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Interview
Keith Schneider  President of DataView, LLC

Keith, How long have you been trading?
I have been trading since my college days, over 30 years and have been going down to Wall Street since junior high school. I would often cut school to visit my uncle on Wall Street, who was my mentor.

What happened next?
Well, my dad was a rocket scientist and requested that I at least go to college before bolting to the Street. So, we made a deal, I went to NYU, and graduated with a liberal arts degree, while spending a lot of time on Wall Street watching Bunker Ramo terminals and trading stock options. I had a blast and really loved trading; my roommate and I made quite a bit of money our senior year. Our graduation present to ourselves from our trading profits was a long vacation in Europe in luxury hotels; and we bought an Alfa Romeo to cruise around in. We sold the car before we headed home.

Where and when did your career formally start?
When I returned from Europe I figured I would head down to my uncle’s brokerage firm, but because of the financial climate in 1976, (a taxi medallion was trading at $36,000 and a seat on the NYSE stock exchange had just traded for $35,000) I was told that there was no position available. So my uncle had a brilliant idea, why not trade commodities. At that time a New York Mercantile Exchange seat sold for just $10,000. That’s what I did, and within a few months I took my trading profits, bought a seat, and became one of NY Merc’s youngest members.

So your background is in Futures?
I have traded all types of financial instruments, but I really cut my teeth trading commodities in the late 70’s and early 80’s, during the inflationary spiral that came as a result of the Oil Embargoes by OPEC in the 70’s. I ultimately became a member of all the New York commodity exchanges. I always traded as a Local (for myself) and never filled paper or did orders. I have traded gold, silver, cotton, platinum, sugar, coffee, OJ, heating oil and crude as an exchange member. Off the floor I have traded currencies, bonds, bills, and options.

How has your floor trading shaped your outlook in trading?
As a floor trader, your outlook is very short-term. There are many types of floor traders. There are traders who are only scalpers, (trading bids and offers for a few ticks), spread traders and position day traders. My primary focus was position day trading, while being at least proficient in all the styles. I never really liked spread trading and loved to figure out which direction the market was heading. So I focused on what I would call position day trading.

Did you have a methodology or just trade from your gut?
I liked a disciplined approach and I focused on building a methodology, a road map for each day, that I could follow to produce consistent results. I trained myself in several types of charting techniques and have basically tried and tested most technical indicators that are available on most trading platforms.

What are your favorite types of charts?
Basic bar charts or candlesticks are my personal favorites. With candle charts (basically, improved bar charts) it is very easy to identify momentum and the strength of the market action [price action] within each bar. When I was on the floor, I always employed a chartist who updated my charts for me. For floor trading, we would keep bar charts and point and figure charts. Point and figure is a lost art, and most charting services do a bad job at it, so I have replaced it with a combination of moving averages and some technical studies. In fact, many charting packages that are written or designed by engineers and not traders do a bad job. The success of one's trading requires three basic elements.

What are those elements?
They are: Mind, Money Management, and Methodology.

The correct tactical implementation of a trading strategy is crucial to success. That is a component of methodology. Having accurate data and being able to identify key points on your charts is necessary for success. There are many systems where it is impossible or cumbersome to identify key points on your charts. I even know of one system where it is impossible to even see what the actual market [price] action is relative to some formulas. A recipe for failure. Visualizing actual market information and some technical studies together is critical to understanding the interrelationships in the data. Pinpointing actual key areas on a chart is crucial to good money management which is dependent on being very precise. A few ticks can be the difference between getting stopped out or not.

What else did you learn from your floor experiences?
Market selection is crucial to profitable commodity trading and stock selection is key to stock trading. I would rather give my money to an average trader in a great market, than a great trader in a dormant market. While I was on the floor, many traders liked to trade only a certain commodity. Sometimes these truly great traders made very little money because they refused to apply their skills to a different market. That is the basic concept behind HotScans. When trading stocks, the key to success is finding stocks that are moving and likely to continue to move throughout the day. Finding intraday trading patterns that have a high degree of reliability while allowing a low risk exit point to minimize losses if you are wrong, is a key ingredient to success. HotScans is designed to find all types of stocks that are in play and are likely to continue to move.

Tell us more about the road map.
The single most important concept in directional day trading is to establish a bias, long or short.

Do you have an easy way to figure it out ?
Yes, it is using the opening range to establish the bias for every day. For instance, after the first half hour, (it could be 5 minutes or up to 45 minutes depending on your style), use the high as the hurdle to have a long side bias, and the low to have a short side bias. Anywhere in the middle do nothing as the stock is telling you that there is no follow through.

In fact, even a swing-trade or long-term position trader should be cognizant of the significance of the opening range, as it can alert you to big failures in the making. For a day trader or swing trader, using the opening range as a cornerstone of your trading system is crucial. Just think of the highs and lows of the opening range as the median of a highway. If you are driving on one side (above the high of the opening range) then the you should be heading north, and vice/versa.

Can you give me a recent example?
Yes. Recently, I identified IBM as a very strong stock, and after reviewing weekly and daily charts, concluded that a breakout above $90 was very a significant event. I wanted to be long above $90. As I expected, on the opening, IBM gapped up above $90 and traded at $90.40. This Friday, IBM closed at just above $80, a miserable drop! Had I not been following the opening range rule I might have been trapped. However, since I waited for a confirmation of the opening range breakout, I never even entered the trade. Why? IBM failed to follow thru to new highs after the opening, on the day it traded above $90. In fact, this key failure of an intraday trading tactic alerted me that IBM was in big trouble. I had great success trading IBM from the short side this week while the market rallied strongly. So, IBM is an example of where following a key rule in day trading saved me form entering a bad position trade as well as providing me with a setup for many great day trades for a period of time. Understanding the importance of the opening range is the cornerstone of any successful day trading strategy, and is an important component or overlay for swing or position trading.

Question (paraphrased): I was looking to short DNA today (6/2/03). I sold it short at 11:42 for $68.56 when it hit a new low for the day . I didn’t trust my $0.15 stop and finally covered at 11:50 at $69.00 for a $0.44 loss. Adding insult to injury, it proceeded to go all the way down to $67.60 Any thoughts on what I could have done differently?
 

Figure 1: DNA's daily candlestick chart.

JD,
I need to make some assumptions to answer this question. First I’m going to assume that you were interested in shorting DNA because you thought its $7 gap up opening that day was potentially a blow off rally or at least a little over done. I have to assume this because as I’m sure you must have known the trend in this stock was clearly up and strong as indicated in figure 1. Generally, it is better to have the trend in your favor. Shorting a stock in such a strong up trend is a very risky trade, but if you catch the top it can also be very profitable.

Despite the risks of trying to pick a top I’ll describe a strategy for trading DNA from the short side. In figure 2 you will see a five minute bar chart of DNA with a red and green horizontal line. These represent the high and low respectively of DNA’s opening half hour of trading. These levels often prove to be pivotal points for a stock during the trading day and can therefore provide a roadmap for a day trader. I use them all the time. Here is how you could have used the opening range to better execute your plan to be short DNA while minimizing your risk.

The basic strategy is based on the premise that a stock below the opening range is in a down trend for the day. So applying this to DNA we will short a breakdown and trade from the short side while it’s below the opening range. If it doesn’t break down we don’t get short! This stock is on fire – it’s in a strong up trend and just gapped $7 higher. You want to see some shift in momentum before shorting it. The shift in momentum we are looking for is the break below its opening range. Once below the opening range you are looking for rallies to sell.

DNA's breakdown could have been played short two different ways. I don't know if you realize it, but you shorted it at a good point--a break below it's opening range, and based on your $0.15 stop you should have been out when it rallied. If you get stopped out then you start looking to get short again at the next rollover below the opening range. In this case you got this second chance at point B. Or your other option is to have a stop that makes sense on the chart, which you also had. I prefer stops based on chart points rather than a random money management stop. In this case the stop based on the chart is the high of the last rally before the breakdown or the high of a good consolidation before the break down. This point is labeled as in figure 2 and the price would have been 69.14 so your risk would have been $0.56. If that is more than you want to risk then wait for a trade that fits both your money management and a chart point. In this case, again the rally up to point B and the subsequent failure would have provided this.

For now I’ll assume you sold it where you did and chose to risk the $0.56. You would not have been stopped out and DNA was down to $67.60 in about an hour. This would have given you a profit of almost $1 on the trade and that’s almost twice what you were willing to risk. When I get close to twice my risk I look for any reason to take a profit on half my position so I would have taken half off the table at the first sign of a rally from this level. In addition to taking some profits I mentally move my stop on the rest of the trade to a no loss. As you can see by the chart, DNA did rally and came all the way back to high of $68.84. So I would have covered the second half of the position at a no loss. a new low on the day. But the day was not over for DNA. At this point it was still trading below its opening range and its rally to $68.84 had been very unimpressive. This stock is still a short! We just need it to rollover and give us a good stop. As it is rallying you should be looking for resistance and looking to see if the low of the opening range is also in an area of resistance. If the low of the opening range was support before the stock broke down it will very often be resistance for any rally. DNA served up a perfect example of how powerful the opening range can be. DNA rallied from $67.60 all the way back to $68.84 and the low of the opening ranges was $69.90. When DNA rolled over with the high of the move being just six cents from the low of the opening range that was your signal to get short again. Even if you had waited for it to fall $0.50 from its $68.84 high, thereby creating a trade with a $0.50 risk you would have still had a good trade. I say it would have been a good trade because at that point even a sell off that stopped at the day’s low $67.60 would have yielded a trade of more than your risk. As it turned out it fell as low as $66.30 which would have been four times your risk!

Hindsight is 20/20 so let’s not confuse my use of hindsight with the explanation of trading strategy and tactics. In evaluating a trading strategy the objective is to identify pivotal price points that enable you to consistently establish positions and stops. Because our objective was to trade a gap higher from the short side I used the low of the opening range to identify the price points at which I would look to establish a short position. I used the high of the last rally or consolidation prior to establishing the short position to set my stop. It is a simple concept, and it was a perfect strategy for DNA. If you have read my posts in the past you will know I look at the opening range all the time. This is not simply a hindsight recap.

There is however one big question I left unanswered. Why didn’t I say to get short at the first break below the opening range at 10:10 when DNA sold off to $68.65? If I was really aggressively looking to get short DNA I might have been short here. This was not a great trade, however, because there was not a good chart point to establish a stop. This alone is a reason not to take the trade – especially trading against the trend. If I did get short without a good stop my money management stop would be very tight. HotScans provides lots of opportunities, so be picky.

Finally, let the market tell you what it wants to happen rather than you hoping the market will do what you want. It is important to note that I was shorting after DNA broke down, and after DNA rolled over. I had a plan–sell the breakdown and sell rallies below the opening range, when DNA demonstrated that it was in sync with that plan I traded it. If DNA never broke down I would have never been short. If DNA did not rollover at $68.84 and instead rallied into its opening range I would not have shorted it at the end of the day.

Regards,

Geoff

Geoff will answer your questions in future columns. Please e-mail your questions to geoff@marketgauge.com

"When trading stocks, the key to success is finding stocks that are moving and likely to continue to move throughout the day...that is the basic concept behind HotScans."

           Keith Schneider