The Fly-Fishing Trader: How He Trades the Market Based on Seasons

08/30/2012 2:00 pm EST

Focus: STRATEGIES

Tim Bourquin

Co-Founder, The Traders Expo and The Futures & Forex Expo

Steve Morris is an active trader and the author of a new book out this month, Fly Fishing the Stock Market: How to Search for, Catch, and Net the Market's Best Trades. In this interview, we talk about Steve's methods for trading, the indicators he uses, and how his trading techniques change based on the "season" of the market.

Steve also explains how fly fishing is similar to trading, and how learning how to be a better fisherman helped him become a better trader. You can find Steve's website here.

Steve Morris is an active trader and the author of a new book out this month, Fly Fishing the Stock Market: How to Search for, Catch, and Net the Market's Best Trades. In this interview, we talk about Steve's methods for trading, the indicators he uses, and how his trading techniques change based on the "season" of the market.

Steve also explains how fly fishing is similar to trading, and how learning how to be a better fisherman helped him become a better trader. You can find Steve's website here.

Tim Bourquin: Hello everybody, and welcome to this week’s interview. Thanks very much for joining me. My guest today is Steve Morris. He is the author of Fly Fishing the Stock Market, How to Search for, Catch, and Net the Market's Best Trades.

I thought that was interesting title. I’m not much of a fisherman myself, but I love all the trading analogies that are out there, and I hadn’t heard this one before. So, I wanted to get Steve on the line and talk about that, find out a little bit about his trading too. So, Steve, first of all, thanks for joining me on the phone today.

Steve Morris: Thank you, Tim. It’s good to be with you.

Tim Bourquin: Alright, let’s talk about why fly fishing is like trading. Tell me what’s that about?

Steve Morris: Well, fly fishing is very similar to trading. Every aspect of catch and release fly fishing as it’s commonly referred to. It’s similar from stocking the prey to managing the catch and landing the fish and basically all the important details in between.

Tim Bourquin: Okay, well, so, I mean—sure, it takes probably patience as well too that makes sense to me?

 
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Steve Morris: Oh, absolutely. I mean there are so many different parallels. I think what I drew from comparing the two activities the most, what I’ve learned the most is it basically deals with seasons and strategies.

If you take fishing for instance, fly fishing, fly fisherman encounters the constant need to match the hatch or match the current fly pattern that fish are feeding on at any given point in time. And those vary, those are cyclical, they’re repetitive, they are not random and they are different from season to season.

And it’s similar in the stock market, the stock market has cyclical patterns to it and it’s important to recognize those price patterns and trade in lockstep with them. They are certainly repetitive and not random.

Tim Bourquin: Let’s talk about how you kind of approach the market. So are you a daytrader, a swing trader, or what do you do?

Steve Morris: Well, that’s a good question. I think every trader is plagued with those questions, am I a day trader? A swing trader? Or do I prefer to buy and hold? And I think the real answer is all of the above and it all depends on what season the market is in and what the particular price patterns are.

For example, if it’s what I refer to it as a spring season, where the MACD lines of the general market on a weekly basis are turning up, all the shorts are on board, they are overbalanced and they get squeezed into an up trend, bargain buyers jump in, that’s certainly a time when you want to getting along is the preference and you want to stay with the position longer, because pullbacks are very shallow and usually those are when the big catches are.

And a stock that you trade will usually have some saying power, unlike a choppy volatile market where the market really has no direction and it’s very volatile, those are times when I prefer to be a day trader and just get little chunks of channels.

Tim Bourquin: So, you don’t define yourself or put yourself into a box I guess, whatever the strategy is, whatever the fish are biting on, that’s what you’ll use, right?

Steve Morris: Absolutely, absolutely, if I define—if I—for instance, from a fly fishing perspective, if I say this is my favorite fly, I’m going to fish this fly everyday, every month, every year in the same fashion, I am seldom going to find success and I think the same applies for the stock market and our approach to that.

Sometimes we’re buying breakouts, sometimes we’re buying pullbacks, sometimes we're buying deep pullbacks and patterns change and strategies are changing and synchronize with that as well.

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Tim Bourquin: So, the book talks about the stock market, I’m assuming you’re mostly a stock trader, do you trade other markets?

Steve Morris: That’s correct, I like to prefer to equity trading.

Tim Bourquin: Any certain sectors or basket of stocks that you watch everyday to get good opportunities?

Steve Morris: Not really, I have a few custom scans that I follow and I try to find if the hatch is on, so to speak, I try to find the fish that are feeding on that particular strategy and so I’m looking for those stock candidates that meet those criteria and then approach the entries that way.

Tim Bourquin: Alright.

Steve Morris: But there are certain parameters that I screen, that I filter. I don’t buy anything under $3, a certain volume have to be present so on and so forth and I like stocks that are from strong groups. Preferably weak stocks in a strong sector or strong group that shows characteristics of a nice reversal pattern on a deep pullback.

Tim Bourquin: I see, so if you find a weak stock in a strong market, you are looking for that to catch up with the other stocks or are you actually looking for to come back down?

Steve Morris: Catch up.

Tim Bourquin: Okay, I see, alright. And then you mentioned MACD, what other types of kind of indicator things do you use?

Steve Morris: Well, the MACD, I love that indicator, I also—I follow the RSI, that’s an important indicator for me for SynDEx.

I am—here again there is another analogy to fly fishing, sometimes the amateurs, the novice, the people that just jump into fly fishing, they are decked out with the most expensive gear that you can imagine. I approach it as just enough, but not too much.

What’s effective, I really think there is an inverse proportion to the amount of indicators you use and your success. I think it clogs the message, it confuses you and you get lost. You miss the force for the tree, so to speak.

So, I stick to about three or four indicators. I have three moving averages that I follow, volume, which basically dovetails into the RSI as well as the MACD indicator, but those are the main tools that I use on a chart.

Tim Bourquin: Anytime somebody brings up moving averages I know if I don’t ask the question, I get tons of hate mails, so I’ll ask, what moving averages do you like to use?

Steve Morris: I like to use the 8, the 21 and the 50 exponential moving averages. On indexes that I’m following, I’ll also put in a—some of the main ones that the crowd is watching the 50 simple moving average as well as the 200.

Tim Bourquin: And are those just because of experience, trying different things or did you come across those in other way?

Steve Morris: Mainly from experience, mainly from—and you know sometimes I vary them a little bit; but based on the particular stock that I am trading, I want to find where that moving average is providing the support level or resistance level and so I’ll fluctuate those moving averages to match the price behavior in that given tradable entity.

Tim Bourquin: Got it. How many trades at any one time are you comfortable managing that are on at that time?

Steve Morris: Five maximum and I try to approach it from a weekly basis, I do my homework on the weekend, I’ll find and filter through and pan for gold and find five gold nugget trades and those are the ones that I watch for specific entry criteria to trigger and I think any more end, well in my hands it gets too confusing. So, five candidates and of those five I might trade three, that actually pan out.

Tim Bourquin: Okay, talk about that the criteria. So, if you are doing your homework on the weekends, you’re picking up these stocks, you’ve got a—what I would imagine is an entry point and then would you set profit targets or the stop losses at that same time, if they trigger.

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Steve Morris: Well, I do, I have—if it meets my specific strategy then I am trying to find a stock that conforms to all set an arbitrary entry point, where I feel like the stock might dip to if I’m looking for a pullback or if it’s a stop buy—stop limit buy, I’ll set it at that level, but I don’t trade that way.

I trade using what I call a strike indicator, which is a system where based on the particular season I’ll use an intraday chart, say, a 5-minute or a ten-minute chart that has—and I’ll watch for the stock to first dip—enter your two criteria.

First of all, I want to see an MACD bullish crossover if I am going long. That’s the alert to buy and the signal or the trigger to buy is an actual price close into the value zone or above the fast EMA.

So the beauty of this is, let’s say, I find a real strong stock, looks great on that weekly chart, even better on a daily chart, I setup this auto-entry trade or manual trade. But if I’m watching this specific intraday chart for that entry signal to fire, I am waiting for the stock which sometimes on a Monday morning will shoot out of the gate and go up, pulling all the amateurs and they get burned and immediately drop, trigger the stop-losses, settle and then start to build a base.

Once momentum reverses and that reverse momentum is proved by a price strength showing in the form of a close above a certain level, that’s my green light to enter the trade.

Tim Bourquin: And isn’t that how it always happens, right? We find a good trade and oftentimes if we’re in too early, you’re right.

Steve Morris: Absolutely.

Tim Bourquin: I really truly believe that most traders are right about their decision that just our timing is wrong, the timing is off.

Steve Morris: Absolutely. The same thing applies in fishing. You take a big fly fisherman, they just can't wait to hook a trout and as soon as they hook a trout, they tighten their drag too tight and boom, it’s off, and then they are left with this hollow what could or what should have been but wasn’t, this is just the story.

Same applies for stocks and you know, for instance, on the exit, I use that same criteria in reverse on a longer term intraday chart, I will use a 30 or a 60-minute chart depending on the particular market season.

For example, the scenario I painted early on with a spring season, I will use up to a 30 or 60-minute chart. So that allows that consider it or compare it to a big fish that you have on, you want to loosen your drag, you want that stock to run, settle just a little bit, consolidate back to a rising moving average or rising support, go again, settle back, go again, you want to juice that trade and squeeze as much profit as the market is able or willing to give you and not exit too early or not exit too late.

And in a fishing situation, if you tighten your drag and you have a big fish on, you’re going to lose it. If you loosen your drag too much, she is going to run out, get caught in the rocks or the weeds and you’re going to lose it. So there is a blend of timing and it requires specific tools to measure that and govern it.

Tim Bourquin: How much does experienced plan do this? Obviously if you are an experienced fly fisherman, you’re better at it. Do you—can you get experience and good at trading in the same way you could with practice fly fishing?

Steve Morris: Absolutely. That’s interesting you just bring that up. Not long ago I took my two boys out fishing—fly fishing and the youngest wanted to learn. And so we set him up in a float tube and about 15 minutes into it, he’s heading for shore.

So I yell over to him, I said, hey, Andrew, you’ve got to watch, watch what we’re doing or you will never learn. Well, that was a fell on deaf ears, he gets out of the lake. He says I’m going to go look in the ditch behind the lake and there is this ankle-deep ditch that drains in upper chain of lakes.

Well, to make a long story short, 30, 40 minutes later, I hear him screaming for us to come look, come look, and so finally we get out of the lake, we go over there. He hooked into a 21-inch rainbow trout. And yet, we had no success at all.

So he proceeds, we landed, he proceeds to show us how he did it and demonstrate like an expert, right, and he is a beginner and lo and behold he catches two more 21-inch rainbow trout. They had been trapped in this little confined area and he discovered the methodology of that. It taught me that, you know what, just like trading sometimes the best catches are not where we find them and you certainly don’t have to be an expert to be good.

Tim Bourquin: And kind of whittling down to find out what you are good at, what you specialize in, what you need to concentrate on.

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Steve Morris: Absolutely. I think that’s the key, the key foundation of a trading system is what’s your personality and what are you comfortable with. And it’s OK to borrow different methodologies and try them and test drive them but take and choose bits and pieces and form your own.

And I think the riddle to success is not necessarily experience, it’s a base of knowledge but it’s a conclusion that you come to between your own ears and I think once you find that blend that works for you, then I think you can become a good trader. I don’t think it takes terrific long time to find that. It just takes the right tools.

And I think all too often too many traders jump into it, they buy this, they buy that, they buy this, they get all the tools, they think the tools are going to do it for them and that’s not the case. A tool is a tool but it’s your own hands, it’s your own decision-making, your own mentality that actually makes you successful. And I think too much can smother the ability to rise and for that talent to surface.

Tim Bourquin: I think so many traders feel like if they can just look over the shoulder of a wealthy trader, a great trader for a couple of weeks that they can get this and yet it’s so difficult to duplicate what a good trader does just by watching them even if they can see everything that they are doing.

Is it—continuing this analogy, is that the same for fly fishing? I mean how can somebody look over the shoulder of somebody and learn in both of these things?

Steve Morris: It’s similar in both, it absolutely is similar in fly fishing. My dad taught me and what was so helpful is for him to get behind me and grab my arm and help me feel the rhythm of a fly-cast and coached me on every aspect of it and for me to watch him as well. I think that’s an integral, important part of the learning process.

But there is no substitute for actual implementation of what you’re thinking or what you observe into actual trades and preferably paper trades at first and then to learn yourself and actual practice and the implementation of what you learned in books or learned through observation. It’s definitely a process but the legwork pays off.

Tim Bourquin: And in your book, you also mentioned talking about getting a 268% growth in your account at a time when, right after the financial crisis or during that financial crisis. What do you think that was the key to making that happen for you?

Steve Morris: The key to that is, I was involved in a group SpikeTrade, which is Alexander Elder’s kind of a trading competition, more of a—I regard it sort of as a training ground, so it helps me compare my strategies amongst the other spikers that were in the group, watch what they did, watch what I did.

It was interesting because when I look back on my successful trades—and I have several listed in the book—when I look back some of the successful trades that I put on were completely different and in contradiction with what the other people were seeing. And so, I went back and I started to search for what they were seeing and more importantly what I was seeing and they weren’t and vice versa.

I really think—I’m a firm believer in contrarian thought process. I like stocks that are on the extreme. When there is an overbalance of short sellers or longs that are hoping for, let’s say, a cup and handle pattern to break to the upside.

Well, smart trade is smart money, the pros are the ones that really go in and take advantage of that deception and take advantage of that. And when stocks are out of balance like that, there is great gains, there is great catches to be made. So, I think that was key.

Tim Bourquin
Okay. And then you mentioned the season part of that which I think fits into that, where are we now in terms of the stock market here—we’re recording this late August, listeners will get this about a week after, so where do you feel we are in terms of the season of the market?

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Steve Morris
Well, first of all, let me preface that by saying that I think there is—it’s extremely confusing right now for most traders. But I use a market timing monitor that I call a WeatherVane, that’s a combination of the VIX and the weekly S&P 500. And then it also has the MACD for the weekly S&P 500.

I borrowed the concept from Martin Pring, who divided the MACD lines into market seasons, when they are below zero and rising, it’s spring. When they cross the center line and are rising, it’s summer. When they fall from above zero or above the center line, it’s fall. And when they cross the center line and are falling, it’s winter.

Right now, those lines have bottomed out above the center line, that’s called the centerline rejection, and are rising. And so, it’s a summer market condition, which is confusing because like I mentioned before, each season has a characteristic price pattern to it, summer is characterized by a real narrow channeling, low volatile up-trending type pattern.

That’s the time that I look for stocks to pullback to the value zone or pullback to a rising support, lock into them and then unload them at the rising—at the top of a price envelope. But it’s summer—it’s a summer market season.

Tim Bourquin: Alright. And so, in that case, your main trading strategy is what—I think you just actually—you just may be have mentioned it, but summer, what kind of trading?

Steve Morris: Well, if it’s a summer market season, I’m only long. Today, the VIX had a little upswing to it, and if the weekly VIX moving average changes to the upside, I have a conflict between the message of the S&P 500 and the VIX and then I get a white bar, it’s kind of a transition zone, it tells me to stay on the sidelines. This morning we got that.

So, it’s really kind of a treacherous market right now and I think we’re at a pivotal point. If we rally through the end of August and September volume comes in, I think we could really see some multiyear highs later as we approach the election time period.

But for now—so for now, I’m kind of cautiously optimistic. It’s in the summer, summer transition zone. So I’m approaching it from the long side. I don’t consider short trades. I will in a real choppy market by the VIX and go long just as a hedge.

Tim Bourquin: Excellent. Well, we’ve been talking with Steve Morris. He is the author of Fly Fishing the Stock Market: How to Search for, Catch, and Net the Market's Best Trades. Steve, thanks very much for your time today. Listeners, we will link to Steve’s book on Amazon.com, so you can take a look at that. Steve, do you have another Web site or anything else we’d like to tell the listeners?

Steve Morris
I do. I have—I offer a free interpretation of my WeatherVane and it’s on my Web site, flyfishingstocks.com. Tim, thank you very much. This was really fun. I appreciate the opportunity.

Tim Bourquin
Great. Listeners, we will link to that Web site. I love the URL, that’s the main name for that, flyfishingstocks.com. Steve, thanks again for your time.

Steve Morris
Thank you. Bye-bye now.

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