Charles Mizrahi: S&P Trader Finds his Comfort Zone
To the uninitiated, all trading may seem the same–it’s all buying and selling, right? But in reality a wide gulf often separates different types of traders. For example, few floor traders make a successful transition to “upstairs” trading, and few off floor traders find they are able to make money in the push-and-pull environment of the pits.
Trader and money manager Charles Mizrahi, president of Brooklyn-based Hampton Investors, is something of an exception. He began his trading career with a stint on the floor of the New York Futures Exchange (NYFE) in the early 1980s and now manages $160 million. His business has two facets: Trading S&P futures, and market timing in mutual funds.
Mizrahi admits his initial trading experiences were not particularly successful; he realized he was not suited to the ultra short-term floor trading approach. But after finding a style and approach that fit his personality and understanding of the markets, he hit his stride. Hampton Investors boasts an annualized return of 45.59% (60.51% over the most recent 12-month period ending March ’99) and a 69% monthly winning percentage. His best one-month return checked in at 36%, vs. a maximum one-month drawdown of 19%.
Mizrahi, who started his current business in February 1985, tried his luck in the stock index futures pit of the NYFE, enticed by the idea of trading an index rather than individual stocks. One of the first lessons he learned was the difference between technical and fundamental trading approaches.
“When I started trading down on the floor, I noticed that people who used technical analysis made money and people who used fundamentals told you why they should have made money,” he says.
But the trading floor didn’t turn out to be the place for him. Mizrahi remained a little less than a year, realizing trading from minute to minute was not his forte. As he notes, it was “a lot of hard work to make a little money. I wasn’t a guy who could trade 25 lots in three ticks–I was just not made up that way.”
| “When I started trading, I noticed that people who used technical analysis made money and people who used fundamentals told you why they should have made money.” |
But before he left, he learned about “long-term” technical analysis from other floor traders, which to them meant concentrating on a two- to three-day time frame. This made more sense to Mizrahi, who found he was more proficient at projecting the market over a two- to three-day span rather than a two- to three-minute span. He used simple techniques then, like basic moving average crossovers, with a good deal of success for while. Finding an approach that felt “comfortable” was something of a breakthrough for Mizrahi.
After leaving the floor for good, he began trading mutual funds: When the market was going up, he went long stock funds; when the market was going down, he’d be in cash. At the same time, he continued to trade his stock index system. He realized the combination of his two areas of trading comprised a viable market timing business. He was not hedging his mutual fund positions with futures, though–his positions were in each area directional and speculative.
Mizrahi is purely a systematic trader, and claims to never override his trading models or introduce any other discretionary elements. He uses a unique, self-adjusting approach that scales in and out of positions in the S&P futures based on the interaction of multiple “indicators,” building and downsizing positions based on a daily update of these indicators.
For example, if he started out with four to six indicators in buy mode and the next day seven indicators were in buy mode, he would increase his position accordingly. If the following day only five indicators were signaling long, he would reduce his position (he explains the details later in the interview). We spent some time talking to him about his approach and how it grew out of his early trading experiences.
Can you explain how you came to develop your trading ideas?
“On the floor, I was having no success trying to do intermediate-term trading. I initially thought the Random Walk Theory worked, but that turned out to be baloney–I was selling when everyone was buying and buying when everyone was selling.
“Fundamentals didn’t work, either. Back then, for example, the big report was the money supply number that came out Thursday night, and I would try to outguess what money supply would be.
“Then I met some technicians on the floor–those funny people making charts with their graph paper and pencils–and they started showing me what they did. I felt that technical analysis was a roadmap showing me where the market was going.”
What’s the basis of your trading model?
“We have a 10-indicator approach. There are three basic categories: The first is monetary indicators, the second is market action indicators, and the third is price action.
“Monetary indicators include 90-day T-bills, prime rate, discount rate, the CRB–things like that. These provide a long-term view of the environment for increases or decreases in the stock market. Over the years I found out which indicators worked best, and these four were not highly correlated and they looked at the market in different ways–they’re very robust. They basically tell me what ‘season’ the market is in, if you want to look at it that way: Is it in ‘spring’ when it should be moving towards warmer temperatures–higher prices–or ‘fall’ when the market should be going into colder temperatures and lower prices?
“The second set of indicators are the market action indicators: The advance/decline line, new highs-new lows, and volume. These indicators reflect the market’s actual strength regardless of price action and are essential in permitting the system to stay with a trend, notwithstanding day-to-day volatility. These give me the guts of the market, what’s happening underneath the surface.
“Price action makes up the third set of indicators. I look at the S&P, the Dow and the Kansas City Value line. I use these to help pinpoint more precise short-term entry and exit points for implementing trades. For example, when these markets are not trading in tandem, the model is alerted to divergences in the marketplace which will be reflected in the model’s signals.”
How do all these indicators come together to trigger trades?
“Each one of these indicators works in and of itself, but I put all 10 together to come up with a rating system. For example, when seven to 10 indicators are in buy mode, I’m trading a leverage of three in the S&P, which means if I have $1 million, I’m trading that as $3 million. When four to six indicators are giving a buy signal, I’m long with a leverage of two. With two or three indicators on a buy, I’m flat, and with zero or one indicators I’m going short with a leverage of three. Those are my four possible positions: long a boatload, slightly long, flat, or short a boatload.
“We call our approach ‘trend anticipatory.’ We’re looking at the market and saying, ‘What needs to happen for the market to go higher?’ If you and I just wrote down 10 or 15 things, we’d probably come up with the same points: interest rates low, advance-decline strong, new lows shrinking, new highs expanding, etc. If those indicators are present, we could still have a couple of days of sloppy markets, but based on market history for the past 50-60 years, the market should go up. That’s what our system does. It’s trying to determine when the probabilities are the best for the market to rise or fall.”
How often are you flat?
“I’m out of the market 11% of the time.”
It doesn’t sound like you use stops of any kind. How do you control risk?
“We control risk through the increase and decrease of open contracts. Stops are a loser’s game in the S&Ps for a couple of reasons. First, where do you pick a stop point? Usually a point is picked on a basis of pain, so it might be in the middle of a trendline, or right above support or below resistance–it’s just a number you pick. Second, the S&P has such great swings in a day, you have to ask yourself where the real price is.
“The real price is the close. If you’re working an intraday stop and get stopped out when the S&P is down 40 points and then rallies back to breakeven, where do you re-enter your position? If you have a robust system, your risk control should be built in to the model, which is how ours functions. When there are more indicators in buy mode, there’s a higher probability of the market going higher, and when fewer indicators are in buy mode, there’s a lower probability of the market going higher. Your risk control is seeing every day where your indicators are.”
Does your model have a typical time frame?
“Trades probably range from seven to 10 days to six to eight months. Winning positions are usually held four to six weeks. A losing position could be liquidated as quickly as seven days.”
When your indicators give a buy or sell signal, how do you enter trades without specific price levels?
“We calculate our indicators just after 4:00 p.m. ET, signals are generated, and trades are typically placed on the close. Sometimes, maybe 10%, are entered the next morning.”
Any final advice for other traders?
“Know yourself. Don’t say ‘I want to be a long-term trader’ and then die when you’re down 2-3%. Find an approach that fits you well.”