Interview with Joshua Hayes, BigWaveTrading.com

March 26th, 2008

For the next interview in the StockTickr Interview Series (RSS feed), I spoke with Joshua Hayes, the founder of BigWaveTrading.com and a free service called BigWaveTrading.net.

Read on for more about how Joshua trades, how he got started trading the markets, and the most valuable lesson he learned to improve his trading.

There are several great interviews on the way – have a recommendation for an interviewee? Drop us a line.

StockTickr: Tell us a little about yourself, Joshua.

Joshua: Hello. My name is Joshua J. Hayes. I live on the island of Maui, Hawaii and have been here for almost a full eight years. I moved here from NYC after working on Wall Street for one and a half years. Before that I spent my entire life in St. Louis, MO. I find living on Maui much better than living in St. Louis, obviously.

I have been involved in the stock market since 1996 at the age of 17, I have been doing this for a living since 18, and have been full-time since the age of 21. When I moved out to Maui, I took part-time jobs here and there which included working at an art gallery, a sunglass shop, beach activities rental, and at a restaurant called Hula Grill. But as of two years ago, I gave up the part-time jobs as my plate became too full with me starting my own blog and website.

StockTickr: How did you get started trading stocks?

Joshua: I happened to see CNBC at a friend’s house near the end of 1995 and saw that IOM and AOL were being talked about. Since I heard about both companies I went and did some research on them. Next thing I know I was diving into the stock market and by the time the end of 1996 came I was day trading and position trading stocks with money that I made while doing odd-jobs. The rest is pretty much history as I happened to start in one of the best bull markets when I started and I was given Investors Business Daily which enabled me to learn to not only buy the best stocks but how to prevent myself from losing all of my gains. However, the fact that I came across IBD at the very beginning is a big part of why I was so successful so early on and why I did not lose a lot of money when the bull ended.

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

Joshua: I was very blessed. I never had one. I learned the CANSLIM system almost immediately and while learning that, I was also day trading, and “messing” around with options. By the time I felt I understood the CANSLIM system, it was clear to me which strategy was going to produce the best returns while leaving me with few losses. Sure enough, it worked like magic as I first saw the market in 95, learned how to buy stocks in 96, learned how to buy the RIGHT STOCKS THAT PRODUCE THE BIG GAINS by 97, learned how to sell by 98, learned how to maximize leverage by 99, and KNEW we were topping in 00. This is why I left NYC in June 2000 and moved to Maui. I new it was over as the charts never lie. The charts were clearly telling me to go home. So to be honest the worst stock probably was IWOV in 2000 as a friend convinced me to make this a long term holding. I normally always cut losses at 7-10%, but this one was down 50% before I got rid of it.

StockTickr: Do you trade for a living now?

Joshua: Absolutely. I have been doing this for a living for a very long time but have made the decision to do this 100% of the time (without a pat-time, which is very normal to have on Maui) as I am confident in every bull market we ever have I will make enough to cover the bad times.

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

Joshua: Cutting losses. No doubt. It is impossible to go broke, once you learn a methodology that can produce enough winning results to make a difference. Even if you are 1 out of 4, as long as you cut the three with a 5-7% loss and your fourth stock rallies 50%, you are obviously going to do very well. During bull markets, I usually have about a 75% win/loss ratio and winners beat losers by at least 4 to 1 margins. In bear markets, longs have a 25% win/loss ratio and the winners only beat the losers by a 2 to 1 margin. So obviously I prefer to go long only in bull markets. Cutting your losses makes sure you will always have capital to use when the next bull market comes along. There will always be another bull market after a bear market cycle and you want to make sure you do not lose all of your money during these times by either over trading or buying stocks on the way down.

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

Joshua: I am a CANSLIM investor that uses a bit of a momentum growth strategy as well. I will only buy completely speculative stocks if the charts are perfect and there is some turnaround. Besides that I need the stock to be high quality. Strong fundamentals, a rising overall stock market, a beautiful chart pattern with the proper volume, and rising mutual fund sponsorship are all requirements I look for in a stock before going long. I love to either buy stocks on powerful moves with huge volume either from bounces off the 50 day moving average or breakouts from chart patterns like double bottoms, cups, cup with handles, saucers, saucer with handles, ascending base, flat bases, and high tight flags. Most of these patterns need to last at least five to seven weeks before I will go long the move.

My usual holding period for the perfect stock would range anywhere from one year to two years. However, I will not hesitate to cut my loss the very next day if I go long a stock and it immediately reverses on strong volume. Everything I touch I expect to move higher immediately. If I purchase it and it moves lower, I know I am wrong and therefore do not want to be a part of it. The usual holding is 6-8 months for my best stocks. But it could be as little as two weeks or as long as two years.

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

Joshua: Since I go long stocks usually right at a breakout point or with a bounce off the 50 DMA and I ONLY buy stocks above the 50 DMA, all of my FINAL cut losses on longs come when a stock closes below the line. If after having big gains, the stock starts to make new highs at a much more rapid to parabolic rate on either HUGE volume or extremely quiet volume, breaks down below the 50 DMA on HUGE volume, or sells off for many days in a row on heavy volume these are all things I would look to sell. My final cut loss, for a stock that has produced at least a 100% gain, is with a close below the 200 DMA. I am NEVER long any stock below the 200 DMA.

StockTickr: What 3 books do you recommend traders read?

Joshua: Actually, right now, there are four but I have to even recommend more as EVERY SINGLE one of these books MUST be read. Everyone and I mean everyone MUST read Reminiscences of a Stock Operator about Jesse Livermore by Edwin Lefevre. This is the book that should be able to prove to you that the greatest trader of all-time traded a certain way and that is the CANSLIM way more-or-less. If the greatest trader of all-time that literally could move the market traded this way, don’t you think you should? How to Make Money in the Stocks by O’Neil, Monster Stocks by Boik, and How Legendary Traders Made Millions by Boik. There are a few others like Battle for Investment Survival by Loeb, Trading in the Zone by Douglas, and How I Made 2 Million Dollars in the Stock Market by Darvas.

Reminiscences How to Make Money In Stocks Monster Stocks How Legendary Traders Made Millions Battle for Investment Survival Trading in the Zone How I Made $2,000,000 in the Stock Market

StockTickr: What technical indicators could you not live without?

Joshua: Price and volume. Without volume, I am screwed. A price pattern is great but without volume I have absolutely no clue if the big boys or the dumb-money is moving the stock. Big powerful moves on low volume usually fall under their own weight. But with volume you can see if the buying is powerful or not. You can’t be an elephant but you can follow them. There will be another TASR, in the next bull market but the price pattern alone will not help me find it. I need the volume so that I know mutual funds, pension funds, insurance companies, and banks are loading up in the stock. Besides volume, I need the 50 and 200 day moving average and 50 day volume average. I have to see the historical support areas and the reference point to volume so that I know if the stock is being supported or if they are going to let it drop. Price, volume, moving averages; that is all I need.

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

Joshua: I have to say since the year 2003, the VIX collapse has made it very hard to find stocks that produce 500% to 1000% gains. In 1998, 1999, and 2003, that was not a problem as many stocks would breakout from gorgeous chart patterns and produce huge winners, after the downtrends were over and a new bull market would start. From 2004 to 2007, I was very happy to just find multiple 300% winners. And after a few years of that it has become tiring. The great news is that the VIX has recently re-entered a higher trading range, HOPEFULLY, taking it back into the 1997-2003 range that I have been used to my whole life. 2004-2007 wasn’t impossible to make a ton of money but the stocks like ERS and BOOM that produced 500% for me could have produced a lot more with a higher VIX. If the VIX was where it is at now back then, BOOM and ERS would have been 1000% stocks. So the low VIX has hurt.

But the worst one is Regulation FD. This now doesn’t allow companies to leak info about earnings that used to show up on charts. That is why you have such HORRIBLE gaps higher and lower now that you did not have pre-Reg FD. It is a stupid law and should be eliminated. It has definitely hurt chartist during earnings season.

StockTickr: How have you adapted?

Joshua: I just accept the fact that I am not going to make as much money now as I was between 1997-2003. From 1991-1996, the VIX was doing the exact same thing it was doing from 2004-2007. But now, thankfully, the VIX is back into the middle of its historical range and if the index is reverting to the mean it is going to be a great next few years. But if the market does not sell off further, taking the VIX to 40, I am afraid we will be right back below a 20 VIX and once again you can forget about getting any 1000% to 2000% returns. They simply are not going to show up, with this kind of complacency.

StockTickr: Do you backtest and if not, how do you instill belief in your system?

Joshua: I have been doing this since 1996, I have owned over 60 stocks that have made 300% gains or higher since then, and I have studied the best stocks in the stock market going back to 1880. Since 1880 to now, every single year, every single decade, every single generation, and yada yada, the exact same characteristics are in the best stocks. The greatest stocks of the 1890s, 1930s, 1970s, and upcoming in the 2020s, all have built the same similar chart patterns and have all had the same characteristic which make up the CANSLIM system. After seeing the greatest stocks of the 1900s-1950s setting up in the exact same chart patterns and making these HUGE moves, just like the 1950s-2007 best stocks, it is clear that this is the greatest way to invest out there. AAII is tracking somewhere over 60 different strategies since 1998 and the AAII screen has produced a return with the CANSLIM system of 1530% to the SP 500s 54%. Now my question to you is why doesn’t everyone trade like this? Because it is too hard for most. Most will not do the necessary work to learn how to find the next 80,000% gain in CSCO.

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

Joshua: Be patient, don’t gamble, read books. Start small, do it because you love the game not to get rich. This is not something you want to get involved in if you are looking to get rich quick. If that is your mission, you will fail. The greatest traders of all time loved what they did. I love what I do. If it wasn’t for surfing, I would probably do this all day long. But thank God, for now (my gf is going to make me move some day) I live on an island so relaxing that I never want to do anything stupid with my trading. By staying relaxed I am always in the moment and never marrying any of my positions. Never fall in love with a stock as it is a piece of paper and remember the only good stock is a stock moving higher. If you buy a stock and it falls 20%, you do NOT buy more, you dump it!! You are wrong and move on. While some people wait for their stocks to turn around, many stocks will make 50% plus moves during the time when your stock loses money. Never throw good money after bad. But the most important thing to do is to ONLY invest with the trend. If the market is moving up, you go long stocks. And when the market is moving sideways to down, you stay in cash. Only once you learn how to make consistent money going long stocks should you even consider going short. However, I remind you, nothing is more important than patience.

StockTickr: What do you like best about trading?

Joshua: I can travel to anywhere in the world and as long as I have an internet connection I can make a living. I can go on surf trips all over the equator (no cold water please) and as long as I have a way to connect I can look at my beautiful charts and just love my life. Making my own hours, making a TON of money in strong bull markets, making good money in strong bear markets, and staying in cash in wild markets like this while everyone else goes nuts just feels great. I love being in control of my life and I thank God in Heaven every day that I get to live my dream and help others now make a TON of money to. There is nothing in life as great as being a professional stock market investor. So many try this game and fail that when you are doing so well at it it makes you feel very good. But what makes it even better is knowing that the goal of trading for a living while living on a beautiful island full with warm weather came true at such a young age. I don’t know what else I would do, if I couldn’t look at my beautiful charts. I am sure it would be something in surfing but honestly that doesn’t sound nearly as good as getting very long LMLP in 1999 and watching a 1,300% gain establish itself in 6 months while doing nothing but relaxing and surfing at my favorite breaks. The surf on Maui might not be that great but doing this for a living here is simply a dream come true.

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    April 1, 2008 @ 1:15 am

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