Brice Wightman Chats With Bennett McDowell
Bennett McDowell has been a full-time professional trader for seven years. In 1998, he started managing money. In this interview, Bennett talks about his search for a methodolodgy that would fit his personality and risk tolerance.
Brice Wightman: How did you get involved in stocks?
Bennett McDowell: I actually worked on Wall Street back in the mid ’80s. When I graduated from Syracuse University, I went into the Navy for four years, but really wanted to get back on the Street to learn the business. So I went back and worked various jobs on Wall Street, eventually ending up in securities firms. I did a lot of trading on my own, as well as watching traders at some of the firms. My trading really took a turn about eight years ago. It takes a good few years — maybe as many as five — before you have the psychology to handle the markets. I use a combination of Bill Williams’ trend-following system and Elliott Wave.
Brice: What was your trading like when you started?
Bennett: Back then, there were many styles and there was a lot of milling through them until I found a style that fit my psychology. But you don’t know that in the beginning. It takes time to learn all that. I spent the first four years of my trading looking through the various methodologies and finding one that made sense with my personality. Also, you go through a period when your money management becomes a real focus of your trading. Money management is everything.
Brice: How has your trading changed?
Bennett: There were so many different methods and styles, it was more confusion for me in the beginning than actually having the confidence in a system that I felt was going to work. In the beginning, my trading was knowing the different systems but not knowing which one I could implement. Trading is a lot like playing a sport or playing music. A, it’s not easy. B, there’s science involved, and skill, and the rest is really just practicing, which is actual trading — until you get a feel for the particular methodology that works for you, improve your skill in spotting patterns and master the type of trading you want to develop.
Brice: What’s your current style of trading?
Bennett: We’re basically trend followers. We trend-follow anything from a five-minute to a 15-minute to a 60-minute to a daily, and at times when we’re dealing with long-term investments, we’ll use a weekly time frame. Basically we use fractals for entry; we try to go in the direction of the Elliott Wave count. It’s really quite successful. (See Trade Example Chart I.)
Brice: Are you primarily a daytrader or a swing trader?
Bennett: We actually do three types of trading. We scalp the market, but in scalping, we don’t rely too much on the Elliott Wave; we pretty much scalp it using a stochastic oscillator. (See Trade Example Chart 2.) We only do that if it’s a three-minute chart or below. Once we get up above that — let’s say a 10-minute chart — we don’t use stochastics any more. I use primarily Elliott Wave, along with our trend-following system. Anywhere from a 10-minute to a 15- minute, we may catch an intraday swing that may last an hour or two, whereas scalping may be a few minutes to 10 minutes. Once we get above the 30-minute time frame — anywhere from the 30-minute to the day chart — that’s a position we’re going to hold overnight. That trade can last anywhere from three days to two weeks. Longer-term money — this is money we manage for clients — we’ll use a longer-term chart, a weekly chart, because we plan to be in that position for a while. That’s a different level. On a primary basis, I’m daytrading almost every day.
Brice: Can you describe your stock selection process?
Bennett: We use Advanced GET to narrow our candidates down. It counts the different wave structures and goes into the market and scans it. Then we apply our criteria to the count. That narrows it down to maybe 50 stocks. Then we visually look at the stocks. What I’m looking for is, let’s say you have a correction in a strong trend up. Let’s say that correction is wave 4; we’re looking for an extension or wave 5 back to the upside in an uptrend. We want to look at all the stocks in that formation. The problem with the software is it’s going to tell you it’s in a wave 4, but it’s not going to tell you where in wave 4 it is. It may be an “A” wave, or it may be a “B” wave. Some traders trade “C” wave; in my experience trading “C” wave, you can get stopped out quite a bit on “B” wave. I’d rather let “C” wave finish, and then your chances are really much better, because once that is completed, you usually see a fairly significant amount of volume at the bottom of the “C” wave.
Brice: That’s your entry signal?
Bennett: It’s one of them, but you want to see the ABC pattern. You can actually see that on the chart, whether you use a five- or 15-minute chart, you can see it. Sometimes you do miss it; sometimes you don’t see it, but you can’t get every trade anyway. I really like to see that ABC pattern I look for high volume. I’ll go off that bar — usually it’s an elongated bar — on really high volume. You look for the bottom and you go ahead and enter one or two ticks above that bar and your stop is right under it. It’s a good low-risk entry.
Brice: When you say fractals, you mean Murrey Math?
Bennett: It’s actually visually more simple than that. We’re looking for a change of behavior in the market. To create a fractal takes five bars. In an up fractal, you want to have two bars preceding the fractal with higher highs and higher lows, and the two bars after the fractal need to have lower highs, so that bar sticks out. That shows that price went up to a certain level and backed off. There’s some reason that the prices backed off. It reached a certain level and buyers were not willing to buy any more, so it backed off — that’s a fractal. Certain fractals have more significance than others, so there are some fractals that we won’t pay as much attention to as others.
Brice: So the fractals give you your entries?
Bennett: Yes. Some of your biggest moves are out of markets that have consolidated; we call them sleeping markets. What happens is your biggest trends come from markets that have had no real movement for some period of time, and that period of time can be calculated using Fibonacci time ratios. A sleeping market is waiting for some new information to come in, to make a break. Usually that first break will form a fractal — you’ll get a break and a pullback — and we’ll probably be there on that second break.
Brice: So you use Fibonacci in terms of time as well?
Bennett: Yes. There are certain parts of the Elliott Wave that are easy to count and certain parts that you just can’t, and those are the parts that you just don’t trade. But when you get something obvious like a tremendous trend up with very good volume, chances are that’s an impulsive wave and wave 3 of one degree or another. When we finished that wave 3, you know using your Fib retracements where the bottom of “C” wave of wave 4 should go, roughly. It’ll go usually between 38% and 62% — the majority end at .50 to .618, which is a Fib retracement. Usually, you look for it to end there and look for some volume and the Fibonacci time extension calculations based off the two previous pivot points should be around 1.382 to 1.618 at the end of “C” wave of Wave 4. If you can see an ABC pattern at that point, that may be a good entry. When you are buying on a “C” wave like that, you are buying without the trend exposing itself yet. You don’t know if that “C” wave bottom really is the bottom, and that’s why you have to have your stop right at the bottom of where you feel the bottom is. That stop has to be with the correct position size so that your risk is no more than 2% of your account value. Usually, if you miss it once, you can pick it up again; it’s very rare you miss it twice. It’s just a real good low-risk entry position, one in which you can really give the market some room because it shouldn’t take that bottom out.
Brice: What makes a good trading system?
Bennett: Ours is like a hologram; we can use it on any time frame. The sign of a good trading system is that you can apply it to different time frames, and if you can’t, then something about the market dynamics may exist — and the system may not be that great. I’m not a big believer in a purely mechanical system; if there were one available, it would cost so much money nobody could afford it. Think about it. If it worked 100% of the time, it wouldn’t be for sale — you’d be printing money all day long. So trading becomes a lot of art and a lot of science. A lot of it is knowing what signals not to take.
Brice: You’re involved in training traders. What are some common mistakes you see new traders make?
Bennett: I would say 90% of the problem is money management, and that’s provided they come to us with a system that they know how to trade. A lot of people don’t test their systems. There have been a lot of people that have come to us with a system that they felt was good, but in reality, it was not. At that point, we have to see if we can make this into a system that will work, or is this something that’s just not going to work? We have them keep pretty detailed records of their trades, and we go over the results — what’s their average win, what’s their average loss — and we get a handle on how many times they’re winning with this system and that gives them a percentage of their edge. We look to see if their average wins are bigger than their average losses. Then that ties in with money management; I find that’s an area where most people — even people who have been trading a while — can always improve. If you look at a trader that’s failed all of a sudden, the reason will always be money management — a position held too long — it’s human, we’ve all done it. The difference between a seasoned trader and a novice is that the seasoned trader fights that urge to hold that position. It’s almost like breathing to them — they just get out.
Brice: What do you do in your off hours?
Bennett: I have a great marriage and a wonderful child and I enjoy spending time with my family. I try to get a little exercise in the afternoon. I think every trader needs to relieve that stress. I do some aerobics and jogging, things like that. I like sailing, but I don’t get out that much. Another kick for me is computer games.
Brice: That relates to trading.
Bennett: Yeah. It’s a natural. Of the traders I’ve talked to, you’d be surprised how many play computer games.
Brice: That and gambling.
Bennett: Exactly. It does relax you because it takes your mind away from anything market related. Also, I find that a lot of traders work too hard at it. A lot of traders that are having a hard time are thinking about trading all the time. I’m not saying you don’t need to work hard at becoming a good trader, but you need to let go; you need to be able to turn it off, especially on the weekends. It’s best to come in with a fresh mind when you approach trading. It really allows you to come in more focused; it allows you to see the market.
Brice: Thanks, Bennett.
Trade Example I: Intraday Trend Trade (August 8, 2001)
When I trade above 3-minute time frames, I use a trend-following system. This is Bill Williams’ overlay indicators on CQG. Trading under 3 minutes, I use stochastic on “noodles” and stock traded. Peak in “AO” histogram indicates a Wave 3 of Wave 3. In the early stages of this trade, I use a red-line stop until the peak of “AO” histogram reverses, then I use a green-line stop.
Fractal entry outside moving averages indicating a possible trend to come, and it did. Initial stop was above the top of Wave 2 @ 42.66. Short entry at 42.24. Exited Trade at 40.38. Profit = 1.860.
Trade Example II : Scalping The QQQ
A = 5- and 15-period moving average crosses and stochastic is trading down from an overbought area. B = Cover position as stochastic crosses in oversold area @ 38.87. Profit 39.25 – 38.87 = .38 profit, initial stop loss is .20 risk.