One of the best unbiased sites in our industry is The Kirk Report. We’ve known Charles Kirk for a number of years and he brings a professional traders’ look at the industry each day.
Two weeks ago Charles interviewed me for his site and, as I mentioned to him, he went even beyond Bloomberg Magazine when they interviewed me and discussed my research early last year (they did a very good job…Charles went even further). Charles’ questions were excellent and they got to the heart of systematic high probability trading.
With Charles permission, I’m going to post the interview here in four parts. After reading it, please feel free to send me any questions or thoughts you may have. You may also want to check out The Kirk Report each day found here.
I hope you enjoy and learn from this interview.
Courtesy of The Kirk Report
Charles Kirk: Thank you for taking the time to answer our questions. Your research and experience are something few people have, and we look forward to any insight you can share that will help us perform up to our abilities.
Larry Connors: Thank you, Charles. Thank you for inviting me.
Kirk: Thinking back how and why did you get interested in the markets and trading stocks for a living?
Connors: I was given stocks for my 8th birthday by my grandfather, who’d been in the market for a number of years and was tracking those stocks pretty much every day after school, so it was early on in my blood. I started my own business while I was in college and was able to make some money from that, and found myself trading in the markets during that period of time. So it’s something that I’ve always been interested in, and it was natural for me that once I left school to continue there. And shortly thereafter I was hired by Merrill Lynch back in 1982, which got me into this industry.
Kirk: In the early days how did you learn how to trade?
Connors: A lot of what I went through is probably the same process that most people go through. It’s almost a sense of self-discovery. When I was first learning how to trade – and again this goes back into college – there wasn’t a lot of information out there on how to properly trade. Value Line was available in our college library. But as far as trading goes, there wasn’t any one place that one could learn how to trade, and what was interesting is that pretty much led its way all the way up into the mid-1990s where there’s just a lack of credible information out there on how to properly trade.
I began the process of quantifying things back in 1987. I had made a decision at that time that I wanted to go off and trade for myself on a full-time basis – something that very few people were doing back then. There was no specific path to take, and essentially I just started following certain technical indicators.
One of the first I was using was the MACD indicator, and in attempting to quantify it I believe I was using the old CompuTrack programs back then and I would go bar by bar by bar. I’d identify a setup and then go bar by bar from entry to exit. It took seven full years before I could get to the point where I could trade for a living and provide for my family.
Kirk: Was there anything in particular you found helpful during the initial learning curve?
Connors: The thing I found helpful certainly was quantifying things. It’s one thing to look at a chart and start seeing the same pattern over and over again. It’s another thing to be able to take that pattern and put real numbers to it.
I would say that some of the writings that Larry Williams did were very helpful early on. His research, especially in the futures market, was many years ahead of everyone else, and it was really the first time that I had seen a professional take short-term strategies and quantify them. That provided a nice base of thinking along the way, and I certainly give Larry Williams a lot of credit. A lot of the research that we’ve now done many years later stems from some of the initial thought processes that Larry Williams published. I give him a great deal of credit for some of the things that we see and do today.
Kirk: Are there any mistakes that you made early on that would prove to be excellent learning experiences? If so, what were they?
Connors: I wrote about that actually in Street Smarts. Without naming names, I was following the advice of a well-known Elliott Wave practitioner who was basically calling for a “supercycle high” in the markets. I had watched some friends make some pretty good money following this gentleman – who was basically just following the bull market – and I put some pretty serious money into a number of options positions. I was buying August 1987 calls, September calls, October calls … all on the OEX (S&P 100).
I had a good deal of my net worth in these positions, anticipating this great big move to the upside. What ultimately happened was that the opposite occurred and the market started imploding in August, September and then crashed in October.
The fortunate part of that story was that it was at that time when I started following my own indicators, and one of the indicators that I followed had given a pretty healthy sell signal a couple of days before the market crashed. So I was fortunate enough to be able to make some, if not all, of the money back.
The lesson learned was not to follow the individual picks of any one individual – that you’ve really got to learn to do it for yourself. Instead of just listening to one so-called guru’s advice, it really put the responsibility on me to learn to trade for myself. That was the best experience that I could have ever had.
Kirk: You mention that you’ve learned from traders in the past including Kevin Haggerty, Linda Raschke, Tony Saliba and others. In your opinion what are some of the more important things you were fortunate enough to learn from all three of these things?
Connors: It’s interesting because Kevin, Linda and Tony are completely different people. They come from different upbringings, different parts of the country, and different walks of life. The common theme that I see in all of them is that they all have a market maker’s mentality.
Kevin, who was the head of trading for Fidelity Capital Markets, obviously is going to be looking to be buying into weaknesses, selling into strength. That’s the only way they can accumulate those types of positions, so Kevin has that market maker’s mentality. Linda having worked on an exchange floor has that same type of mentality – buying a pullback, selling at the strength. Tony, having been a floor trader for all those years, has the same type of mentality. They basically are buying when everyone is selling and selling when everyone else is buying.
We’ve tested all sorts of type of market behavior. The one behavior that you’ll see that consistently tests out is buying into pullbacks and selling into strength. You’ll see that over and over and over again. We’ve published this on many different tests, and if you take a look at Kevin and Linda and Tony – again, three very different people from three different walks of life – they look at it the same way.
Kirk: What kind of trading do you do the most right now? And what do you trade the most?
Connors: We have four different parts of our trading. We view it as four separate businesses. There’s a day trading component, there’s a short-term stock trading component, there’s an ETF trading component, and then there’s an options trading component. And I can even add a fifth component to that, which is basically a special situations component – a small portion of the money for trades that we can’t quantify. Those are the things that we can’t quantify, but at least we have some capital that’s allocated out there. The majority of the cash over time has become allocated more and more to ETFs. We see more opportunities in ETFs.
Kirk: What’s your average hold time and how many positions do you have at any given time?
Connors: None of the day trading positions are held overnight. That’s what day trading is about: being out at the close. The majority of the overnight positions are held anywhere from between three to seven days. Our exits were published in my book Short Term Trading Strategies That Work. You’ll also see the same type of exits in High Probability ETF Trading, which is the most recent book. We’re pretty big on position sizing and making sure that we keep small position sizes so we can have multiple positions at any given time.
By that I mean we could have 20, 30, 40, 50 positions. At the same time, there’s other times we could basically be at all cash. If the markets are giving no edges we can ultimately be in all cash, but we usually always have a small portion of the money allocated at any given time. In most cases we’re usually under-leveraged. We very rarely use leverage, and if I have one complaint with the way we go about doing markets it’s that usually our cash levels tend to be high. So we’re always looking to put additional strategies to work in order to increase our exposure to the markets.
Kirk: How many trades do you make on average of a week, a month or a year?
Connors: That is very much dependent upon market conditions and what the market brings. On any given day we could take a minimal amount of trades, including none, and then there are other days where we are just flooded with positions. Certainly when markets are above the 200-day moving average and have pulled back sharply, we are triggering signals all over the place during those periods of time.
Then there other times when markets tend to move sideways and maybe are just chopping around the 200-day. At those times, we’ll tend to be fairly light. We’ll tend to have fairly high cash positions during those periods. So again, it’s very much dependent upon what the markets are giving us.
Kirk: I know one of your main talents is your ability to quantify and extensively backtest trading strategies with the help of your research team. How does one learn how to and ultimately acquire the skills to properly quantify impact tests on trading strategies?
Connors: Excellent question, Charles. I’m very fortunate – my head of research, is Cesar Alvarez. Cesar was one of the design engineers and senior team members on helping Microsoft build out Excel in the 1990s. After he left Microsoft, Cesar became a full-time trader. He understands markets from a trader’s perspective and he understands testing from a research perspective. He comes from that rigorous computer science background that he has both from his undergraduate degree, his graduate degree, and then ultimately his seven years over at Microsoft.
So there’s extensive knowledge there. Cesar’s right-hand person is David Weilmuenster. David provides the deep statistical knowledge; he has a degree in physics from MIT and an advanced degree from MIT, so David is able to go in and take things even further.
Now for someone to be able to acquire those skills – it’s tough for someone to have a graduate degree in computer science and then do all those years at Microsoft, and then also be able to have a couple of degrees from MIT. And both Cesar and David understand trading from a professional’s viewpoint.
There’s certain basic coding skills that are required. Another important thing is the integrity of the data is critically important. Sometimes people will publish test results of some trading strategy. We’ll go in and look and won’t be able to replicate the results.
Many times the problem is that their testing was done using databases where maybe there was a survivor bias. They’re testing data that doesn’t include stocks like Lehman, it doesn’t include stocks like Enron. They haven’t taken dividends or splits into account. The integrity of the data tends to be one of the most critical things when you’re looking at system testing.
It’s just a long process, and again I’m fortunate to be able to have these gentlemen as part of the research team.
Courtesy of The Kirk Report
Click here to read Part 2 of the interview with Larry Connors.
Larry Connors is CEO and Founder of TradingMarkets.com and Connors Research. His two most recent books are Short-Term Strategies That Work and High Probability ETF Trading (both available now in paperback). Larry also has a daily ETF subscription service. For a free one-week trial, click here.