Techniques of a Stock Swing Trader
Jeff White is speaking at this week’s Dallas Traders Expo about the traits of highly successful traders, and Jeff should know: he’s been successfully trading his own account full time for several years now.
In this interview, we talk a bit about the traits that make for successful trading and why Jeff feels they were so instrumental in his own success. We also talk about his personal trading habits, how he does his homework at night to find the best trades for the next day, and how he uses his scanning software. Jeff explains how he scales in and out of trades and how he decides how much risk to take on any individual trade.
Finally, we talk about his days as a professional golfer and how the skills he acquired in that sport helped him to become the trader he is today.
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The interviewee for this podcast, Jeff White, will be speaking this week at the Dallas Traders Expo. See you there!
Tim: Hello, everybody, and thanks for joining me for our trader talk podcast this week. The Dallas Traders Expo is this week. I’ll be there moderating a few panels, including the Live Trading Challenge, and also interviewing the people in the video studio. What’s different this year is the video studio is out in the exhibit hall so you’ll be able to see us do that.
One of the people I’m going to be interviewing there and also has a workshop, he is a speaker there, is Jeff White. He is on Skype with me today. He is from TheStockBandit.com. Jeff is a full-time trader. He’s got a great blog there on his website. If you’ve never read it, you should definitely subscribe. He’s got some great stuff.
But I wanted to get Jeff on the phone today and talk to him about what he is talking about at the expo and then just a little bit about his trading these days too. So first of all, Jeff, thanks for joining me on Skype today.
Jeff: Hey, Tim, good talking to you as always and I’m definitely looking forward to being at The Dallas Expo these next few days, I guess.
Tim: Yeah, absolutely. So let’s talk about what you’re teaching at this show. I know you’ve got a workshop there in addition to the interviews you’re doing with me, but what’s your workshop about?
Jeff: Right. So I’ve got a workshop Thursday morning. I believe it’s also going to be webcasted. So those who may not be able to attend live can attend virtually. But the name of the workshop is called "Unique Traits of High Performance Traders." And so the premise is really that among the best traders out there, regardless of the timeframe they might be operating on, regardless of what market they may be involved in or what strategies they use, things that transcend all of those minute details of their actual approach, they still employ a number of traits. So I’m going to be discussing several of those and just kind of talk to people to where I’m explaining things that I think are qualities that must be included in your approach as a trader regardless of what the details are for the market or your exact strategy.
Tim: Mm-hmm, I like that. And one of the things people may not know about you is that you were on the golf team in college and you’re going to draw a lot of comparisons between golf and trading. Can you talk about that a little?
Jeff: Sure, yeah. I took off real seriously starting in the eighth grade and did okay in high school and got to play in college on a scholarship and then actually turned professional and tried the mini tours for three years after college, which is a tough way to make a living. Let me just clarify that. But it was a great way to start a marriage. My wife caddied for me. We had a great time.
But there are so many comparisons between the game of golf and trading, and you can probably apply that to a few different sports in terms of the way that you’ve got to have the right mental approach. Now, you’ve got to work hard and you’ve got have a strategy that you’re going to employ in your own trading. But mentally, it’s always difficult. Kind of like on the golf course. You might have a good day on the golf course. You can always look back and see a shot or two or three here or there that you still could have done better, and it’s easy to kind of beat yourself up for that.
The same is true in the market. You hardly ever buy the low; and if you did, you’re not going to sell the top. But at the same time, it’s this constant effort to stay in the present tense, to learn what you can from the past, and try and apply that going forward, but always stay in the present tense. Take one good trade at a time to where you’re not really skewing your mindset right now based on your last trade, whether it was a winner or a loser. You don’t walk on sunshine when you book a profit. You don’t wallow in the pit of despair when you book a loser. It’s about playing this numbers game as a trader and knowing that you’re kind of compartmentalizing each trade that you’re putting on in such a way that not only are you helping to minimize the risk to your capital but also to your confidence.
Tim: I love that idea. We always hear of course that don’t get down on your losers and just move on to the next thing. But you t hear all the time as well, don’t celebrate your winners like you’ve just won the World Series too or just beat Tiger on the links. I could see comparisons there with golf. You make a bad shot. You don’t want that shot to affect your next shot the same way with trading.
Jeff: Right, absolutely. One of the biggest challenges in trading is staying in the present tense, and I think that you see a lot of athletes do that. Like right now, the NBA conference finals are taking place. I’m a big Oklahoma City Thunders fan so I’m pulling for them, but you see a great player go to the free throw line, and generally they’re going to follow the same routine, and I think that’s their way of putting themselves in their comfort zone. They’re going to maybe bounce a ball the same number of times. They look at the hoop before they shoot it a certain period of time, and then they release it and they let it go.
And I think you’ve got to kind of take a similar approach in your trading. You’re finding the best trades you can. You’re being selective and you’re being methodical and disciplined, but at the same time, once you’ve put it on, you’ve got to let it go and let it run its course.
I heard recently about a guy who runs a bungee jumping business, and he was saying that no matter what people do on the platform before they jump, a lot of them will kind of do these different acts of bravado to act like they’re ready to do this. He said he can see it in their eyes every time. Before they jump they’re still scared. He said they’re kind of walking the line between they want the thrill of the free fall and they are still scared to jump, and he said it’s just kind of this battle that he can see them facing every time before they go.
And I think the same can be true as traders. You know that there’s risk in the market. You know that in order to get paid you’re going to have to accept some of that risk. It’s just about going about that the right way in such a way that you’re protecting yourself if this trade doesn’t work out. And as a trader, you’ve got to accept that you’re just going to be wrong a lot of times. That’s just part of it.
Tim: Mm-hmm. Now, as a full-time trader yourself, you come up with these traits I’m sure talking to other traders and the things you’ve seen yourself when you’ve been successful too, but how do you put that into practice? If I want to achieve those traits -- I mean it’s easy to practice trading. How do I actually take those traits and make them my own?
Jeff: Okay. So like one of the traits that I’m going to discuss is use the right weapon. I’m going to start off and I’m going to actually explain that in our military we’ve got all these different weapons at our disposal. Depending upon the type of encounter that’s expected, we might send a warship to the Gulf to make our presence felt, or we might send in special forces at night to raid Bin Laden’s compound and we’re dropping in people by helicopter.
Depending upon the encounter that we’re expecting, we’re going to send a different type of weapon. I think as traders we’ve got all these weapons at our disposal. We’ve got chart patterns, we’ve got indicators, all these technical tools that can be useful or they can be detrimental.
And so whether you’re a short-term trader, you’re a day trader, you’re a swing trader, maybe you’re a little bit longer-term and you’re a position trader, you still need to understand the right times to use the tools that are at your disposal. So maybe you’ve got your favorite indicators for example. Let’s say that maybe you love MACD and stochastics and you love moving averages. Well, that’s fine. There’s nothing wrong with those things as long as you know when they’re useful and when they’re not.
Let’s take a moving average for example. You look at a chart that’s in the trend. You apply a moving average. And my personal take is you fiddle with the period for that moving average until you get something that that stock or that chart is really respecting. It might be a 50-day or it might be a 200-day, but it might be something that’s completely different. Maybe it’s a 26-day. I don’t know what it is. Every stock moves through its own rhythm and at its own pace.
But let’s say that you’ve applied the moving average to that chart and you’re getting some useful signals for a little while, and then that trend levels off and now the stock moves into a trading range. Well, every two or three or four days, maybe prices crisscrossing that moving average as if it’s not even there. So now you’ve gotten an indicator that was serving a purpose and now is just clutter on your charts. So it’s about understanding when those are useful and applying them on your chart at the right time; and when conditions are not useful for that indicator, strip it from your chart and move on to something else.
So really, this idea of using the right weapon at the right time applies to any trader of any timeframe. It’s simply the fact that they’ve got to understand what’s working now and what’s not working.
Tim: I like that idea too because we all would apply something to a chart, see that it works, and then it works going forward. But all we know really is that it has worked in the past. So how do you bring that two together? Do you then test it in real time for a little while? Or how do you get to that point where it’s working in real time rather than just on the chart back-tested?
Jeff: Right. Well, you never know for sure. Let me just put that right up front. But beyond that, I think there are two ways. One is your experience. As you become more experienced as a trader, as you detect more nuances in the market or you understand current conditions a little bit better than you used to, that’s going to play a role. But also it’s simply a matter of just staying on top of the results you’re getting and continually evaluating what has been working, what’s not been working.
And it’s this willingness and this ability to keep adapting and keep making these adjustments as you see, "Okay, this has been working some but it seems like it’s working less and less. So what else is there that I can turn to? Which types of plays have I maybe been ignoring that maybe I opt to start paying a little closer attention to?" And it’s just kind of this ebb and flow of what’s working now and what’s not.
So for example, just over the past few months we’ve seen this take place in the market. January, February, March, incredibly strong market. It was not a runaway type of up move because we would rally and then we would rest a little bit. What we did see with consistency was every minor dip was getting bought aggressively. Dips were getting bought much more aggressively than breakouts. So we would nudge past the key level for a day or two and then we would spend a week moving sideways. Yet, we weren’t really pulling back. So it was a market that was really dominated by dip buyers.
Well, then, after the April 2nd peak, we saw kind of a multiday selloff which was a little bit deeper than any pullback we had seen since December, and the conditions where kind of shifting. So we saw a little bit of a composure change in the market. Suddenly we have entered into this trading and then we created a lower high on May 1st, and since then it’s been a market where every little bounce is getting sold.
And so these things don’t happen overnight. It takes a little time to shift from one type of market into another. But as you’re evaluating, okay, I’ve been buying dips, and now it’s mid April, and I’ve bought this dip and I’m not getting paid and now I’m starting to recognize that maybe there’s a lower high in place. Now you start shifting your approach. Maybe you don’t all out become a bear, but maybe you just start becoming much more selective with which dips you’re going to buy or maybe you start playing some of the range games.
So it’s just being equipped as a trader to take on different types of plays as you’re seeing them and just continually being honest with yourself and evaluating the trades that you’re taking. If you executed your plan and it just didn’t work, is that a factor? Because those types of plays are starting not to work or is this just kind of a one-off trade that didn’t pan out the way you expected? So you’ve just got to continually spend a lot of time evaluating your results, measuring the types of feedback that you’re getting and results that you’re getting. Are these working? Am I taking the wrong approach? Or is it just kind of a direction in this type of market now? I think you’re just always evaluating those types of things.
Tim: Is it something I have to do every morning if I got to be prepared to trade a different way every day if I’m a short-term trader?
Jeff: No. I don’t think that’s a good idea because what you end up doing is you’re trying eight different strategies over five days and you don’t know which way is up. That’s just a very quick path to confusion. I think as a trader with less experience, I think you get a couple of different strategies down to where you understand them and you become versed in those.
And from that point forward you start adding just kind of one at a time, and you’re learning going forward, as we enter into a slightly different type of market, okay, here’s a failed bounce up to a resistant zone, let’s say, and now you’ve got to start understanding where can you get positioned for the next little stop in the market. How can you get on the short side the most effective way? Maybe that’s a trade that you’ve never made before, but as you’re progressing through different types of markets like we’ve been seeing, you’re able to add a play here and there to where before you know it, six months, a year, three years, in my case 12 years later, now you’re equipped with a lot of different strategies and then it’s just a matter of just staying on top of things, really being a student of the market on an ongoing basis.
Tim: And talk about your timeframe these days as a trader. Are you a swing trader, a day trader? What are you doing?
Jeff: I do some day trading and I primarily do swing trading. So I’m looking for moves that are going to last from two days to a few weeks in most cases, and that’s really what I’m trying to do. As long as we’re not in the type of environment that we saw late last summer where volatility is extremely high and we’re getting enormous gaps on a daily basis, the swing trade, the multiday timeframe is one that I’m really favoring at this point because that’s the best way to avoid the knee-jerk intraday reactions that we do see.
But as we enter some of those higher volatility periods, it’s much more difficult to manage risk on an overnight basis, and therefore, I think you’ve got to shorten your timeframe to the intraday basis. I do like to day trade but most of my trading these days is on the swing basis.
Tim: First of all, what markets do you typically trade? Is it just stocks?
Jeff: Yes, just stocks. I’m just an equities trader.
Tim: All right. So how are you finding your trades these days? Are you looking for strong momentum? Talk about the screening you do to find your good trades.
Jeff: Okay. I really have spent a lot of time over the years as a chart pattern trader, and I like drawing trend lines on my charts and kind of evaluating consolidation areas and breakout zones and taking trades as those levels get crossed.
More recently I’ve been taking more trades against key levels. So for example, a stock has been respecting support let’s suppose, and maybe it gets through that support to the downside. It rallies back up to it. Now I’m seeing that as an opportunity to get short as a failed bounce type of setup.
So I really am a technical-based trader but for me it’s all about price and volume and I really care a great deal about how price is acting with or without volume’s participation. So recently we’ve seen pretty good market pullback and we’ve sold off some. We saw multiday bounce attempts. We saw an okay lift in price but volume really wasn’t there.
Now, you can also look at the calendar and say that was Memorial Day week or the week leading up to Memorial Day and that’s historically a very light volume week. And that’s true. However, from a technical standpoint, it was a balance in the market that was not being confirmed by volume and it was also after the creation of at least one low high on the daily charts.
So those are the types of things. I want to be very mindful of the existing market trend and then I want to be trying to focus on individual plays that let me first and foremost manage my risk well, and then secondly turn the profit.
So a lot of traders kind of approach it from the other direction. How much can I make in this trade? For me it’s more a matter initially of what am I risking? How much might I lose in this trade? And then I’m looking at the other side on the profit side. Is there a potential for this trade to play out? Is there room on this chart for this stock to run to either project from this pattern or maybe a measured move or to the next key level on the chart? Is there room to offset that risk that I’m taking in a ratio that I believe is favorable, which is three or four to one?
Tim: What software do you use?
Jeff: I use TC2000 which is a charting software. It’s been around for years and years and it keeps getting better. So it’s a great tool and it’s part of my everyday process. I build a lot of watch lists in there. I draw a lot of my charts and it’s just a tool that I find very useful in my trading.
Tim: All right. When you’re doing your homework, do you have a basket of stocks, say 30 or 50, that you’re looking for these chart patterns? Or when you go through thousands of charts at night to find those patterns that you think are setting up nicely?
Jeff: Right. No, I go through several hundred every night. It took some time to build up to that. Someone who does not look at charts every night, if you tell them to go look at 500 charts, they might not make it through that watch list before tomorrow’s opening bell rings. But if you start small, it can be a skill that you build.
When I first started, I might look at 25 stocks in a night. And as I would move from chart to chart, I’m just evaluating several things. Is there a trend there? Is it a well-defined trend? Are there some key levels? Are there some patterns here starting to shape up? Is volume confirming the moves and price? What’s the personality of this stock? Is this type of stock I think I could stay in for a trade or is it maybe a little bit too slow and it might bore me out? Or maybe it’s a little bit too erratic and it’s more prone to maybe shaking me out. So I’m kind of evaluating all those things when I see a chart.
And in this software, what I can do is I can hit the F on my keyboard and I can flag that stock. So as I go through a primary watch list that might have 500 plus symbols in it, and I see something that looks halfway interesting, I’ll hit the F on my keyboard and move on to the next stock. Well, by the time I’ve gotten through my watch list, now I’ve kind of earmarked maybe a couple dozen stocks that I think deserve a closer look. And then I’m going to go back to that flagged list and say, "Okay, which ones of these look like they’ve got great risk/reward profiles? Which ones of these are acting like right now they’re ready to start making a move?" And then it’s a matter of prioritizing my plays.
So I think that’s a skill though that you build that you can either get through the same list in a shorter period of time or you can look at larger lists of stocks in the same period of time.
But one big advantage that I feel like it offers me is it gives me a much greater feeling for the depth in the market and how most stocks are acting. I can get a good reflection of that from the S&P 500 chart for example, but when I go and I look at several hundred individual stocks, I get a much better feel for which ones are acting weak, which ones are holding up pretty well, which ones may just be showing indecision, and that’s going to give me, in my opinion, a little bit better feeling for how the overall -- the broad market is behaving.
Tim: And then when you do come up with this watch list, is that something where you’ll buy the strongest looking place on the open? Will you wait till it moves and trades a little bit and then see where it’s at? What would you like to do?
Jeff: Some people like to wait a few minutes. Personally for me, once that level is crossed, I want to be involved. And it doesn’t matter to me if that’s in what people might call amateur hour, the first half hour or first hour of the day. That doesn’t matter to me. I want to be involved based on this level on the chart has been penetrated and now price is starting to make its move. That’s when I want to be involved.
So I’m going to show up each day with my list of trades and I’m going to have my game planned for them, and they might all trigger an entry or they might none. None of them might trigger an entry. So it’s just a matter of I’ve created several if-then scenarios for myself for each day so that when the market opens, it just becomes a matter of executing that game plan that I’ve put together from the night before.
Tim: The if-then statements. I’ve heard that before. Corey Rosenbloom talks about that. I think Linda Raschke talks about the if-then statements. There’s definitely something there. Some good traders are talking that way about their trade.
So does the if-then also include stop losses, profit targets as well?
Jeff: Absolutely. Yes, yes. And I use a lot of those bracket orders which many brokers offer, and you’re able to structure the entire trade from the outset. And then as you find the need to manage that trade or adjust the stop loss, you can’t do quite easily. But with a bracket order you’re able to set the entry, the stop loss as a stop order and a limit order for booking profits. And I really like that. That way I can structure that place. I know exactly what all my levels are for each trade I’m going to take, and then it’s just a matter of executing it and playing that numbers game that I was referring to earlier.
Tim: All right. As we finish up here, Jeff, do you have a recent trade in mind that was -- I’ll take either a good trade or a bad trade that you thought that taught you something or that was well executed or you learn something from, just something that sticks out in your mind that maybe you could share with us that’s kind of a good example of how you trade.
Jeff: Sure. Right now I’m in a stock. I’m in this O’Reilly Automotive. ORLY is the ticker. And here’s a stock that made a really big move throughout the latter part of last year especially, really from late last summer. It just trended incredibly well from the high 50s into the low 100s.
In early May this thing topped out. I saw a pretty big character change on May the 17th. This thing gapped lower and sold off on pretty heavy volume. The bounce that we’ve seen since then has failed to reclaim that gap zone. So we’ve seen the stock pull back from its highs and then gap lower on heavy volume. The next bounce since then has failed.
So then this looks to me like a trend change in progress. So I actually short this stock right now. I’ve got a pretty well-defined stop loss just above the most recent bounce high. And I’m up a little bit in the stock. I’m not up a lot. But today we saw a bounce in price but volume was down compared to yesterday’s decline and so I’m still seeing that I feel like I’m right on this trade and it’s just this evaluation constantly of price and volume and the behavior of the stock. Even on an up day if I’m short, when I say up I’m saying that the price advanced so that the stock moved higher against me today, I’m profitable on the trade at the moment and it bounced in such a way that it’s not very convincing.
So I’m just setting up a play that I feel like has good potential. It’s got a well-defined exit. And now I’m just evaluating this trade as it progresses and I feel like I don’t need to make any adjustments just yet. I’m going to stay with it for now and continue to see how it behaves both on weak market days and on days where the market may be able to bounce.
Tim: Do you manage trades by taking shares off, putting shares on during that trade? Are you putting much in managing it and then you’re out with the full size?
Jeff: Okay. Well, there’s a little bit more complicated answer to that question. I do get in in one piece and I stop out in one piece. So if I’m wrong, I’m getting completely out. But if I’m right, one of my trading methods I should say is that I like to get out in a couple of pieces if I’m right.
So I have an urge as just part of my personality that when I’m seeing a winning trade, I’m prone to booking profit a little bit prematurely. I’m very disciplined on the exit side on the downside, but when I’m up on a trade I’m generally a little bit more prone to getting out a little early. So what I do is I try and scale out when I’m profitable. And what that helps me do is just satisfy that urge to book some profits and I’m using favorable moves in price to create exits for myself. So I’m going to get out on the profit side in a couple of pieces.
Tim: Okay, excellent. Well, that’s great. Listeners, you can check out Jeff’s workshop at The Dallas Traders Expo. He is going to be speaking on Thursday. Jeff, I’m looking forward to seeing you there, and hopefully we see a lot of our listeners there as well.
Jeff: Great. Thanks very much.