Alexander Paul Morris: What’s Working Now In Day Trading……
Editor’s Note:
The following is an interview done by Dave Goodboy in conjunction with
RealWorldTrading.com.
After you read the interview, talk about it
here.
Brice
This
is Dave Goodboy, executive producer of www.realworldtrading.com.
This week I had the pleasure of interviewing innovative trading software
developer and avid day trader, Alexander Paul Morris. Alexander has been
trading for many years and is a highly skilled computer programmer. He
combined these two passions to create a revolutionary trading platform called
TYMORA. Using this highly unique tool, Alexander discovered trading
tactics and techniques that are working now in the highly volatile world of day
trading. Let’s get started!
Dave: How
are you today, Alexander?
Alexander: I’m
doing great – Thanks for asking!
Dave: Let’s start out by talking about your trading background. What
first perked your interest in the market?
Alexander: I’ve always been
fascinated by the markets ever since I was a kid. My
grandfather made it through the great depression and even came out a bit ahead.
He in fact still held some of the best stocks he had back from those
days. One thing he taught me early was the dangers of using leverage and
overextending yourself.
Dave: I see the trading passion runs in the family. What year did you
trade your first share?
Alexander: Actually,
it was more like forays into mutual funds back in the early 80’s. We did very
well with the Gabelli Funds, and in fact still have money invested with Mario to
this day. Out of all the mutual funds out there, he’s always been one of the
solids in Value Investing.
Dave: Yes, obviously he has survived in many types
of markets. I remember seeing Gabelli’s advertisements back in high
school. How did you transition into day trading from mutual funds?
Alexander: I was always fascinated by the
potential, hearing the stories of “If you had bought IBM back in the
day..”, etc. Believe it or not, what really perked my interest to the
shorter-term trading was a kit my father had purchased about trading futures.
Dave: Do you mind sharing what kit this was? Ken
Roberts by chance?
Alexander: I
knew that the stuff wouldn’t work – especially the way it pushed the
possibilities through “pyramiding”. How’d
you guess?!
Dave: Come on, you can share the secret!
Alexander: Should
I be embarrassed?!
Dave: Not at all! Everyone got those things
in the mail from Ken Roberts. Regardless of the validity of his methods and
marketing tactics, he certainly perked many people’s interest in the markets.
Alexander: Either way it
intrigued me enough to start trading more frequently – so I can say that my
first shares were traded in the early 90’s. I’ve also traded foreign
exchange, futures, options, you name it.
Dave: What Ken and other promoters like him fail to
tell you is pyramiding will cut you down fast when it goes against you.
Did
you trade through the internet boom?
Alexander:
Actually, I started
well before the boom.
Dave: I know you learned to use the Level II
screens from their inception. Many traders sincerely believe that Level II has
lost its usefulness in today’s market. What have you discovered about Level
II? Is it still useful?
Alexander: Not quite from their
inception, but much earlier than most people! It’s such a different
game now trade-wise. Executable Level II screens really began in 1987
after the crash, when no market maker would honor a quote. That eventually led
to the SOES bandit phase, which was really all about arbitrage – arbitrage is
great when you can find it. By the time the books are published though, it’s
because the game is all but over. Getting back to using Level II today,
in the markets, every piece of information you have access to is an edge.
Dave: Right, Harvey Houtkin and his group
popularized the bandit type trading.
Alexander: Correct!
That’s why I’m always especially iffy on Forex – and also the
non-electronic futures back in the day. You
just can’t see the real market.
Dave: How has using Level II changed from back in
the early 1990’s to today?
Alexander: Today,
everyone who wants to has easy access to Level II and
of course every market participant knows this.
Dave: Ok, exactly are you doing differently today
in regard to Level II?
Alexander: Back
in the day it was all about arbitrage and the market makers literally didn’t
even know what was hitting them. The entire
market is just a game – and with Level II, it’s just one more piece of the
puzzle. I mean, would you rather trade Forex where you see nothing, or a stock
where you see who’s looking to trade, and time and sales that’s saying who’s
actually going up to bat.
So you have to think of Level II (and trading in general) like a game of poker.
Dave: That makes sense. Can you get more specific as to what you
look for on the Level II screen?
Alexander: I’m
looking for things that don’t make sense.
Dave: What do you mean by not making sense?
Alexander: To
understand more, let’s take a step back for a second.
Dave: Alright, sure.
Alexander: The
question is, for example, what does it really take to create an upmove in the
market. First, we need aggressive
buyers, and preferably more than one. We also need few aggressive sellers. Any
sellers coming in have to be relatively weak. And then you need a catalyst
— some event to set things off.
Dave: How do you tell a buyer is aggressive? What do you look for
on the Level II screen?
Alexander: It’s
all about finding the clues. For example, let’s say that a stock is edging
higher and someone comes in and sticks out a 10,000 share offer.
Now,
the weakest hands will first think, “OH NO! Run for the hillsâ€.
The real question though is why would someone show such a large
offer? And of course, who is it scaring out of
the game?
Dave: As a kind of a bluff?
Alexander: Exactly!
Level II is a giant bluffing game. And
also figuring out when it’s not a bluff since
someone might really be trying to sell that 10,000 shares.
He might also have 100,000 more to sell.
Dave: Well, figuring that out seems like the trick to master the
market. How is this done?
Alexander: Let’s
say the 10T share block shows up, a few hundred shares are sold, AND … hmmm..
the stock upbids and tightens the spread? That’s
… interesting. There
are many ways to bluff, so I’d have to say that most likely yes. I mean, if you
ever posted even a hundred shares up a penny to see if other traders would
follow, that could be considered a sort of bluff — a test.
We’re always trying to test the market to see if our premise still
remains accurate.
Dave: I see. It is really like the world’s biggest game of poker.
Alexander: Exactly
– Level II really gives an edge when people are on the line —
when people aren’t “thinking straight”.
Going back to the earlier example.
Dave: Right, go on.
Alexander: I
can also take a relatively low risk bet on panic.
Dave: How do you identify panic on Level II? Can you give an example?
Alexander: Everyone’s watching
this stock creeping higher towards the 10T share block. Some
may be short, some thinking of going long. But most
are likely thinking hey, I’ve got 10,000 shares to cover, or 10,000 share
to go LONG from if I need to, so I’m okay.
BUT
no one’s selling out.. and the bid keeps edging higher and .. woah! Someone just
grabbed 5000 shares! Now, let’s think
following the big money– Who’s got the guts
to buy a 5000 share clip into a 5 cent spread on a stock that is edging higher
and simply no sellers are entering the market? I
want be on that side of the market! We’ve also identified a potential
catalyst – a group of traders who may be caught with their pants down hoping the
stock will finally break and go lower.
|
Dave: Whoa, slow down Alexander! Now, we all know
any trader on many platforms can fake size on Level II. How do we even know the
10k block is real?
Alexander: We get
the clues from watching the Time & Sales along with Level II. And we
see the shares getting taken without being pulled. Once those last
shares are taken — say in two or three large blocks, the stock may jump a
quarter point as they all chase and panic.
Dave: Gotcha, so you are combining the Level II with time and sales?
Alexander: Absolutely! It would
be much less useful without it.
Dave: Moving on here, you mention the top 10
market makers in your writings. Who are they currently?
Alexander: Well,
believe it or not, that changes moment by moment depending on the stock.
Dave: Interesting.
Alexander: My platform, TYMORA,
in fact, keeps track of all that information. For example, if we look at ONXX, a
stock I was trading on Friday, TYMORA currently indicates that ETRD (ETrade) is
currently ranked as the #1 Market Maker. Probably not who you would normally
expect.
Dave: Impressive, so your software discovers the
rankings at the moment of the MM’s?
Alexander: Everyone always thinks Goldman,
and GSCO is certainly a true force to reckon with when they play the game, but
they are not always “on the chopping block”.
Dave: Yes, Goldman is the first group that comes to
my mind when I think of MMs.
Alexander: Yes.
And we don’t figure it out just by who’s showing up a bunch of times on the
top of the Level II. It’s more like, who’s “causing some trouble” when
they show up.
Dave: What do you mean by this? You mean who is actually making
transactions and movi
Alexander:
Right. Now another thing to remember is that the ECNs nowdays also play a
big role, even by the market makers. So that’s also why we need to consider the
whole picture, and not just follow GSCO like we hear so often. Always remember,
if Goldman is in control, do you think he’s going to make it easy for anyone to
figure out his moves?
Dave: Obviously not.
Alexander:
In fact, if GSCO is the one in control, maybe we would be less inclined to trade
that stock right now too unless we get a very clear read of what’s going on.
Why? Simple – think of poker.
Dave: AH, I see your thought process – it makes
perfect sense.
Alexander: Do you want to go up and bet
against the world champion, or rather the Sunday afternoon amateur poker crowd?
Dave: You are clearly thinking outside of the
standard box most day traders are trapped in.
Alexander: Exactly. That’s
really what trading’s all about.
Dave: You will actually never trade a stock a powerhouse like Goldman is
lead in?
Alexander: I
wouldn’t say never. It’s always case-by-case based on what we
see, and that’s just one more factor to consider.
Trading
is really about learning how to sit back and listen to what the market is
telling us – putting together the clues.
And also knowing when we are off our game. But
that’s something to perhaps touch more on later.
Dave: OK, that brings me to another fascinating
discovery of your research, time of day tendencies. Can you fill our
members in on what you have found? Particularly what the â€dangerousâ€
time zones are.
Alexander: There is definitely truth in
time-of-day, because people tend to act in a herd mentality. The thing is with
many people being aware of these tendencies, the effects can often shift, kind
of like seasonality. The January effect becoming the December effect, etc.
Of course, there are some that always seem to stand true. I’ll
tell you though that as an example, although lunchtime tends to be the boring
fake out shake out no-trade zone, I’ve found some amazing opportunities pop up
then. It helps having the right tools of course to point you towards them.
The first hour of trading tends to be the most volatile, while all the
panic sets in, all the gaps are played out.
Dave: Makes sense. Go on.
Alexander: Sometimes,
I find great fading opportunities off the bell. A stock will suddenly drop a
point for no reason off a large offer slamming down, for example. Once the offer
dries up, it bumps back up a good half of the move down, and sometimes even
recovers completely. Usually though I like to
take a step back and let all the other traders hash things out first –
sort of like phase one of a war. Then as
they slow down and burn themselves out, I start looking around for the pieces
that are left standing and pick and choose what looks best.
The last week in fact is a perfect example of how psychology plays out in
the markets. Everyone was panicking over the
London terror attacks. Most of the time, it is
exactly this type of catalyst that the big boys need in order to suck up the
float they want and then aggressively push the markets to achieve the outsized
move they are looking for.
Dave:
I
see. Is this another thing you watch for on Level II?
Alexander:
Exactly! You see, if a trader wants a big move, he can literally
create his own move by slamming out the offers. Especially on a low-liquidity
stock, you’ll watch it pop a point until it will re-equalize at a new level, and
for that time traders will all “believe” that’s the new level, BUT…
what good will that do the large trader if he didn’t pick up 100,000 or so
BEFORE the move to distribute back out to the public.
Dave:
OK,
this makes sense. Let’s get back to the dangerous times to trade.
What are the most dangerous times?
Alexander: I’d
have to say the first 45 minutes and the last half-hour are the most dangerous.
Triple-diamond danger would be the first 5 and the last 5 minutes of the day.
Dave: When anything can happen.
Alexander: As an example, I’ve
seen stocks that have gone up steadily for 3 hours drop 75 cents from 3:58 to
3:59 and then be higher by 4:02pm.
Dave: Geez, talk about volatile!
Alexander: For someone new to
the game it’s a good way to get shaken out fast. Which goes back to the point of
waiting for those types of events, where people get thrown off kilter before
putting your hard-earned money at risk.
Dave: That triggers another question, do you find it wiser or easier to
trade stocks than e mini type future products?
Alexander: I
think that’s much more of a personal question than anything else. I’ve trading
all of these types of assets at one point or another. For example, I liked
trading the e-minis the first few years they were out. Not as much competition,
had potential for some nice quick moves. But
now everyone wants to trade the e-minis. The time I get interested in them again
is on an event such as the terrorist attacks when they go through the floor.
However, my first choice then would probably be the DOW minis – they currently
trade more like the e-minis did a few years back. And you don’t have 250
contracts sitting at every price level.
Dave: I see, it’s all in the waiting. Waiting for the perfect time to
pounce and make the trade.
Alexander: The
biggest mistake that people make, though, is trying to trade a particular
vehicle just because of the huge leverage it can offer them without
consideration for the opportunities they feel they can extract.
That will just help them part with their money that much faster. If
someone’s found a statistical edge that they feel confident they can trade, go
for it. But please, people, don’t try and trade Forex just because you don’t
have $25K, you don’t “see” the forex commission, and you can start
with $1K to control $100K.
Dave: The political, environmental, and
economic factors need to line up to create the perfect trade, and the e-minis
are the perfect vehicle to ex
ploit abnormalities.
Alexander:
If someone had been up around 5am that Thursday morning, I believe the
e-minis would definitely have been the best way to go.
Dave: Exactly, that makes perfect sense. Let’s move onto chart patterns.
Have you found any validity to chart patterns and what ones in particular?
Alexander: There is definite validity to
some chart patterns, and I do keep track of the ones that people tend to watch
the most. In addition, with TYMORA, I am always aware of all the Key Trendlines
and Support and Resistance Levels. The difference is that at the point of
make-or-break, I watch the players and the time and sales to ascertain how the
current scenario will likely play out.
Dave:
Ok, you combine charts with tape reading?
Alexander: Absolutely
– that’s what gives the real edge. My best
trades always tend to be the ones that start out slow and boring. But I can just
“feel” the bubbling beneath.
Dave: Obviously,
it’s difficult, even with the latest software, to trade multiple stocks while
tape reading and watching the chart. Is there an ideal number of stocks
one should trade at a time?
Alexander: That’s
really more of a personal thing.
Dave: What have you found?
Alexander: I have to say that such a big part of trading is
about focus, and even with all this technology, unless there’s a few that I
really like, I like to stick with one or two at a time. Now,
that doesn’t include a part of a position that I may let ride with a trailing
stop and do as it may.
Dave: I understand. I am talking about active
trading.
Alexander: As far as
“babysitting” new positions, I’ll tell you that sometimes stocks turn
so fast that I’ve had two profitable positions turn to losses in a flash because
I was scrambling to get out of both instead of focusing on one.
Dave: Focus is the key.
Alexander: It’s
frustrating when the one you pick doesn’t budge and several others start
running, but in the end, it does go back to narrowing your focus.
That’s actually one of the hardest parts of trading.
I think fishermen could make great traders.
Dave:
Interesting concept. Why?
Alexander: Because
they know patience and they know that if they rock the boat too much while
waiting they may scare their best bite away! So,
just sit and wait and focus and be patient. It’s a lot harder to do
consistently than most people think.
Dave: You are credited with creating a unique
software platform that does many of the things we have talked about so far. Can
you briefly describe this revolutionary platform?
Alexander: My
pleasure Dave!
Basically, I couldn’t find any software out there that could look at the markets
the way I wanted to see them to get the edge I felt I needed just to have a
chance in the game. Fortunately for me, I’ve
always been exceptionally talented with computers.
Dave: I know exactly what you mean. Even many of the proprietary
trading packages I have seen are seriously lacking in what works in this
environment.
Alexander: Whenever
there was something I wanted to do, I could “just write a programâ€. Even
today, I am constantly updating TYMORA with new features, tools, and
analysis that have the potential to provide the best shot at success — and an
even greater edge. There’s no communications gap between the developer and the
trader.
|
Dave: TYMORA–that’s a unique name. Does it have a
meaning?
Alexander: In
fact it does!
I chose that name based on the ancient Greek Goddess TYMORA. She
represents Good Fortune, Skill, Victory, and Adventure. Fortune Favors the Bold!
Dave: That’s very cool. I like it!
Alexander: Thanks Dave! It rang powe