For the next interview in the StockTickr Interview Series (RSS feed), I spoke with Scott Andrews from Master The Gap. Scott trades the e-minis using a unique style that he devised on his own through years of backtesting and trading experience.
Read on for a great interview and learn more about how Scott trades, the types of setups he’s looking for, and how he got started trading.
StockTickr: Tell us a little about yourself, Scott.
Scott: I grew up in rural Virginia and now live in Cary, North Carolina with my wife and four daughters. I attended the United States Military Academy, most commonly known as West Point. After graduating in 1987, I served as an Aviation officer and helicopter pilot. Serving in Operation Desert Storm was enough for me to realize that I loved the Army and flying, but not enough to make it career. So, I left in pursuit of a more family-friendly lifestyle.
My first job was selling laboratory products and chemicals to scientists. It didn’t take long to realize that they weren’t interested in hearing my “war stories”; they just wanted to find and buy what they needed as quickly and efficiently as possible. So, in 1995, I co-founded a company called SciQuest.com and launched one of the Internet’s first business-to-business web applications. In a nutshell, we created an Amazon.com shopping experience with about 2 million laboratory products and chemicals for scientists that integrated with an organization’s procurement systems.
StockTickr: How did you get started trading?
Scott: I had the privilege and good fortune of taking SciQuest public on the NASDAQ exchange in 1999. It was during these crazy times while interacting with analysts and institutional fund managers that I gained a unique, front row seat of how the markets worked. However, it was the extraordinary moves in our stock price, in both directions, that sealed my interest in technical, short term investing.
After stepping down as CEO of my prior company in 2001, I started looking at a variety of different entrepreneurial ventures for my next career. In fact, over the course of a 6 month period I conducted a very extensive personal analysis comparing my financial goals, skills and resources with the needs and opportunities of a variety of different business opportunities.
After failing to find a match that motivated me, it struck me to consider trading for a living as business venture. The thoughts of no employees, no travel, maximum time with my family, minimal investment, and unlimited financial potential were attractive to say the least. But I also knew that my genuine, life-long interest in the markets combined with a mathematically and risk oriented personality would likely serve as a great foundation for this career change.
When this light bulb went off in my head, I committed 110% to becoming successful as a full time trader. The only concern I ever really had was how long it would take me to achieve consistent profits and how long my wife would continue to support me and my new passion. Thankfully, she was patient.
StockTickr: Most traders have a horror story about losing their shirt when they first started trading. What’s yours?
Scott: I had surprisingly good success at first and even made a profit trading my first year. But then I increased my trading size and soon my average size winner was dwarfed by my average size loss. Every time I had a winner, I found an excuse to take profits prior to my originally planned target. I gave back all of my first year profits (plus a little more) in the 1st quarter of my 2nd year.
It was a brutally tough and humbling experience for me, but I learned a lot and was fortunate not to lose more. It was also a great catalyst that forced me to evaluate my strengths and weaknesses, as well as my financial and lifestyle goals. This self-evaluation resulting in me focusing all of my efforts and energy on the opening gap – a setup that generates plenty of profit potential, minimizes discretionary decision-making, and is easily back-tested.
StockTickr: Do you trade for a living now?
Scott: Yes, I trade for a living, mostly focused on the opening gap. I also run an educational site (www.masterthegap.com) that I started in 2007 where I share my research and help traders profitably trade the opening gap.
StockTickr: What single lesson did you learn along the way that has helped you the most in your trading?
Scott: The biggest lesson for me was realizing that I did not need to change “me” to be a successful trader. I simply needed to find the setup, timeframe and approach that best suited for my personality, and strengths and weaknesses. Too many new traders have it backwards; they get drawn to the promise of profits and try to adapt their personality to trade that technique profitably. Speaking from experience, that normally only results in extreme frustration and confusion and ultimately, losses.
StockTickr: Describe your style of trading.
Scott: I focus my personal trading primarily on fading the opening gap in the US futures indices (i.e. S&P 500, Dow, Nasdaq 100, and Russell). At the heart of my gap strategy are “zones.” I use these to segment and organize the various gap setups into groups that may exhibit similar trading patterns. I use the prior day Open, High, Low, and Close and prior day direction (up or down), in conjunction with market trend, seasonality and daily price patterns to determine whether to fade the opening gap or not.
Though my signals are a based upon a strategy system that I’ve created in TradeStation, I manually execute the orders. On average I trade the gap about 2 times a week. I dabble with day trades during the opening hour and the close on occasion, but my real edge and “bread and butter” comes from trading the gap.
StockTickr: What’s your exit strategy for winning and losing trades?
Scott: I generally target gap fill or beyond and use a stop equal to roughly 30% of the 5 day ATR (Average True Range). Since all of my plans have a pre-defined profit expectancy, I simply let the historical probabilities work and I am either stopped out or have a nice winner.
StockTickr: What 3 books do you recommend traders read? Other than your own, what are your 3 favorite blogs?
I recommend Mark Douglas’ books (The Disciplined Trader or Trading in the Zone), Trade Your Way to Finanicial Freedom by Van Tharp, and Market Wizards by Jack Schwager. To be honest though, I have read nearly a hundred different books on trading and have learned something from each of them, but the most important ones are about the psychology of trading.
My favorite blog is TraderFeed by Brett Steenbarger. It’s the only one that I read routinely.
StockTickr: Do you think one day computers will make better traders than humans and has that day come already?
For the average person and trader that day is already here. Most folks will not be able to tackle the psychology and complexity of discretionary trading and are better off following a system with rules. I am one of those people.
StockTickr: What technical indicators could you not live without?
Scott: A Japanese candlestick is the only one. Other than that, I prefer price action and patterns. Most indicators are grossly over-rated, easily mis-understood, and improperly used in my humble opinion.
StockTickr: How do you think the market has changed over the last several years? How have you adapted?
Scott: Huge expansion in volatility of course. I had to move to an average true range (ATR) based system for stops in order to accommodate the volatile action of the past couple of years. And this has made position sizing a little more complex, but manageable.
StockTickr: Do you backtest and if not, how do you instill belief in your system?
Scott: All of my signals and gap trading decisions are based upon historical probabilities that I’ve identified through extensive back-testing. I trade much more profitably and patiently when I know that I have a historical edge backing my setup. Otherwise, my personality is such that I tend to over-manage and tinker with my trades – normally resulting in cutting my winners short and riding my losers, a terrible combo!
StockTickr: What advice can you offer traders who are just starting out?
Scott: Know thy self. Find that single market, setup and time of day that best fits your personality and then focus, focus, focus! Way too many newbies waste a bunch of time chasing the lure of money and the next great idea. There are lots of ways to make money consistently in the markets, but none of them can be found without an objective self-assessment and serious focus, effort and analysis.
StockTickr: What do you like best about trading?
Scott: I love the freedom and control over my own life that it provides. There are an unlimited number of ways to make and lose money trading the markets. One of the surprising benefits for me has been the ability to use my creative side to invent new ways to take profits out of the market. This is truly exciting and empowering for those that have the stomach and means and interest.
StockTickr: Thanks for your time, Scott.
Scott: Thanks, Dave.
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