Woman have traditionally been under-represented on Wall Street. The issue has nothing to do with mathematical skills or business prowess. Rather, we have simply held to a somewhat customary expectation that men are more suited for the battlegrounds of high finance.

Now that the web has created a genuinely open community for traders, both males and females are thriving in the meritocracy. One such excellent trader is Anne-Marie Baiynd.

Anne-Marie is a statistics junkie who has expanded her addiction to include technical analysis. She is one of the key presenters at the upcoming 3 Gurus webinar (click here to learn more).

Damien Hoffman: Anne-Marie, how did you get started trading?

Anne-Marie:  I ran a technical recruiting business for many years.  I started from the ground up and built the business to a very competitive level.  I got tired of dealing with the people on both sides of the desk and the hundred hour work weeks.  I was overwhelmed with constant employee issues of kinds you can only imagine, unless you’re in the business.

In July 2005, I bought a block of tickets for my recruiters to attend a Success Magazine seminar.  I accompanied them on a whim.  While there I saw an Investools presentation and I was instantly hooked on the technical aspects of trading.  I sat there thinking:

“OK, finally, you get to use all that math you love at work (beyond addition, subtraction, and percentages).  This is going to be awesome!  Now I know why everyone on Wall Street is a millionaire … this stuff is a piece of cake! Holy cow, I’ll be basking in Monaco before you know it.”  Now as I recollect that, because it is indeed what I thought, I laugh and shake my head saying, “What a DOPE! I was a babe in the woods.”

I immediately signed up for a class with Investools.  Then, with the support of my really wonderful and patient husband (and a sizable loan from him), I started trading live about a week after my account was funded.  After all, why in the world would someone like me need to paper trade?  To say I was a complete idiot would be a gross understatement.  By skipping the paper trading stage, I embarked on a sure fire way to lose copious amounts of cash.

Of course, I only needed about twenty hammers to the face to realize the truth: trading is both an art and science which takes a lifetime to develop.  Moreover, the mind is not built to trade, but must be trained to trade.  The market doesn’t care what you think or how you arrived at your conclusions –  no matter how many degrees you have, how bright you are, or how logical you believe your approach to be.  If you get caught up in being right instead of re-evaluating at necessary points, go ahead and kiss all your funds goodbye.  It takes a lot of trades to go badly before you figure that out.

Along the way, I finally figured out what worked for me.  I learned from the great work of Brian Shannon at Alphatrends, and Peter Reznicek at ShadowTrader.  They taught me the proper way to look at stocks and how to understand the meaning of underlying market trends and movements.

Damien: Do you have any female idols in the trading world?

Anne-Marie:  I do not have any idols because I am basically self taught and don’t read the pundits or anything opinion based in any major news venues unless it’s for pure entertainment purposes.  When I first began trading, I was glued to that guy who comes on CNBC at 6pm Eastern with the crying babies and such — I’ll leave him nameless.  But soon, I figured out he’s just gaming the system for himself.  I haven’t watched business television in 2 years.  I am highly suspect of opinions.

Damien: What is your trading style?

Anne-Marie:  My trading style is based on a combination of things.  I am a swing trader, by and large.  I usually trade the 1-2hr charts, but I also trade smaller time frames if good opportunities arise.  I trade high beta stocks because I am impatient.  They are usually higher priced stocks with good price patterns.  I trade those same stocks constantly because I get a feel for what the chart is going to show next.  I can surmise how those stocks will behave at earnings.  I understand the volatility spikes which are important when trading options — which I spend a lot of time trading.  I used to be all over the map with different stocks. But I needed to focus. I realized — by losing money — my overly-analytical brain paralyzed my trading while trying to understand why a stock was moving. As a result, I would end up entering trades late and leaving early.

I have only a few indicators.  I once had about 7-8 of them. That was ridiculous.  Now I use the slow MACD line, the fast Stochastic Momentum line, and a weighted moving average or two.  I mostly trade slopes and inflection points — so long as they coincide at a price level I’m watching. The convergence usually occurs at the “golden ratio” of a Fibonacci drawing.  I do not trade when my moving averages are flat because this indicates chatter. Trading in a flat market is a great way to give too much money to your broker and the guy on the other end of your trade.

Damien: How does it feel to be a female trader in a male dominated business?

Anne-Marie: Trading is an extremely unnatural business for a woman to be in.  Most women thrive in an environment of certainty.  If not for the absolute support of my husband and family, I would have been long gone from this business.  Real support is the single most important aspect of becoming a successful trader. You must have reinforcement somewhere: family, wife, kids, or whoever.  This is the most brutal business I have ever been in.  However, at the same time, this is also the most rewarding business.  Truthfully, there is no other occupation I would rather have than this one.

Damien: Thank you very much, Anne-Marie.

Anne-Marie: Thank you.

This week Gilbert “Gman” Mendez — Head Trader at SMB Capital — offers instruction on trading the open:

Readers who enjoyed this also liked this instruction from Gman:

Reading the Tape: Trading into a Position

Reading the Tape: How to Use Levels to Win

We are proud to have hand-selected SMB Capital as a partner to offer our audience products and services to become better traders. To learn more about their new Reading the Tape course, click here.QQQQStocks

Master trader Fari Hamzei uses inductive reasoning like current back-to-back World Chess Champion Viswanathan Anand. Fari has won numerous “Market Timer” awards (which means his skills are legit) and he is a highly respected member of the quantitative (“quant”) trading community. He is the founder of Hamzei Analytics.

I recently read Fari’s excellent book Master Traders: Strategies for Superior Returns from Today’s Top Traders. This book is full of great lessons for the intermediate or advanced trader. The book is a collection of educational chapters by masters of their specific trading niche.

The first part of the book focuses on Technical Analysis. In each chapter, the author shares a few secrets about their proprietary trading methods. In Chapter One, Jeff deGraaf discusses how traders can profit when fear or arrogance manifests in the market. deGraaf also offers pithy nuggest of wisdom such as: “In the market, arrogance without fear will eventually break you. Fear without arrogance will leave you paralyzed at the most inopportune time. The delicate balance of fear and arrogance fosters appropriate aggressiveness without the recklessness.”

My favorite chapter in section one is Chapter Two: Sector Analysis. Given the incredible explosion in sector ETFs, I think this chapter greatly benefits investors/traders who want to better understand some technical tools analyzing sector rotation and trends. I have already taken a few ideas onto the trading battle field.

The second section of Fari’s book looks at Fundamental Analysis. I found Chapter 6, Investigative Investing, to be one of the top overviews regarding best-of-breed fundamental analysis. If you are interested in taking your Warren Buffett, Peter Lynch, or YahooFinance skills to the next level, chapter author Kai-teh Tao makes this book worth the price of admission.

The final three sections cover Sentiment, Derivatives, and Trading Size. These sections will make the quants salivate. Honestly, quantitative models and high level options strategies are not my style of trading. But I did read through all the material and it’s excellent. In fact, I was left with a feeling of jealousy that in this lifetime I probably won’t have time to create such cool models and platforms. Now, if I could only find a quant or two who would like to crank out my wildest strategies …

In conclusion, Fari did a great job assembling a professional team of traders to share their wealth of knowledge. If you are looking for a new edge and want to get fresh ideas from true masters of their domain, I highly recommend:

Smita Sadana

In the movie Crouching Tiger, Hidden Dragon, actress Michelle Yeoh plays a master warrior of ancient martial arts. At the end of the film, she confronts her protege and instructs her with the ultimate secret to success: to remain true to herself. Professional trader Smita Sadana offers us the same sage wisdom for investing and trading.

Smita has delivered a 43% compounded annual gain over the last 11 years. During the same period, the S&P500 index is virtually unchanged. Her accomplishments make her one of the greatest individual traders — and possibly the best female trader — on Wall Street. My interview with Smita was like living through a passage from Jack Schwager’s classic trading book Market Wizards. Smita enlightened me on dealing with emotions, risk management, and the art of discipline.

Smita is another Wall Street professional who is praised for both her skills and her character. In 2004, she lost her father to a tragic murder over a petty sum of money. As a testament to her admirable nature, she used this event to reevaluate her life and dedicate new energies to helping others through financial education. Her firm TraderVantage perpetuates her mission.

I wish I could say successful women on Wall Street are equal in number to the successful men. However, if Smita has anything to do with this issue, there will be an unprecedented amount of women following in her footsteps soon enough.

Damien Hoffman: Smita, when did you fall in love with the markets and decide to dive in?

Smita: My interest in the markets started as a hobby in 1995. I had just finished my double masters in economics. The stock market was a new American passion. I remember thinking, “How tough can buying low and selling high be? I have the education. I can do it really well.” Well, the first year I managed to finish about 20% down — which is bad [laughing], but worse compared to the fact the S&P500 went up 30% that year!

My active investing netted me a very bad blow. But I wanted to do it right or not at all. So, I started reading and researching. I came across what turned out to be one of my favorite quotations by Paul Tudor Jones, “Why not make your life a pursuit of happiness rather than pain?” I thought about that quite a bit and said, “I’m going to give myself one year. If I can turn this around, I’m going to do it. Otherwise, I’m going to quit.” I would’ve quit had I not started making progress. But the early success at that time was the beginning of my attachment to the market.

Damien: Can you share some of those early successes when the lightbulb went on and you knew you could be a profitable trader?

Smita: It was the mid ‘90s. Everything was going up. The financial media was just getting started. There was a lot to learn. I was simply fascinated with the way markets moved. I was enamored by them.

The path to where I am today has been absolutely incredible. We have been through two of the historically worst bear markets in a single decade. As a result, I have learned an unbelievable amount about the market in a very short time. Under normal market conditions, that amount of learning would have probably taken several decades. But the market action from the mid-90s to 2009 has been unprecedented.

Actually, I am very fortunate and grateful because in the mid-90s the markets were quite forgiving of trading mistakes — as most bull markets are. However, if for example I were to start trading today, I would want to be much more knowledgeable and empowered by trading education.

Damien: So would you say it’s harder to earn a living as a trader today?

Smita: Absolutely, Damien. The markets have changed. It’s like the Gladiator movie where the gladiators must be prepared to know what’s coming. We are no longer in the time when things just go up in a straight line and it doesn’t matter what you’re trading. Actually, piling into one thing might have been OK then, but it is definitely not OK now because the markets are changing on a dime. What once happened over the course of a year can now happen in days.

I remember in December 2008 we were having 4% moves in volatility per day! That is something that hadn’t happened in 70 plus years. The markets have become and will remain difficult to navigate. We’re bombarded with a steady onslaught of information, the markets are much more volatile, and out emotions have become more chaotic. The money management and trading business is tough to begin with. But when you add these heightened variables, this makes our profession quite a challenge. Of course, overcoming challenges is rewarding. However, the new environment means we must be better prepared.

Damien Hoffman: How have you succeeded to date?

Smita: Well, at the end of 2008, I had been fortunate to achieve a 43% compounded annual return for the past 11 years. Given that I do not take excessive risk, let’s just say I think I am allergic to large drawdowns [laughs]. So these returns are decent risk-adjusted returns. I don’t rely on leverage. Given the state of the markets in this time period, I feel immensely grateful — blessed. That’s another reason I feel compelled to pass on what I have learned from the markets.

I am always looking for things to improve. The market actually teaches you a lot of life lessons. The companies that succeed are the ones that change with the times. Traders that succeed are the ones who are willing to be flexible on the path they follow to their goals. People who are happy are the ones who don’t fight inevitable change — instead, they embrace and adapt to it [laughs].

Damien: Can you give me some examples of how your perspectives have evolved since the crash in 2008?

Smita: In September 2008 I realized this was not an ordinary bear market. I had traded through the other bear market at the beginning of the decade, so knew I would depend on my number one trading principal: capital preservation. I became more engaged in the thesis, “Defense is the best offense.” I was going into the bear market with my account at all-time highs and I am generally a risk averse person who does not want to take too many chances — especially in 2008, I wanted to hold on to my gains.

I once took a lot of drawdowns in my account — sometimes 20% or 30%. However, I would go on to make new highs because we were in bull markets. Over time, I’ve realized I cannot do that anymore — especially as my account size grows. The drawdowns can have too much of an effect on my psyche. So, as I said earlier, you have to adapt and change to the new circumstances. I never intended to make this change, but I’ve had to tame my trading somewhat. I now use smaller positions. I have parked some assets in cash. I no longer trade my entire portfolio, which I’ve always done. Basically, I’ve learned to win by playing good defense.

Damien: Although I’m a risk taker, I’d also say my legal training has made me somewhat risk averse. When I first started trading, this was a key obstacle for me. How do you counter-balance your risk aversion to still succeed as a trader?

Smita: Very good question. I like to think about this topic like driving. What’s the basic aim of driving? The basic aim is to reach your destination. If you are driving in good weather and the road is clear, you can drive at the speed limit — which, by the way, I drive this way in real life too because I am risk averse [laughing]. But if there is sleet, rain, and fog in front of you, you must drive safely and securely to reach your destination.

To some extent trading has changed forever. On the other hand, money management rules will never change. I think this is where most people mess up. The problem is usually not in the analysis or whether you are a technical or fundamental trader. The problem begins when traders do not formulate or follow money management rules. For example, they may not honor their stop-losses, position sizes, or diversification. They may not care about drawdowns. They may continue doubling-down on a trade because they believe something is a great investment and fall in love with their own thesis. Proper trading is a very difficult balance to strike because you must be engaged with a stock or company enough to have a position, but you must also look over your own shoulder to protect yourself. As I say often, trading for a living is a dream come true, but with independence comes great responsibility.

Chairman Mao Xian famously said, “Good trading is 10% methodology and 90% psychology.” Consequently, I think that trading is a pendulum between ecstasy and agony. You want to use emotions as the driving force behind the act of trading, not behind the decision making for the trade. Emotions are a necessary ingredient for success. Have you ever met a successful person who was not passionate about her work?

Damien: No.

Smita: I believe strong emotions are a necessary ingredient for success – people who are successful use their emotions to stay passionate. The trouble begins when emotions, instead of being the driving force behind the act of trading, become the driving force behind every trade. You have to stay passionate about trading, not every single trade!

For example, one of the things that really changed my trading was when I started to pay more attention to my total portfolio rather than obsess about every individual stock. I keep meticulous records of my daily trading. I write where my account is versus the S&P500. So if you asked me where my account was at the end of 2007, I could tell you exactly. The one way to know where you are going is to see where you’re account is going, not where every individual stock is going. Everything you own on an individual level is necessarily built into your account summary. I think traders make the mistake of saying, “This XYZ stock lost me a lot of money. I need to make all this money back from this one stock’s loss.” Once you start viewing your trading as an aggregate of many different individual trades, your trading will reflect less emotional activity and more improvement. You will focus more on growing your account with less care for which stock or set of stocks gets you there. This has contributed to a more balanced approach to the markets, since the account as a whole is devoid of wild swings that incite wild emotions.

Michelle Yeoh

Damien: Given these volatile times, do you have any additional advice for traders to help keep our emotions in check?

Smita: Use a check list before you make a trading decision. My checklist has a few basic rules:

1. Trade small in times of extreme volatility.

2. Recognize levels that the markets can go to and wait for validation before further capital commitment.

3. Have reasonable expectations. Don’t let irrational exuberance take over.

4. Always remember why you trade.

Additionally, hope is not a trading strategy. Beware of the tendency to trade on hope and the desire to recoup trading losses immediately. Traders need to base their trading decisions more on thoughtful strategy and evidence than hope.

Also, I don’t think it’s an act of courage to try to trade from both sides of the market when volatility is intense. Of course, I trade both the trend and counter-trend — but that’s for regular markets. Since September 2008, I have not taken many counter-trend trades, I’ve parked a nice amount of assets in cash, and I have not been trading as frequently. I know a lot of services say make the most of this volatility, but a few mistakes or slight breach of discipline can create havoc.

So, within the context of the market environment, I chose stocks with a certain set of fundamentals that I like. Then I use technical analysis to facilitate the timing for entry and exit. If the set ups don’t act well, money management rules prevent a small rolling stone from becoming an avalanche.

Another important rule is never argue with the markets. Respect the market and believe that the market is always right! I wince when I read about “the need to tame the market beast.” In my humble opinion, the only way to beat the market is to tame the beast within! Trading is not simply about returns or beating the markets. You also have to address all the traits in your personality that affect your trading. After that, you must employ your strengths while managing your weaknesses.

Looking at the big picture, if it’s muddy, cloudy, and dangerous in the markets, how much do you want to expose to the elements? You let the markets tell you. Once the environment clears up, you can get back in and happy days are here again.

Damien: What signals are you looking for to know whether clear and sunny skies are here again in the markets?

Smita: I conducted a deep study of how bear markets have ended in the past 100 years. The results are summarized in Minyanville’s Bull Market Timer. I use these signals to show the way as the market turns. I have also been writing about this in Minyanville’s Buzz & Banter. Again, so long as you trade with very strong money management rules, you can venture out. For example, I have a money management rule I never break: I don’t hold a stock during its earnings announcement. I prefer to sell prior to earnings and repurchase if I like what I hear and see. As Donald Rumsfeld says, “We are trying to reduce the unknown unknown factor.” Basically, there is a known unknown and then an unknown unknown. For example, we know the known unknowns: we know we cannot know where a certain stock is headed or how earnings will be on the known date for earnings. So, we can take care of the known aspect of the stock trading. What we cannot do is control the unknown unknowns. For example, if a biotech company says a certain drug had adverse consequences, we cannot control that. So, to reduce the risk in these situations, we can avoid trading biotech companies or holding stocks during earnings announcements.

Damien: Seems like a major factor here is discipline. You are known for having extraordinary discipline as a trader. Discipline is a rare and challenging skill to maintain. Where did you learn to be disciplined?

Smita: While I have naturally tried to be disciplined throughout my life, I recognize trading requires a degree of discipline that most other habits do not. Think of trading as a war: we deal with a constant flow of information and we must manage our reactions, expectations, and emotions. We must be constantly aware of what’s happening and cannot let our guard down. If we get hurt, we must rely on resilience to bounce back as if nothing’s happened. Such action, day in and day out over the course of many years, is very difficult. As I said earlier, a slight breach of discipline in trading can unleash financial havoc. I wonder if the Trading Gods know about these rules since minor infractions don’t go unpunished! I’ve also constantly used disciplinary techniques from Behavioral Economics, Psychology, and personal trading experiences. As a side point, I majored in Psychology and Economics while getting my Bachelor’s degree.

Discipline is incredibly important because, as I said earlier, nobody is looking over your shoulder. There is no agency with which you can launch a complaint, “The stock wasn’t meant to go down … it came out with great earnings!” You can only react as an individual — which means discipline is your only protection.

Also, I do not engage in a relentless pursuit of perfection when it comes to trading discipline. We all know perfection doesn’t work in trading! I think consistent discipline can be maintained so long as lapses in discipline are minor, trading mistakes are not compounded by staying with them, and the trader’s ability is not seriously impacted.

In reality, trading has taught me more about discipline rather than the other way around. At times you walk. At times you run. Sometimes you sit by the side of the road. But at no point can you lose sight of your destination. As Edmund Hilary said, “It is not the mountain we conquer but ourselves.” I find myself rigorously doing things to hone my discipline so my trading can be positively impacted. If you want to succeed at trading, first dust off those New Year Resolutions and see them through Dec 31st!

Damien: You’ve mentioned risk and money management many times. In my humble opinion, I think these are the Holy Grail to successful investing and trading. Can you share more about your strategy in this important area?

Smita: I’d be happy to. All risk management stems from a thorough self-analysis of the investor’s personality, then customizing the appropriate trading techniques. Some of the questions I asked myself were:

What are my goals from trading? Are my expectations realistic?

How much time can I devote to this pursuit of profitability?

Do I consider myself to be emotionally resilient? Can I let go of painful and upsetting situations or do I tend to re-live them over and over again?

What kind of markets am I more comfortable trading in? Range bound or trending?

Am I more comfortable trading several stock positions or indexes?

How do I divide risk within those stock positions? What is my optimal position size? Are those positions adjusted for stock volatility?

Do I feel comfortable in short-selling?

What is the time horizon for my trades?

What kinds of stop losses do I feel more comfortable implementing? Does my discipline require hard or mental Stops?

Does trading provide me with a high? (Real trading can be actually quite boring) Can I use the same trading set-ups over and over again and not fall asleep at the wheel?

I already discussed capital preservation, but it’s paramount to my trading. Neither genius nor size can necessarily survive anomalies. Look at the spectacular collapse of Long Term Capital Management or even Amaranth Advisors. They went from being up 22% to down 36% in one trade in 2007!

I’ve also realized the undoing of the biggest and most successful traders has been their actions after a losing streak. My trading rules enforce a mandatory shut down after such a losing streak. This is due to the fear of being what Malcolm Gladwell calls “Mind-Blind.” Poor account action leads to poor risk-assessment of event probability. Traders bet more aggressively if they have endured a losing streak, as many a recreational gambler will attest.

On Buzz & Banter, I often discuss the interplay between emotions, risk, and technical analysis because emotions are the real cause behind the run-in with risk.

Damien: In relation to emotions, when you look at the tape and charts, what signals do you look for to determine market psychology?

Smita: I look at hundreds of charts a day, including indices, market sectors, key stocks, as well as market statistics. These together paint a picture of the collective emotions of the traders and investors in the market. While one data point is insufficient to draw conclusions, when combined with recent history as well as historical precedent over the last several decades, you can start to draw reasonable conclusions about the sentiment and how the market is likely to react to this state of sentiment. While all market conditions are different, investor and trader psychology tend to stay the same — oscillating between greed and fear. This is played out in the chart patterns that one can learn to interpret over time. Of course it is not possible to divine what will happen in the future. The skill is all about gaining an edge in the probability assessment.

Damien: Please tell our readers about your company TraderVantage and what you specialize in?

Smita: Over many years, I have been approached by people wanting to learn about different aspects of trading. I think there are three kinds of people in the financial education area. First, those who offer shortcuts and ways to alleged “instant riches.” Second, those who belong to the financial media but who have little personal market experience. And, third, those who offer their own expensive trading programs. I belong to none of these categories. As a trader I firmly believe that trading is a complex pursuit that requires managing stock and market analysis, money management techniques, market sentiment indicators, and individual psychology.

Early in my career, I used some of the stock advisory services. I realized once I got a list of stocks, I would conduct my own due diligence and buy what I felt like. I didn’t make much money nor did I learn anything about the methodology behind the trades.

So, TraderVantage is my way of sharing some of the knowledge and insights that comes from spending tens of thousands of hours with the tape and proprietary trading patterns that have enabled my personal success. I sincerely believe that the markets are not going to be easy to navigate for many years. So I hope these resources help individuals improve their trading and investing skills. I try to provide that via our Personal Trading Mentorship program. We have also been consulting with Hedge Funds looking to improve their trading methodology, both via fundamental and technical analysis.

Damien: I spoke with Todd Harrison, CEO of Minyanville, and he had nothing but great things to say about you. Specifically, he said you “embody everything Minyanville is and hopes to be.” What personal philosophy has led your peers to praise your character as well as your skills?

Smita: Todd has a way with words. I am deeply humbled and honored at the same time. People are driven by different things in their lives. When you come across those who are on the same path, there are synergies. That’s where Todd and Minyanville come in. It’s really not about me Damien, I guess I stand for ‘responsible investing’ — the only way investing works over a long time — which is Minyanville’s main message. My personal philosophy has always dictated that in order to make a big difference over time, I’ve got to make small differences every day just like the ‘long term’ is made up of many short terms.

So, over the years I’ve been concerned and troubled to see people lose their wealth, health, and relationships because they were never taught basic things about managing money. Our education system teaches us a lot, with a goal to earn money via a successful career. But there is very little education on how to handle money, how to stay away from or minimize debt, how to increase savings, or how invest wisely to grow real wealth over time.

In 2004, I went through a terrible personal tragedy during which I questioned the basic premise of my self-chosen profession. My father was a victim of a robbery. He was killed for a petty sum of money. This totally turned my world upside down. Don’t get me wrong. I love trading, the markets, and the constant challenges they bring. But I started wondering, “What is the social value of a good trader?” My sisters, one is a doctor and the other an engineer, both had jobs with social impact. I wondered how could my profession make a real difference in people’s lives?

I decided to channel that feeling of restlessness into a mission of helping people more responsibly manage their money. I wanted to influence how people think about money. I wanted to help people use the power of financial education to achieve their dreams rather than haphazard buying and selling what the popular financial media highlighted as the story-du-jour. I started educating at many levels. I appeared at school sessions in front of kids. I mentored individual traders and investors.

There are no coincidences. When you really want to do something, you’ll find a way. When I came in contact with Todd and Minyanville I realized our “mission” was similar. And here was a guy who’d given up an illustrious career to do great things for others. An act of courage I must say.

Minyanville is a great community where people meet without hidden agendas. We work to help and learn from each other towards a common goal. I am fortunate to be a contributing member of the Minyanville community.

Damien: Who influenced you most on your journey and how?

Smita: I have been very fortunate to have many mentors on my life’s journey. My parents always believed that women can do anything — and my mom especially was one of those women. She got her Doctorate degree in the 1960’s when women were still not as active in the workforce.

So, when I realized that my husband (Sumit Sadana) was very interested in the markets, trading with its glass-ceiling was a natural challenge that attracted me to this profession. I actually discussed and debated a lot of my ideas with him and still continue to do so today. I rely on him for his excellent fundamental analysis and back-testing interesting new strategies with me — not just opening jars!. I got many lucrative job-offers along the way, but they paled in comparison to the challenge the markets offered.

In the mid 1990’s, one of first turning points in my trading career came when I started learning about Technical Analysis through Don Worden’s Telechart. Since then I’ve read numerous books on Technical Analysis and absorbed and adapted many different trading philosophies. I am also an ardent student of psychology and believe the real heroes are people who have succeeded despite set-backs in life. In that context, I am interested in collecting quotes from great people — this interest was a legacy I got from my mother. The wisdom from these real heroes helps me in my personal growth.

Damien: You first reached out to me as a response to an interview I did highlighting professional women traders. Can you explain your feelings and experiences with women in high finance?

Smita: Well, Damien, you had touched upon what I am very passionate about. Money management has been dominated by men since they were the ones who traditionally earned money. Many women were precluded from entering this field because of the the notion that managing money is all about number crunching and complicated formulas. But the times are changing. After all, this profession is a relatively recent phenomenon. Trading as a profession is a product of the mid-90’s due to the advent of the internet, easy access to brokers, and ubiquitous financial information.

I have also noticed a relatively recent phenomenon where women are tired of not being actively engaged in financial matters. I call it the “Mad Honey Phenomenon.” Women have started taking steps toward educating themselves about financial matters, commensurate with their earnings power and life expectancy. That remains the next frontier.

So, while success in this profession offers a sense of personal accomplishment, I recognize and respect the fact the market doesn’t really care who is trading on the other side of the screen. Age, gender, even experience does not matter as much as adherence to discipline.

And who knows … maybe my foray in trading will also encourage men to try out the Latin dance class at my gym. For now, only a few brave souls venture in [laughs].

Damien: I’m excited to watch you pioneer for girls such as my new daughter!

Smita: Thank you!

Damien: Most traders spend a tremendous amount of time consumed by their job. However, I read you are active in the performing arts. Can you tell us about this additional passion of yours?

Smita: I used to be very active in theatre among many other activities. That was during my University days. I actually won the top National level competitions in India. Now, my interaction with theatre is only an occasional interaction from the other side of the stage — as a member of the audience!

However, that experience has also influenced my trading tremendously. Rehearsals put your through a grueling regimen of patience and discipline. You learn to read emotions since you have to reproduce them. Lastly, the live performance prepares you for dealing with troublesome issues in real-time!  Ah … I really miss that time, but I guess I should be content with watching live drama in the markets everyday [laughing].

Damien: Smita, you are quite an interesting person and I’ve greatly enjoyed getting to know you better. I look forward to staying in touch as my daughter looks for great role models!

Smita: Thank you, Damien. I look forward to that too. It was a pleasure to do this interview with you.

Charles Kirk

Have you ever heard of the investor who grew $2000 into more than $1 million? Meet Charles Kirk. Charles is not your average fast-talking, infomercial-star pitching to sell you his get-rich-quick scam. Rather, Charles is one of the most respected investing and trading bloggers on the web.

Charles is best known for The Kirk Report: a blog which provides readers with a steady flow of excellent tips for becoming a better investor or trader. He works hard to help educate people on how to build a skill set which will benefit them for a lifetime. Rather than promise quick riches, Charles takes pride in being honest when explaining the time and discipline required to become a successful investor. In a business full of charlatans, Charles is a gem.

I sat down with Charles to discuss his ride to millionaire status, his widely-read blog The Kirk Report, what it’s like to be a good-guy on Wall Street, and what it takes to follow in his footsteps …

Damien Hoffman: Charles, we both bailed on a law career. Can you share how you transitioned from law school to stocks and blogging?

Charles Kirk: As a law student my interest in the market grew beyond a part-time hobby. This was back in the roaring mid- to late 1990s which was an ideal time to get started as a trader. For one thing, the great bull market helped me to do well without having any consistent edge or risk management skills.  Starting with only $2,000 of cash, I could also trade online for less than $10 per trade which made it feasible to trade on a more active basis. Finally, it also helped that I was bored by my law studies and feared how unhappy I would be as a lawyer. Trading stocks provided for a fun and challenging diversion which I thoroughly enjoyed.

While I was actively trading enough to be considered a full-time trader during law school, it wasn’t until I later earned my law degree in 1999 that I decided to make trading my full-time profession. With a career in law as my “Plan B,” I gave myself two years to prove to myself and my family that trading stocks was a correct career choice. Although there were many ups and downs, fortunately it became clear I made the right decision as my skills and profits increased in the following years. By 2007 my career trading profits surpassed the $1 million dollar mark.

As for blogging, once I graduated from law school and decided to become a full-time trader, I started sharing my thoughts with friends and family through a newsletter which eventually transitioned into The Kirk Report. Back in 2003, there were very few blogs focused exclusively on the market and this provided me with an opportunity to reach out and help others who were going through the same things I had since I started this wonderful journey.

Damien: Your site has been around for a long time and is well respected by nearly every top blogger in the investment space. Can you share why you think you’ve earned the respect of your peers and what’s led to the lasting success of The Kirk Report?

Charles: Although traders have access to a lot of wonderful information and tools today, there is still a lot of bad information and advice — for example, pump & dump schemes, front-running advisories and aggressive or false marketing. Therefore, many people are simply looking for someone they can trust to learn how to do better in the market. Over the years, I think I’ve earned the reputation that I’m honest, I don’t have an agenda or an axe to grind with anyone, the website I’ve created and the content I share within it is useful, and that I’m genuinely interested in helping others succeed more in the market. The Kirk Report is also different than most by not giving advice or stock tips, but rather in creating an educational environment that fosters individual trader development versus guru following. In fact, the mission statement that I created for The Kirk Report from the beginning is something I try to still meet every single day:

“My primary goals for the website are to help the ‘little guy’ investor and to provide food for thought, not blind recommendations. I’ve learned many things the hard way through trial and error and my intent is to share my daily thoughts, analysis, and views — as well as others who I think you should pay attention to. Ultimately, my end goal is for an individual investor who reads The Kirk Report frequently to make much more informed, intelligent, unemotional and therefore, ultimately very successful investment decisions.”

With the addition of this year’s mentorship program, my long-term vision is finally being realized for the website to help others take their own strategies and skills to the next level.

Damien: You’ve definitely done a great job actualizing your mission statement. One thing I’ve also noticed is your premium product does a great job giving a snapshot of the day. Can you explain your framework for analyzing markets and how you settled on this framework?

Charles: My goal every day is to get members to learn how to think about the market in an unemotional way by being fully aware of what has and will likely move the market and why. Most people, as you know, fall in the trap of looking for opinions and advice that confirm their own bias and portfolio positioning. I do the exact opposite by forcing readers to read things that constantly challenge their opinions and positions. For some, this is confusing and frustrating because they’re looking for clear cut and confident “you must do THIS with your money” type of recommendations and analysis. That’s not my approach!

At the end of the day, you and you alone need to know what to do with your money. The opinions and analysis of others are always secondary to your view. My goal is to empower others by exposing them to a number of opinions and strategies so they can develop and expand on their own methods in their own way. They can develop an approach that enables their own skills and personality to work in their favor. Over the years I’ve learned by helping hundreds of other traders that all of us posses the ability to trade and invest well — but to get there we must undertake a long and arduous discovery process that requires constant exposure to new things, analysis, and strategies. That’s what I do every day at The Kirk Report.

Damien: I’ve also found that there are two camps of investors: those who want the framework and skills, and those who want picks and nothing more. Obviously, the investors in the first camp become wealthy, and the others, well, they just chase opinions for a lifetime. Since you pride yourself on helping individual traders with their skills, what mistakes must individual traders avoid in order to drastically improve their chances of success?

Charles: Sorry, but you are not going to become a great trader by avoiding mistakes. This is a game of mistakes and we all learn the most from the mistakes that also hurt us the most. There is no way around that.

Every successful trader I’ve had the pleasure of meeting has the battle scars to show this is a tough way to make a living. It is a true misfortune that so many in this industry try to convince others how easy it is to trade well when there is nothing easy about it. The mistakes that will tend to hurt you the most are also the ones you already know you shouldn’t make but make them anyway. In fact, the times I’ve lost the most money have also been when I have violated one of my very own trading rules. The same rules I’ve developed with years of experience from making the same mistakes.

I have told members I could create a list of trading rules that would virtually guarantee the success of every person who decided to follow them. But the truth is as humans it is against our nature to follow the rules even those we’ve had to learn the hard way. That’s also what makes all of us so interesting and why the markets are so challenging and constantly engaging. If no one made mistakes, the market would be completely efficient and void of opportunity. Mistakes, by their very nature, create opportunity in the market. Those who can learn how to profit from the mistakes of others as well as to reduce and contain their own are those who succeed. The big mistakes to avoid are trading too frequently & too aggressively without proper risk management skills such as using stops and proper position sizing.

Damien: You trade stocks full-time. What is your advice to someone who aspires to try the same path?

Charles: Trading is very similar to any profession that requires a certain amount of skill: it takes vast amounts of time and dedication to learn. Only liars and crooks who want to sell you easy short cuts, trading advice and alerts, expensive software, etc. will tell you different. In fact, even the brokers are guilty of the same “it is easy, anyone can do it” type of mentality in order to fill their own wallets with your trading commissions. Remember the cute baby who trades at E-trade?

However, to do well over a lengthy period of time in a consistent manner takes a tremendous amount of skill. This can only be acquired through a dedicated, extensive effort. My suggestion for anyone who aspires to do what I’ve done is to spend several years just learning everything they can about the market and exploring different types of trading strategies. The Kirk Report can be helpful in this capacity especially if you take time to read through all of the links and resources I share. During this time I also think it is important to build trading skills by trading in simulated “paper trading” accounts.

Only after you’ve acquired these skills and have proven some measure of consistent success, can you even start to think about trading full-time. By then, it should already be patently obvious if you’ve got what it takes to make it as a full-time trader based on your current and past performance. And, remember, this is not a profession suitable for everyone and that’s OK. Find a career that makes you happy and able to provide for yourself and your family. Trading provides that for some, but certainly not everyone who desires to set out to trade full-time.

Damien: Would you say being away from Wall Street helps you feel more objective and less susceptible to the emotions of the masses?

Charles: I once thought there was a distinct and clear advantage, but I no longer think so. With access to the same real-time information and tools that those on Wall Street use, for good or for ill I am unfortunately impacted by the very same opinions and emotions that traders who work on Wall Street face every single day.

However, because I am an independent trader who trades only my own money instead managing other people’s money, I have a tremendous amount of freedom and flexibility to trade the way I want to at all times. Those on Wall Street who work for others simply don’t have that luxury and that’s to their own detriment as well as their clients.

Charles Kirk in Utah

I’ve been doing this long enough to understand that sometimes it is OK not to trade and be patient while your strategies aren’t working well. There are times, for example, that I will significantly under perform the market and that is to be expected. For example, if I had to meet weekly, monthly or quarterly profit targets irrespective of prevailing market conditions to make others happy with me and my job performance, my trading would suffer because I’d be forced into making emotional “performance anxiety” trades that I wouldn’t otherwise be tempted to consider.

While I set extremely high goals for myself and my trading, I have learned not to let those goals control my trading decisions.

I’ve also learned when I have to be very aggressive in the market and to recognize when market conditions are such that pays the most reward for the least amount of
risk. As you might suspect, those times are exactly when other people are flooding the exit doors and running away from the market. If I had to justify my actions to others during those key market junctures, it would make my job that much more difficult. The market is challenging enough. So, my complete independence allows me to zig while others zag and be able to see and take advantage of opportunities during market panics and bubbles. In that respect, my 100% independence is a true asset.

Damien: Charles, in addition to being a great trader, you are a very nice person. However, most people think they need to be Gordon Gecco to succeed in this business. Can you explain how being a good-guy has worked for you?

Charles: I think the Gecco-mentality is something you see far more in movies than real life.  Some of the best people I’ve had the pleasure of meeting are traders.

The truth is that most professional traders have been humbled by the markets enough to know and respect the value of having good Karma and doing things that keep the trading Gods on your side as much as possible. In my experience, the vast majority of traders share a common dream to reach the point of financial independence so that later on in life the assets we acquire in trading will go to help many others after our careers are finished. This is a common goal of many traders who I meet and call close friends. I think it has to do with the fact that as traders we are engaged in a zero sum game. One person wins and the other person losses and most of us don’t have the opportunity to make a significant difference in other people’s lives. But at the end of the day, those of us fortunate to call this our profession clearly recognize that we are indeed very fortunate to be doing something that we truly love and, if we are successful, we also feel obligated to look for ways to give back to others to make this a better world for everyone.

Like most things, the media loves to place all of the attention on the bad apples especially when markets perform poorly and people look for someone to blame for their own mistakes and investment losses. Just look at how much time and focus has been devoted to Bernie Madoff. So, bottom line, I think the perception is flat-out wrong.

Damien: Charles, how do you manage work-life balance with two successful businesses? Is this related to why you do not allow comments on your website?

Charles: Because of the sheer popularity of The Kirk Report, it would be a full-time 24/7 job to monitor and respond to a message board system. That’s simply not possible. My priorities are simple and straightforward: family first, trading second, then the website — in that particular order.

As I have confessed on many occasions in the past, I’ve struggled tremendously in balancing all of these priorities, but I think I’ve finally learned how to do it or at least do it better in recent years. While I devote a lot of time and effort to The Kirk Report and my paying members, I’m still accessible and available when they desire to share views and ask questions. So, at the end of the day, I think I’m doing every thing I can to provide a high-value membership for the price and still help as many people as I can. God willing I hope to continue doing this for a very long time.

Damien: We hope so, too. Charles, thanks for taking the time to chat with me. We wish you continued success as both a trader and industry-leading blogger.

Charles: Thank you for the opportunity, Damien.

To learn more about Charles and the The Kirk Report, please click here.

Gilbert "Gman" Mendez

It seems the chatter about High Frequency Algorithms has gone down a fair amount. Maybe as intraday traders we have become desensitized to their shenanigans and have learned to live with the frustration they bring to our business. Or maybe there really isn’t much to talk about. How many times do we need to hear the schpeel about how they make the market more efficient? yada, yada, yada. Instead of writing – complaining even – about the HFTs I want to talk about some of their characteristics.

I have been a bit out of the loop in the past few days due to health reasons. I am currently battling a silly case of the flu. And let me tell you there are only so many 16-hours days of sleeping I can handle. So as I lay here awake in the middle of the night staring at lady liberty I can’t help myself to think about how these dopey programs work. I can’t imagine them being that complicated. I mean speed is the name of the game, so overly complicated mathematical computations are out of the question.

Thinking back on my engineering days and the cheerful lectures (sarcasm?) on computational nonsense I recall a few things. Linear systems are easy to program and computational friendly. From a mathematical standpoint this boils down to average price and rate of change in price of a stock (think fear/greed thermometers if you will). Further, common sense tells us these algorithms are dependent on volume and liquidity to run their show. So an accumulation/noise algorithm tries to keep a low rate of change in the stock while there is light volume, giving a chance to a magical moving average to catch up to it provided there is enough liquidity in the stock.

I know I have now lost some of you with all this mathematical gibberish. The point I’m trying to make is simple. The more controlled a stock is (low rate of change) the more likely it is for HFT algorithms to run us over. Think of consolidations, these were levels where we as traders would take considerable positions in anticipation of bigger moves. We would over-leverage our positions knowing our risk was well defined. As the rate of change in price would pick up in the opposite direction we had thought we would exit assuming we were wrong.

But what if the program would just drop the level right before the magical average was about to catch up to it? Then as traders start to puke positions the algorithm is able to get significant volume at a slight discount. Those who just exit their positions realize what happened and scramble to get back in now altering the rate of change in the stock all together leading to the actual move. Just “simple and elegant” as my calculus professor would say.

How this is useful information to trading is the important part of the puzzle. I chose to trade a bit aggressively during times of high volatility (steep rate of change) and when there isn’t much or too much liquidity for programs to run their show. That only seems to take place in premarket, after hours and the first 15-20 minutes of the open. At all other times I am very careful of not getting in plays that “seem too obvious” or when the rate of change seems to be about flat. I rather wait for the volatility and volume to manifest itself to come out and play.

That doesn’t mean I am suggesting that you should consider start chasing moves in a stock as profitable strategy. I am suggesting that those struggling should consider developing momentum trading skills. I am also suggesting being cautious around points of low volatility.  These are the levels where stocks can be often “manipulated” or as the SEC would put it, more efficient. For now, I am off to pop some Nyquil to make my immune system more efficient hoping I can sleep this off and make it to the open tomorrow. Happy Holidays!

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Dr. Brett Steenbarger

A few people have asked me why I covered my swing trade (selling S&P 500 Index on Friday and adding to the position Tuesday morning). Three reasons stand out:

1) I had set an initial profit target at the weekly S1 level. We hit that level and, per my discipline, I always take profits on one unit when the first target is hit. (Note: this presumes a system for unit sizing of positions; I will be blogging on this topic shortly. The basic idea is that you divide your capital for a particular idea into several portions or units. This enables you to systematically scale in and out of trades.)

2) When I saw that we were having a labored time hitting the second, S2, target, I took the position off entirely. My concern was that we were seeing significant selling pressure (negative NYSE TICK, volume at bid exceeding offer in the ES futures), but that the pressure was having a difficult time moving stocks meaningfully lower in the afternoon.

3) I knew we had a strong momentum day to the downside. Recall that the proprietary Demand/Supply measure is an index of the number of stocks trading above and below the volatility envelopes surrounding their short-term moving averages. We hit 200 on the Supply side, which means that a very large number of stocks had closed below their short-term bands. This has only occurred 30 times since late 2002 when I first began collecting the data. When this has happened, the S&P 500 Index (SPY) has closed up the next day 20 times, down 10 for an average gain of .60%. That told me that, short-term, I might be able to re-enter my position at better prices. (Note: I update Demand and Supply every day before the market open via Twitter; follow Dr. Brett’s tweets here).

Everyone has different ways of trading and different disciplines. Mine calls for me to let positions run to their targets, but–once they hit targets–be proactive in harvesting profits when my edge seems to have dwindled. It’s a nice illustration of trade management and its role in helping traders maximize gains, but also protect them.

This article was originally posted at TraderFeed on Wednesday, September 2, 2009.

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Reading the Tape with Gman: How to Read the Tape

The word on the street is that intraday traders are frustrated. The rules of the game have changed. Most high probability chart setups in between important levels are being manipulated by the high frequency algorithms. If you are an active intraday trader reading this, I guarantee you have been a victim to what I call the screw job program. Let me explain.

The highest probability trade for a well capitalized algorithm is the trade where it is guaranteed emotional order flow. By emotional I’m referring to the order flow that comes out of positions where traders just want out – our stop orders.

Consider all of the high probability plays: flags on strong/weak stocks after a drive, consolidation, support/resistance at important levels. We all trade them. We size up as the play develops in our favor and we trade them quite similarly when the play goes against us. We bang out of the stock when we assume we are wrong (especially when we have size).

Let me offer an example of a common screw job program. A stock drives on the open, comes off very little and starts to consolidate close to the high of the day on a tight range for a significant period of time. You can spot plenty of buy interest on the bid, the buying is clear. The stock spends so much time consolidating that the VWAP and moving averages start to catch up to the price action. You see a tremendous opportunity to “load the boat” with little risk on the consolidation calculating the stock has another leg higher.

The stock takes the top of the consolidation with volume and you add to your position. You know you are in the driver’s seat. I start the theme music to “Jaws”, and our desk’s group of traders I have affectionately termed the Shark Tank, communicating an excellent trading opportunity to the firm. Then out of nowhere there is more selling interest, the bottom of the consolidation drops and you bang out of the play. 15 minutes later the stock is making new highs without you in it. Talk about getting bitten by the market. Sound familiar?

Check out these charts of BAX to illustrate my point from above. One shows the intraday price action on a 3 minute chart while the 15 min and 60 min chart give us a clue of the upside of the play.

I know I have been a victim to this screw job algorithm at least 30 times in the last month.  But lately I have started to catch up to their nonsense and have had to make some adjustments.

1. Increase the stop loss on the position
2. Trade with less size until witnessing the screw job then lay into the position when it gets back above the level.
3. Stay light or flat on the setup, wait for the screw job and then add while the screw job is taking place. Then lay into the position when the panic subsides.
4. Trade more in premarket and after hours when there are very few/no algorithms.

Dr. Brett Steenbarger once told me:  turn frustration into opportunity. Doing the steps above have helped me tremendously. Clearly the algorithms have some advantages but the trader who adapts will always come ahead. Happy trading!!

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