For a while now I’ve been meaning to explain who I am and how I trade. After reading Dr. Steenbarger’s blog today, I’ve been inspired to do it, so here goes. It appears that my trading philosophy is very similar to that of Dr. Steenbarger. I’ll attempt to use similar headings so you can compare & contrast.
Who Am I?
Name — Michael Seneadza
I guess I’ll start with college. I graduated from Stanford University with a BSEE in 1990. From there I went to work as an information systems consultant with a (then) Big 6 firm. I worked in IS for the next nine years, mainly building Windows-based client/server applications using PowerBuilder and Oracle. During that period, the mid 90′s, I became interested in the stock market. My interest really intensified in the late 90′s for a couple of reasons. Of course the technology boom has a lot to do with it, but where I was working at the time also contributed greatly. In 1997 I was on a project for an energy trading firm — not Enron but one of their competitors. Being in that environment really got me thinking about trading as a profession. So I made the leap in 1999 after my last project ended. I decided it was “now or never” for me to try my hand at trading for a living.
This is serving as my trading diary of sorts. Most books about trading suggest that traders should keep a journal, but I’ve never done that. I’ve never been one for writing, and I’ve always relied on my memory. Even in school, I rarely took notes. But a journal is a great idea for traders because it’s important to be able to figure out what’s worked, and failed in the past. I’m still not doing the full-fledged journal that is recommended by the experts, but what the hell, I’m my own boss. (Update: I now keep a very detailed journal!) I also thought I’d put my market commentary on this blog to share my view of the market. People are always asking me about what I do, so now they can see in almost real-time.
I also post on other things besides the stock market. Please use the “Archives By Category” as you see fit. And check out the things in the QuickLinks section. I post interesting things on a wide variety of topics that I come across there.
Why You Should Listen To Me
You shouldn’t! Make your own decisions, and decide what trading/investing style you’re comfortable with. What works for me likely won’t work for you. Having said that, I think it’s helpful to see what others are thinking about the market. That often helps me find good trading opportunities, even if they are opposite what someone else is thinking.
I consider myself a swing/position trader. (Update: I switched to day trading in June 2005) I am relatively short-term oriented, looking to play 3 to 5 day moves. I use two trends, I’ll call them longer-term and shorter-term, to help in timing my entries. The longer-term trend tells me what direction I should be trading (long or short). I use the shorter-term trend to determine when to initiate positions. (An easy way to see trends is through the use of moving averages.) The goal is to initiate as the shorter-term trend is coming into alignment with the direction of the longer-term trend. For example:
That is a simplification of how I use moving averages. What I really use is a method called Multiple Moving Averages, which was devised by Daryl Guppy. (There’s an excellent MMA article written by Guppy available for purchase here. ) MMAs are good at providing an early warning of trend reversals. I combine MMAs with Japanese Candlestick reversal patterns to fine-tune my entry points. So when I see the trends coming into alignment, I’ll look for some candlesticks to confirm the expected turn in the shorter-term trend. For even more confirmation, I use a Stochastic Oscillator to attempt to buy around oversold and sell around overbought levels.
As you can see, I’m not one for using a lot of indicators. And those that I do use are more visual than based on precise numbers. I like being able to glance at a chart and trying to feel the mood of the action. The markets move based on greed and fear, and candlesticks are a great tool for reading those emotions.
In my opinion, the most important part of trading is money management. Much to my surprise, most trading books don’t cover that topic. Position sizing, and expectancy are critical elements of any system. This is true for traders and investors. (They’re really the same thing, just over different time frames.) I highly recommend â€˜Trade Your Way to Financial Freedomâ€™ for an excellent discussion on these topics. My goal is not to be right all the time, but to win big when I’m right and lose small when I’m wrong. My ‘perfect scenario’ is to take 10% gains, and a maximum of 5% losses on any one trade. Because of my position sizing, and the fact that I won’t lose more than 5% on any one trade (assuming the stock doesn’t gap against me), I only risk 1% of my equity on any one trade. If I were to go on a long losing streak and my equity decreased, I would likewise make my position size smaller. As my equity (hopefully) grows, I take the profits out of the market.
For me, this is the hardest part of trading. I often exit way too soon, as evidenced by this upswing. I had the post-war turn nailed, but sold way too early, leaving a few months worth of mortgage payments on the table (ugh). It’s important for traders to let their profits run, and that’s something that I’m still working on. Like I said earlier, I try to buy near oversold, and sell (or short) near overbought. So I’ll look to exit a position as the stochastic reaches overbought, and/or when the stock reaches a Bollinger Band. I also use stop loss orders to protect my profits, and to take me out of losing positions. So if I have a $500 gain in a stock, I may place a stop loss order to guarantee me $200 on that position. As the profit grows, I’ll move the stop to lock in more profit. On the downside, for a long position, I generally look to exit at the lesser of a 5% loss, today’s low, or yesterday’s low. The opposite for a short position.
I want to point out that I do not try to catch every move. There are often times, like right now, where I would just sit and wait. I think the market is very overbought (short-term) right now and due for a pullback. But, the longer-term trend is up, so that tells me to play the long side of the market. Given a situation like that, I can do nothing but wait for my indicators to tell me it’s safe to re-enter the market.
How I Find My Trading Candidates and Execute
I have a software package, TC2000, that I use to scan for certain patterns. After the market closes I’ll look through a couple hundred charts and pick out the ones that present the best risk/reward scenarios. I know that sounds like a lot of charts, but it goes really quickly. I takes me no more than 2 seconds to decide whether or not to pass on a stock. As an example, I’ll pull up a list of stocks that made hammers, and flip through those. The ones that made a hammer near converging MMAs would immediately jump out to me. Then I’d take a look at the stock in relation to its Bollinger Bands, and I’d look at the stochastic. If all, or most, of those things lined up, that stock would make the list. I keep a list of my long and short candidates in a spreadsheet, along with my entry points. I load those into my trading software, CyberTrader , and wait for alerts to start going off. So most of my day is spent waiting for dings to sound, and managing my stops on open positions.
I think that’s a good overview of what I do. My style is an amalgamation of things I’ve learned over the years, and is always being tweaked. The books listed on the front page of this site were instrumental in helping me create my system. There is a bit more to what I do, but I don’t want to bore you anymore than I already have. If you have any questions/comments, please leave them in the comments of this post and I’ll reply ASAP.
Oh, I’d be remiss if I didn’t mention the Chart Man, Gary B. Smith of TheStreet.com and Bull & Bears. There is some great material in the TSCM archives. As you’ll see, I borrowed a lot of my style from Gary, though I don’t really play break-outs as aggressively. Definitely check these out, and save them locally before Cramer decides to move this stuff to the paid part of the site.