TraderTalk Workshop: What It Takes To Make A Living Trading The QQQs, Part 1
This is Part 1 an edited
transcript of the live audio TraderTalk workshop held for TM subscribers by QQQ
trader Don Miller and Eddie Kwong, on Thursday March 21, 2002. Click
here for the audio version. Click here for
Part 2.
Eddie Kwong: I have with me
Don Miller who is going to share with us how he trades the QQQs
for a living. How are you doing, Don?
Don Miller:
Very good. How are you doing,
Eddie?
Kwong: Great!
Don, let’s talk about your background prior to when you started trading. From
what I understand, you didn’t exactly start out on Wall Street, right?
Miller: No,
I didn’t. I have an accounting degree so I’ve always been around the financial
industry, but from a different angle. I am a Certified Management Accountant
(the private industry equivalent of a CPA) and basically I worked my way up
through the corporate ranks in a number of positions starting in the financial
area — accounting, finance, budgeting, things like that. Eventually I was
overseeing a division for a major telephone company in the Midwest. That was my
former life. It seems light years ago.
Kwong: Well,
somehow today you are doing something completely different — you trade the QQQs
full time for a living. Tell me, what gave you the itch to become a trader full
time?
Miller: Well,
I think it was a few things. First of all, the number part of the business —
again, probably because that’s how my brain works — was certainly intriguing.
Even more so than that, I was looking for — “the ultimate entrepreneurial
experience.” What I mean by that is I wanted to have a bit more freedom.
I wanted to get out of
the “corporate rat race.” I hate to say it because had a very good
position and was compensated very well… but something was missing. The
challenge that wasn’t there. I’ve been lucky enough and blessed enough in my
life to have accomplished quite a few things at a relatively young age and kind
of got to a point where I looked around and said, “Gee, is this it?”
When trading really
started going more online and off Street, I realized that there were
opportunities to profit — to generate business-like profits on a fairly
short-term basis, much like running any other business. It was really that and a
desire for some freedom and independence that got me into it. When I started I
was able, Eddie, for the longest time, to be able to trade based on the time
zone I was in, I could trade opens and I got fairly good at that and developed a
record that was consistent enough and profitable enough for me to consider
making a pretty big leap.
Later we’ll talk a little bit about the one bump I had — but that’s how I got
to the point. It was not a “Mr. Binky” decision (if you remember the
old Ameritrade commercial). It was documented success and then making a very
conscious decision to pursue something that was not only intriguing from an
independence perspective — but it was also challenging. It was something that I
knew right away would challenge me, not only when I first made the change but
every single day after, and even after the skills were acquired.
Kwong: Let’s
go a little deeper into that. Did you just start dipping your feet into it
gradually and find yourself experiencing some success and decide to transition
into it gradually? Or did you just tell your wife, “Hey, tomorrow I’m going
to become a full time daytrader!” How exactly did that come about?
| “That first month was rough, let me tell you!” |
Miller: Well,
it’s interesting because I remember at the time and I remember discussions with
my spouse. I know there was a time — where there was about a year’s worth of
real consistent performance — and when I looked at the numbers and I looked at
what I was earning in my corporate life, I was convinced that I could at least
retain what I was bringing in before and then that left only possible upside
beyond that. So I felt I could make the switch from a cash-flow
perspective. But there were a couple of times where I waited. I felt that I
wanted to make the change but yet I waited. I wanted a few more months worth of
data. When I finally made the change, I had enough comfort and enough evidence,
if you will, to go ahead and do that. That first month was rough,
let me tell you!
Kwong: You
had the confidence and the confidence was built up after you had some
performance just trading part-time. Nevertheless, it was probably a bit of
a challenge, was it not, convincing other members of your family? You know,
convincing your in-laws?
Miller: Yes,
especially at this time when this whole (I hate this term “daytrader”
but I’ll use it for the point of discussion) daytrading was just getting a
terrible rap — you know, they were kidding that all these people were going to
leave their jobs and go do this thing — and here this hopefully somewhat sane
executive is making the decision. You know, I was very fortunate that I had a
very supportive spouse and family from day one in everything that I’ve done —
my wife was very supportive. We knew the risks going in.
I also felt though that my fallback
scenario, frankly, was that if this never turned out, I could get back into the
telecom industry, which was an industry I had worked in. There were fallback
plans in place. I mean I had cash reserves built up, I had a fallback plan and
this, again, was not a knee-jerk and so the numbers were there and it really
wasn’t that difficult a decision. It’s one of those things where if I’m going to
pursue this and I’m going to get better at it, I’ve got to apply myself full
time and let’s make the cut here.
Kwong: That’s
interesting. Just as you place stops when you put on a trade — you put a stop
on this whole career change here.
Miller: That’s
exactly right. It’s just like a trade. You put yourself in position where if the
potential is there, you are able to take advantage of it, in terms of upside.
That’s a great way of looking at it.
Kwong: Tell
me about that first month.
Miller: Do
I have to? (Laughs)
Kwong: Yeah!
We talked about this before the whole workshop began — you’re going to tell me
about that first month.
Miller:
Well, suffice it to say that a lot of things changed that first month. The
biggest change psychologically was that all of a sudden I was needing to put
bread on the table. I was now looking to this not as supplemental income,
not as “Oh gee, let’s try this,” and “Oh, we’re doing really well
for a period of time but I still have a corporate job.” This was it.
That pressure, if you will, a different way of looking at the business, coupled
with now being in front of monitors and the market really, for a good six and a
half hours each day, as compared to maybe one or two… where I had previously
just traded opens and had some methods in place that were working pretty well
from a probability basis… Everything went haywire.
It’s a month, Eddie, that tested the
depths of my soul if you will, because here’s a string of things that happened,
basically: I stopped doing what worked and I started experimenting. I started
doing everything that I would teach now people not to do, things I would never ever
think of doing now. For some reason, because the pressure was there,
I over-traded, I blew stops, I doubled down, I traded IPOs, I mean, you name it.
When you think of “Don Miller” and some of those things, you’d say
there’s here’s no way I would do that — yet in that first month
that happened, and I gave away — it was in May of that year — I gave away 75%
of the profit that I generated from January through April — in
four trading days.
Kwong: Hmm.
Miller:
And so here I was in a position. Not only did I not have income coming in, but
I had negative income.
Kwong: That
must have made such a big impression on you that perhaps it was that emotional
extreme you went through that was the catalyst for your turnaround.
| He said, “I want you to put that in your pocket and let it burn a hole in your pocket all weekend long.” |
Miller: That,
and I got some wonderful advice from someone I greatly respect in the industry
and the advice was this (and this was after my worst day)… he asked me,
“Do you know what you did wrong?” I said, “Well that’s pretty
easy. I can name four things right off the bat.” He said, “What I want
you to do is I want you to write that down on a piece of paper.” This was
on a Friday.
He said, “I want you to write
everything down and I want you to put that in your pocket and I want it to burn
a hole in your pocket all weekend long. I want you to think about that every
single hour of that weekend. You are going to have the worst weekend you’ve ever
had in your life. And you are going to feel the pain.” And I did that.
I didn’t know it at the time. I kind
of knew what he was getting at but I didn’t know at the time. He said,
“When you come back, I guarantee you — I can’t say you’ll never do any of
those things again — but I guarantee you that you will keep them to a bare
minimum down the road.” And that, coupled with the strength of my family,
the strength of my faith, got me through a very, very rough time and that’s what
led to the subsequent streak that we referenced a few times. It’s not that I
planned it that way at all, it’s just OK, I don’t like to lose. I had proven I
could do it before. I had to get back and just let time do its thing.
Kwong: Now
you say you wrote these things on a piece of paper and you put ’em in your
pocket?
Miller:
Yep.
Kwong: Do you still have that
piece of paper?
Miller:
Uh, I don’t know.
Kwong: I’m
curious because everybody is wondering… I’m wondering what were the
mistakes that you made — and you mentioned a few of them briefly — what are
the things that I, as a trader — and all the listening audience — what are the
things that we are supposed to avoid doing? Tell me right now.
| “Make sure that whatever happened in the past… has no bearing on your next move. It’s a mental state of closure…” |
Miller:
1. Cut your stops. 2. Don’t double down on a losing position. 3. Don’t
hold overnight. (I’m talking about an intraday trading account — I’m not
talking about a swing trading account.) 4. Don’t trade IPOs.
Basically, don’t trade anything where
you can’t manage your risk — because this business is more about managing
risk and cutting losses than it is about gains. Had I — on the worst trade of
all of what happened during that stretch — had I either not blown my stop or —
even if I had blown my stop — if I had not given up.
If I’d just said, “OK, that happened. I can’t do anything about it. I’m
getting a re-entry trigger in the same direction. Instead of just closing up
shop and leaving for the day. In that case I was short a stock that had run
against me. I blew my stop. I got ticked off. I closed everything up. Had I just
re-entered at an appropriate point in time, what was a huge loss would have
turned out to be a gain.
So that has taught me over the years,
Eddie, to make sure that whatever happened in the past, yesterday, last month,
whatever happened the last trade… has no bearing on your next move. I don’t
care if your system went down and you lost 20,000… it has no bearing on the
next move. It’s a mental state of closure that I was taught through that lesson
that I’ll tell you, sticks with me to this day.
Kwong: One
more question before we get into the strategies. Is your lifestyle as a
full time trader everything you expected it to be? Is it what you’ve always
wanted? Are there negative things about it that you did not anticipate — or
positives that are just icing on the cake for you?
Miller: Well,
what’s interesting… I’ve never thought about it in those terms, but you know
in terms of the independence and the freedom, I probably have less independence
than I expected I would have because I enjoy what I do so much. I find it so
stimulating — not exciting, (but) stimulating,
challenging — and it’s a business I love being around. I have a
tendency just because of my personality to probably do too much market-oriented
stuff and not get away from things. I’ve done this to gain the freedom — now I
find I have the freedom…
Kwong: I
know. You and I have exchanged e-mails late at night so I know that you are
still behind the computer.
| “(at) first… I thought I had made the biggest mistake of my life. “ |
Miller: But
in terms of the entrepreneurial experience, you’re everything from the custodian
to… System problems? You’re it. Money management? You’re it. The accounting,
the administration — I mean, that’s all you. That’s good and bad. It’s good if
you have the skills and can hold yourself accountable. But if you don’t have all
those abilities, you have to rely on other people. From that perspective, it
actually has met what I was looking for.
Of course I can say this now. I
couldn’t say that when I first made the change — I thought I had made the
biggest mistake of my life, Eddie. But I’ll tell you — I got through it. And
because I got through that, had I not gone through that period, I would not be
the trader I am. There is no question I had to go through that. I would not want
to wish that on my worst enemy but I had to go through it. And it’s led to
things that I can do that I never thought I could do.
Kwong: I
could probably continue with you for two hours on this subject alone, but let’s
talk about strategies now. You’ve got the markets there. How do you make money
off the markets? Teach me how.
Miller: Well,
I’m a believer that there is not one magical method out there. I mean it
sounds so obvious but I think that we’re all as individuals wired so differently
that I can show you a chart — we’re going to look at this first one shortly — and
I could show you two or three different ways to trade something like this. And
this is not after the fact, hindsight stuff — “here’s the chart it looks
so clear” — this is while the market is moving. I write a column midday,
as you know, and often have to talk about the market in terms of where it’s at
now and where it’s likely to head.
Kwong: That’s
what you do in your new
course as well. You try to let people see the market as it unfolds, not
knowing what is going to happen next and you try to train people to see the
patterns the way you do as they unfold. Anyway, go on.
| “That emotion, at some time, will turn… Markets don’t go straight up; they don’t go straight down…” |
Miller: Well,
let’s look at the first chart — a major reversal. It has the A,
B, C, D notes on it. What this reflects
and I am invariably a large reversal trader — I recognize that trends don’t
continue forever and recognize that there is emotion at play, sometimes
significant emotion at play on a trend. That emotion, at some time, will turn.
Markets don’t go straight up; they don’t go straight down — despite what
happened in 1999 and 2000. They never will. And it’s a matter of timing.
This chart, I think, is a good example
of when I say there is no one way to trade. I think what we’re going to see here
is a balance of how much confirmation premium one wants to pay — and I’ll
touch on that as I get through this. This was a 1-minute chart which was post-FOMC
mid-last year. And in terms of the reversal, I think this is just outstanding
because it shows us several things.
Screen Capture From Tradestation by Omega Research
©2002
Miller: What
I look for in reversals, and you’ll see me talking about this in the column a
lot. One of my first heads up, one of my first clues, is what I call stochastic
vs. price divergence, which means the price is doing something that the momentum
indicator’s not showing, or vice versa. In this case, if you look at the two
vertical arrows, up and down around 1437 and 1440 or thereabouts, you’ve got a
double row on the chart. (Now this could be a 13-minute chart, by the way. This
could be a daily chart. It doesn’t matter. It just happens to be a 1-minute
chart.)
You’ve got a double row,
a double bottom if you will — or a potential double
bottom at the time, because you don’t know how this is going to evolve. But
you have a momentum indicator — and the one that I choose to focus on is
stochastics. You can use a relative strength, a mix or something else, I choose
to focus on this. You have a momentum indicator that says well, on the
second bottom you don’t quite have that same momentum, that same thrust that you
had on the first one.
Kwong: Sure.
Miller: And
even if the price were lower in this case — and we’re going to look at one
later from today, from this morning that shows that even if the price were
lower, if the stochastic reading is not as low, it gives you an immediate signal
that the momentum is waning. It doesn’t mean that a trend has reversed. It means
that OK, this is not tremendously strong selling. This might be a few
latecomers, very late shorts or maybe folks that went long on the first one and
they’re getting rid of that or whatever. So, in terms of looking for reversal,
it’s often a heads up. Now someone could enter there on a long for
example, but there’s a huge risk there because the trend has not yet reversed.
Kwong: Right.
Plus you probably (just to insert here parenthetically) would not advise
somebody to trade off of stochastic divergence alone. Many, many people have
known about stochastic divergence for years and you’d probably get yourself…
Miller: Well,
I’m not a big KD crossover guy, you see the blue and red lines which represent K
and D — a lot of people think about crossovers. I can show you — I had a
column the other day that had about five of these crossovers and the trend never
reversed. (Laughs) I want a trend reversal.
Kwong: Yup.
Miller: So
if you look at some of these other indicators, B, C
and D… B reflects
a price cross — a bar that actually penetrates the 15-period which I use to
define my trend line.
Kwong: The
15- period moving average is the red one, correct?
Miller: That
would be the red one. So point B is an
example of the price crossing, which as we know with price action, we may get
wiggled in and out, whipsawed… Is that really trend reversal? Hard to tell. So
you could take that entry. You could wait until your more significant trend
indicator in terms of having a 5-period moving average actually cross
your 15, which provides you a little bit more evidence, a little bit
more data that this trend is now correcting itself from… I mean look at
that blue line on the way down. Right? And even though the price wiggled a few
times… pretty clear on what the 5-period moving average is doing. It’s still
downtrending, OK?
At point C, though, you get a cross of the
two lines, and then at point D, not
only a price cross and a cross, you actually have the whole thing crossing and
then you pull back toward a new trendline. And I can give you reasons to take
any of those entries — under certain circumstances. Even a divergence alone if,
for example, there’s another trend right underneath and it’s supporting a larger
timeframe. You know, it might be worth taking, but it’s a risk.
It’s a premium issue here. How much
confirmation do you want, and how much are you willing to pay for that
confirmation? If the trend reverses, point A
is the best. OK. If it doesn’t, you know, that best price if it does go in the
direction could be offset by those times when the trend simply doesn’t reverse
and you’re stopping out. To get the price cross, you’re paying a bit of a
premium. To get the moving average cross, in most cases you’re paying an even
larger premium and then to get the full cross and the pullback, you pay even
more of a premium.
So depending upon how much risk you
want to take on in the trade, there are four different ways you could trade
that reversal.
Kwong: Sure.
And at the same time there is such a vast amount of information streaming in,
you know, from the outside world. There’s CNBC, there’s different quote
screens that you might be monitoring, there’s news on individual big-cap Nasdaq
stocks which may impact the movement here, there’s the S&P Futures…
Miller: Right.
Kwong: Are
you keeping a corner of your eye peeled on these other factors? Are you
basically making a decision on the basis of the price action and you know, the
indicators and the pattern setups that you see here?
| “When I say ‘simple’ I don’t mean ‘easy,’ because it’s far from that. This continues to be the most challenging thing I’ve ever done.” |
Miller: I
think you have to always have extra ears, if you will. It’s kind of like flying
a plane. I’ve got a method here where I really rely very significantly on three
indicators. But like a cockpit on an airplane, there are so many things. I won’t
say it’s “noise” but it’s something I take into consideration in
terms of just general market environment. Today was a good example with the FOMC
minutes and the Fed coming out at noon. A lot of people got short on that and
got killed.
So you’ve got to take things like that
into consideration but by and large, I want to keep this business as simple
as possible. When I say “simple,” I don’t mean “easy,”
because it’s far from that. This continues to be the most challenging thing I’ve
ever done. Yet when I say “simple,” I mean “very clear.” OK,
I’ve got three indicators on these charts. I’ve got:
- Bollinger Bands — to
define range
- Moving Averages —
to define trend
- Stochastics ––
to define momentum
I want to know those three things
because I don’t care if these are the Qs or watermelon seeds, if you have those
three things, and you have a liquid market and you can understand how emotion is
reflected in the charts, you can trade anything. And so, the things that
you mentioned — the volatility, etc., as low as they are these days — I mean
yeah, it’s kind of important to know at certain points what happens with moves
to some extent certainly, but by and large, I would rather trade something that
was unencumbered by any of that stuff. And I think it’s doable.
In
Part 2, Don Miller explains the important role that staying out of the market
at strategic times plays in keeping his monthly bottom line positive.
Plus…much, much more!
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Additional To receive immediate
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Don Miller is a
professional daytrader whose main expertise is in adapting to changing market
conditions and applying the optimal strategy for the moment. Using the QQQs as
his main vehicle, he specializes in trading intraday pullbacks and fading
extreme unsustainable price moves using a combination of momentum, price
patterns, Nasdaq futures movement, stochastic divergence, and Bollinger Band
spikes.