Quick Takes: A Conversation With Jim Hyerczyk
While the futures markets are often seen as alien territory by even experienced stock traders, talking to Jim Hyerczyk makes it plain that, no matter the arena, the rules of the trading game remain the same.
Hyerczyk, a Chicago-based trader who got his start in the markets 16 years ago, has worn a number of hats in his career: broker, analyst, individual trader, and Commodity Trading Advisor (CTA) through his company JAH trading. He also is the author of Pattern, Price & Time (1998, John Wiley & Sons).
Hyerczyk has enjoyed many of the ups and survived the nerve-wracking downs that come with being a professional trader. He began with jobs at the Chicago Board of Trade and Chicago Mercantile Exchange in brokerage and analysis capacities, learning to trade for himself, before he eventually took a position with the Hightower Report market analysis and advisory service. He began making a name for himself and eventually started his own company.
Fascinated by the interaction of time and price in the futures markets, his track record of timely and accurate forecasts led to
an interest in managing money. While he had been trading relatively small accounts up to this point in his career, Hyerczyk quickly attracted several million dollars in funds and just as quickly found the difficulties of trading large accounts can impact performance just as much as entry signals and stops points. Although he rang up a 45% return in his first several months of trading, he realized he had grown too fast and needed to downsize his operation. He continues to trade the same fund today.
We talked to him briefly about the lessons he took out of this experience. Many traders will find the basic
themes — controlling risk, trading in the direction of the trend and entering on pullbacks or
retracements — familiar from other traders profiled on TradingMarkets.com.
Mark Etzkorn: Are you a systematic or discretionary trader?
Jim Hyerczyk: I use a mechanical approach to define the basis for a trade, but I
use discretion to take or not take a trade based on what is happening at a particular time and my analysis of different factors.
Mark: Can you explain the basic mechanics of your trading approach?
Jim: I try to keep losses at a certain level. Many times if you’re trying to trade a breakout system, for example, if there’s a 20-cent range in soybeans when you’re trying to buy a breakout of the top of the range and sell when it crosses below the bottom of the range, that’s an automatic $1000 risk (based on placing a stop at the opposite side of the range from the breakout). But if you just stick a money stop in
arbitrarily — say, $500 — you’ll get stopped out even though the market is still moving in your direction. You can’t use dollar stops. The market doesn’t care how much money you have.
So, what I do is wait for a breakout and then enter on a 50% correction of the move from the low of the trading range to the swing high at the beginning of the correction.
Mark: So how do you control risk on these trades?
Jim: I use a market-based, pattern-based technique. Basically, I’d get out when the trend changed, measured by the difference between the 50% point and the most recent swing bottom. With this type of trading, you can get a series of losses when a market is choppy, but at the same time, those losses are small. So, your profitable trades outweigh the losses.
Mark: You’re not purely mechanical. What kind of discretion comes into an approach like this?
Jim: Well, if I have a big trade immediately, something on the order of 10:1 in terms of my risk, I’ll close the trade out in a two- to three-day time window. Often, I like to see the trade go against me somewhat the first day. If it retraces to a certain point, then closes up, I feel more confident about moving my stop up
quickly — I can move it to breakeven in the first two or three days.
That’s what I shoot for — to move the stop up as fast as I can. The idea is to initially use the swing bottoms for your stop with long trades, but once the trade is under control, to work the stops up progressively. But you have to be realistic about the fact that the market could set off your stop, reverse, and keep going in
its original direction, so you can’t keep it too tight.
Mark: Do you trade the same way in all markets?
Jim: Yes, to me it’s a pretty universal approach.
Mark: Do you use any approaches that are dramatically different from this, either in terms of time frame or technique?
Jim: The only countertrend signal I use is a closing price reversal. For example, I would define a prolonged move down. On the current day, if the market made a lower low than the previous day but closed
higher — in the top half of the bar’s range — and closed above the opening. Then I would try to buy a 50% correction of the next day’s range. I use a stop under the reversal bottom, but I would suggest using a stop close only. In other words, since you’re going countertrend, you really want it to work on that first day. That keeps the losses down.
I also have a two-day swing technique: A market has to make to higher highs after a low or two lower lows after a high. When it crosses the high by a certain
amount — it depends on the market, but $250 is a rough estimate — you enter.
Mark: Have you ever done any daytrading in the futures markets?
Jim: I’ve provided some intraday analysis and trading levels for pit traders in the S&P when I was at the Merc. It basically involves taking the approaches I use on the daily time frame and applying them to hourly charts, trading in conjunction with the larger
trend — look for buys if the daily chart is up and sells if it’s down.
But there are only a few markets I would attempt to daytrade: S&Ps, T-bonds, silver, soybeans, and at times, one of the currencies.
Mark: One last question: What’s something that’s not talked about very often that you think would benefit aspiring traders?
Jim: Don’t take every signal. Stay out until you have very strong verification for a trade. Most of the public is focused on the number of winning trades, but a really good approach will maybe be 50-50, and you’re going to have strings of losers. So you have to work on attaining a 2.5:1 or 3:1 risk-reward ratio.