my earliest childhood memories was, while growing up in rain-drenched Louisiana, watching the water beads wiggle up and down the window of the car I was in. So trying to guess where a randomly-wiggling object is going to go next as always been a strange fascination of mine.

My first very equity trade was on black Monday in October of 1987. It wasn’t deliberate, and I should have taken it as a warning sign but failed to do so. I spent the next 20 years trying to learn from and understand the markets, and I’d say only just now do I have a relatively decent grasp of it.

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

Tim: I think buying my first stock on black Monday was a pretty instant horror story. I was completely naive and had no idea what I was doing – which is a circumstance I fear the vast majority of investors are in. I bought Apple Computer because I loved their products and because I worked there. I thought I was getting a bargain since the stock was so much cheaper than it had been before. Of course, it kept going down. For no particular reason, I bought more of it in December 1987, and I actually came up ahead even though averaging down isn’t exactly a wise thing to do. But I didn’t know any better!

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

Tim: Never do an ad hoc close. I can’t tell you how much money it took me to learn that lesson. What I mean by that is, once you’re in a trade, set a stop, and forget it. You are welcome to adjust your stop price as the markets move through time, but rushing in to close out a position just because you think you should is insane. Let your stops do the hard work for you. As a good friend of mine once said, “Don’t just do something! Sit there!” I cannot think of any more valuable piece of advice than that when it comes to the markets.

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

Tim: I’d call myself a swing trader with an inexplicable proclivity toward the short side of the markets. My typical holding time is anywhere from one to three weeks. It really depends on the broad trend of the market. As of this writing, the markets are being very cooperative, so I’m happy to hold on to trades as long as they don’t cross my stop price.

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

Completely chart-based and stop-based. Within seconds of being in a trade, I’ve got my stop order in place (which, in the case of options, is a contingent order). I never let a position just float out there. And every few days I make sure my stops are up-to-date based on recent chart action. In a declining market (for a bear like me), this is great fun, because it’s just a matter of locking in your profits tighter and tighter.

StockTickr: You’ve made no secret of the fact that you’ve been bearish for some time. Would you call yourself a natural contrarian or is there something about the market over the last few years that makes you consistently bearish?

Tim: I think I must have been hit on the head by a brick as a boy, and I can’t remember it. Either that or I just have a really bearish personality built into my DNA. I definitely don’t try to hide it, although I force myself to offer up a bullish chart from time to time. I’ve heard the old saw about bulls make money, bears make money, and pigs get slaughtered. I suppose that’s supposed to be an admonishment against being greedy. I personally think it’s a useless little bromide. I’d say instead that bears make money in bearish markets, bulls make a TON of money in bullish markets, and that’s that. Bulls will always come out ahead in the end, because stocks can go up thousands of percent, whereas they can go down only 100%. No one ever got filthy rich shorting. Just being long at the right time.

StockTickr: What 3 books do you recommend traders read?

Tim: Well, my own, for one thing! In all seriousness, I’m quite proud of it, and anyone who uses the Investor Toolbox or Prophet.net would benefit (it’s called Chart Your Way to Profits, and it was just published by John Wiley). I also have a lot of admiration for a book called Trading in the Zone. Finally, Market Wizards is a classic I think every trader should read.

Chart your Way to Profits  Trading in the Zone  Market Wizards 

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

I barely have time to do my own blog each day, so to be honest, I really don’t blog around that much. But I will say The Kirk Report is a fun read, particularly the entries where he had a mish-mash of links to various interesting articles or web sites.

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

I confess, I have no idea what you mean by R value. As for the percentage of my portfolio, I typically put no more than 5% into an equity trade, 1% into an option trade, and 5% into an index option trade.

StockTickr: What technical indicators could you not live without?

Tim: All of ’em. I’m an old school chartist – give me a ruler and a pencil, and I’m a happy guy. Although I must say, I have grown quite dependent on Fibonacci retracements.

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

I think the major change has been, until quite recently, complacency. Humans have an incredibly short memory, and the lessons from 2000-2001 were promptly forgotten, just as they have been throughout human history. People got stupid about the markets again, and the rah-rah cheerleaders on CNBC could again cheer with impunity. I don’t know if the very recent downturn will last, although I certainly hope so. By the way, I’m a lot more fun in person than I bet this interview is making me sound! I probably sound like I’m a grumpy 97 year old man with a broken walker.

StockTickr: Do you backtest?

Tim: No. Never have.

StockTickr: How do you suggest traders go about finding a system that matches their personality?

Tim: I think that takes years of trading to figure out. I remember an old saying that “If you don’t know yourself, the market is an expensive place to find out.” It’s true. But it can be a really fascinating process of self-discovery.

StockTickr: What do you like best about trading?

Tim: I like the fact that, every day, a tiny piece of human history unfolds. I doubt many people think of it in historical terms, but the markets are unveiling the human story with every tick. So all the business ups and downs, the scandals, the products, the politics, the weather – it’s all built into it. So establishing a personal relationship with the market – as long as it’s a disciplined one – it’s a really engrossing way of plugging yourself in to the entire world around you.

StockTickr: Thanks for taking the time for this, Tim.

Tim: Sure, Dave!

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. Prospectus Said,

    March 20, 2007 @ 4:50 am

    Tim,

    Do you mean you risk losing 5% on an equity trade, or that your position size is 5% of your equity?

    Also, do you have particular setups that you look for, or do you just get a feel for directionality in a stock you’re following and ride the moves?

    Thanks!

  2. Good to Go Pile . . . « Trading for the Masses Said,

    March 20, 2007 @ 6:53 am

    […] Tim Knight Interview […]

  3. Born2Code Said,

    March 20, 2007 @ 8:39 am

    Prospectus: i cannot speak for Tim, but following his blog and this interview i am fairly certain he is talking about position size of 5% and NOT risk. Also the charts he posts reveal a lot about his approach to trading. i have not been reading him for long, but so far i can tell that is looking for topping formations that are breaking below long term support.
    Tim: i believe Livermoore did become filthy rich shorting stocks… not that it helped him die happy.

  4. Prospectus Said,

    March 21, 2007 @ 5:07 am

    Thanks, B2C.

    Also, Livermore suffered from depression, which is why he didn’t die happy. People think of him as just a prolific short seller, but in reality he was just as gifted in and apt to take the long side. He always wanted to be positioned in the direction of least resistance, as he called it. He’s famous for shorting the 1929 crash, but he went short months before that as he saw a top in the market and a change in the underlying fundamentals. A true trader! His financial downfall was an inability to follow his own excellent trading rules. In that sense, I see a lot of similarities between myself and Livermore. Learn from the great ones, both what to do and what not to do!

  5. Tim Knight Said,

    March 21, 2007 @ 8:08 am

    To respond….

    + The position size is 5% of my equity

    Umm, it occurs to me that’s the only question! Thanks for checking out the interview; it was fun.

  6. Tim Knight Said,

    March 21, 2007 @ 8:09 am

    Oops, there’s another question:

    “Also, do you have particular setups that you look for, or do you just get a feel for directionality in a stock you’re following and ride the moves?”

    It’s more of the latter. I love classic patterns, such as head and shoulders or domes. Every chart is unique, but a good set of trendlines and, in some cases, Fib retracements will tease out the likely direction and stop prices for a stock.

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