Manuel Ochoa: Trading With A Plan
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| Manuel Ochoa
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With a 22% year-to-date (through mid-September 1999) return and recognition from both Managed Accounts Report (MAR) Hedge and Futures magazine as a top young trader, Manuel Ochoa, 31, has established himself as a hedge fund manager to watch.
TradingMarkets.com co-founder Manuel applies both longer-term trend-following and swing-trading techniques in the futures markets, focusing on financial futures (specifically, T-bonds, S&Ps and currencies). He first caught the trading bug as a finance student at the University of Southern California (USC) in the late 1980s and early 1990s. His general interest in the field became more pronounced when he found out his International Finance professor was actually a full-time currency trader who taught on the side.
| “I traded the S&P early in my career with a seat-of-the-pants approach, and needless to say, it was a bad experience” |
“I’d talk to her and she’d share strategies, really current things they were doing both on the technical and fundamental side,” says Manuel.
As a result, he began to research futures trading approaches and strategies at the university computer labs–much of his work was tied to his coursework at the time. While he wasn’t testing specific strategies per se, he learned a great deal about price behavior and market correlations that laid the groundwork for his future trading systems. He also began dipping his toes in the chilly waters of the markets with his own money.
Like most other traders, he walked–and sometimes stumbled–before he ran. His trading as a student was mixed, at best, and he blew out his account once. After college, he spent two more years researching, testing and trading his own account (using a short-term, discretionary approach) before becoming a consistently successful trader.
“It was kind of seat-of-the-pants trading, and I was actually losing money for a while,” he remembers. “I traded the S&Ps early in my career with that kind of approach, and needless to say, it was a bad experience.”
| “The advantage of systems is they give you a specific trade plan that you can execute every day; the disadvantage is that they can be very difficult to during losing periods” |
His failures, though, were the catalysts to design the systems he uses today. Manuel bases his ideas on solid price behavior concepts, using the same systems in all the markets he trades, the only difference being the parameters from one market to the next. We talked about Manuel’s understanding of the markets and how it’s reflected in his trading systems.
Mark Etzkorn: Many traders are uncomfortable with trading systems because they feel like they lack control over their trading. What brought you to adopt a mechanical approach?
Manuel Ochoa: If a trader feels uneasy using a system it’s probably because he doesn’t understand the nature of it. Their are certain advantages and disadvantages to systems. The advantage is it gives you a tool you can use to approach the markets every day–a specific trade plan that you can execute and make a profit in the long run.
But you also have to realize that most systems are only right about 40% of the time, so it can be very difficult to follow your system during losing periods. If the trader doesn’t understand the nature of his system he will almost surely quit using it and end up taking a loss.
| “Trend following has a lower percentage of winning trades because you are trying to make most of your money in one or two big trades–you’re going for the home run, so to speak” |
I adopted a systems approach because I saw patterns that developed over the years. Tradable patterns can be very simple. For example, when a market makes new highs there is usually follow-through; or if the market makes a new high and then fails, it usually makes a big move the other way. To execute these patterns I programmed them and started trading them. Once a system is up and running, I can use my time to research other ideas.
Mark Etzkorn: Is swing trading better applied in non-trending markets, or can it be used in trending markets as well?
Manuel Ochoa: You can do it in both, but the results are probably better in non-trending markets because of the range-type price action that you get. You have more time to exit trades in sideways price action than you do in trending markets.
Mark Etzkorn: What sort of percentage profitable trades would you say an average successful swing trading system has? Can you compare that to the average trend-following system?
| “Diversification is important if you are systems trading because you don’t know where you are going to make your money in the future” |
Swing trading has a higher winning percentage of trades than trend-following. Swing trades should average at least 60% winners because you are taking small profits very often and you need those to cover the occasional loser. Trend-following has a much lower percentage of winning trades because you are trying to make most of your money in one or two big trades–you’re going for the home run, so to speak. The rest of the trades are losers and small winners.
Mark Etzkorn: You trade across a range of markets and on different time frames. Can you briefly describe, for those who might not know, the importance of diversification–both in terms of markets and time frames?
Manuel Ochoa: Diversification is important if you are systems trading because you don’t know where you are going to make your money in the future. There are only a couple of markets that make very big moves each year, simply because the supply-demand situation doesn’t fluctuate that much on a year-to-year basis.
| “If you place stops too close there is a good chance that you will be stopped out of too many trades” |
However, once in a while you do have a major shift in the outlook for a market, which causes the big moves that system traders can profit from. One way to improve your chances is to diversify the time frame of your systems. You can have a system that looks back at the last 50 days of data to make its decision, and then you can use one that only looks back at the last five days. The advantage is that you can trade moves that are five days in length and also the longer ones at 50 days. These systems will behave differently and their losing periods are much less likely to occur at the same time than would two systems that look back 50 days. This way, you smooth out your returns.
Mark Etzkorn: Do you think longer-term trend-following (in the futures markets) is feasible for the average trader with a relatively small account–say $25,000 to $100,000?
Manuel Ochoa: Yes, they can still do it. There are mini contracts on some of the U.S. futures markets, such as the bonds and the currencies. The trader can also diversify, but instead of trading 40 markets, he may only trade 10.
Mark Etzkorn: How do you manage your trading from day to day? Do you enter all your trades for the next day on the current day, after you’ve updated your systems after the close? Or do you play things more by ear, waiting to see how things develop as a trading day unfolds?
Manuel Ochoa: I do a combination of both. I place some orders the day before because I have a longer-term view of that market. Some orders are market orders, which represent my short-term view on a market.
Mark Etzkorn: Do you spend your days intentionally avoiding the screens–testing and researching instead–or are you regularly checking your positions and market conditions?
| “Tradable price patterns can be very simple: When a market makes new highs there is usually follow-through, or if the market makes a new high and then fails, it usually makes a big move the other way” |
Manuel Ochoa: It depends. Most of the time I stay away from the screens because I am looking for specific patterns or new releases of interest. This doesn’t happen that often, but when it does, I’ll watch the markets more intensely during the day looking to make a trade.
Mark Etzkorn: Do you sometimes have an initial risk on a swing trade that is larger than (or close to) your profit target?
Manuel Ochoa: Yes, because of the random price movement in the markets. If you place your stops too close there is a good chance that you will be stopped out of too many trades. In the end you end up trading with tight stops that all get hit and you have a big loss.
Mark Etzkorn: What kind of software, communications (phone lines or T-1, etc.), and trade entry (direct access, standard online, the old-fashioned way–phone) do you utilize?
Manuel Ochoa: I use custom software that I had programmed and I also use some off-the-shelf software. It depends on what I need. If I need very complex calculations, I’ll use my custom software. For easier tasks, I use the other software. I just use a DSL Internet connection to get quotes. Whatever it takes to get the job done.