TradingMarkets Interview With High Velocity Trader Dave Floyd
Dave Floyd is a successful “high velocity trader.” Recently we caught up with Dave who shared about the scalping strategy that has enabled him to achieve his success.
Brice: How did you get involved in the stock market?
Dave: My stock market interest was cultivated back in college, and then after college, pursuing jobs in the mutual fund industry. Then I was fortunate enough to get a job as an assistant bond trader for a bank in San Francisco; it really evolved from there. I had an interest in figuring out how I could make money from intraday price movement. I stumbled onto a daytrading firm in San Francisco, and they told me what they had to offer — what could and couldn’t be done — and it sounded appealing. I was pretty young at the time — I was 24, and didn’t really have a lot of responsibilities, so I figured I‘d take a shot at it.
Brice: So you had an interest in stocks even while you were trading bonds?
Dave: At that point, I really didn’t care what I was trading. I wanted to trade and learn more about it. Obviously, bond trading is a much more subdued form of trading, unless you’re in Chicago on the floor. Stocks just seemed like a natural route to go.
Brice: What happened when you got to the daytrading firm?
Dave: Well, I was humbled for about a year and a half, and basically traded really small in order to preserve my capital while I taught myself how to trade. This was back in 1994, and daytrading wasn’t really on the radar screen yet. I was in an office with three or four guys who were as amateur to the game as I was, and we just muddled through. We traded really small until we figured certain things out.
Brice: What kept you going during that year and a half?
Dave: Something deep down told me I was going to figure this thing out. It was in the back of my head every day, “I am going to figure this out,” and I kept plugging away small so I didn’t get myself into any situations where I lost a ton of capital on any one trade.
Brice: What was your learning process like?
Dave: I knew what my Achilles heel was. After I understood the mechanics of what was going on — that just came from observation — the problem I was having back then was I was very intimidated by pressing the button, even though I saw setups there. So, what I was really working on for that first year was just getting over my fear and sticking my neck out on the line. What really got me over that was this other guy who was a colleague of mine at one point, who was at another firm, and I went in one morning and watched him trade. He was basically doing the same kinds of trades that I would do, but he was doing them very decisively, and he was making money. Basically I saw a professional in action, making money, and it just reinforced in my head, “Well, that’s what I would have done anyway. He just had the guts to press the button. I don’t.” It was nice to see someone else doing what I was already planning on doing.
Brice: So you knew that your ideas would have worked out anyway and it gave you confidence.
Dave: Exactly. It was like night and day from that point on, and I’ve been doing it ever since. Suddenly, the bleeding stopped, and I was actually making a little bit of money each month, just progressing from there.
Brice: Has your trading changed much since then?
Dave: I’ve become better at understanding technical analysis. The other part is the experience level. I’ve seen things over and over again, and I’ve learned to interpret them. A lot of that may not be technical; it could be just the way order flow is coming through on a particular stock. The overall style hasn’t changed dramatically. I think it’s just been fine-tuned over the years as a result of experience.
Brice: What are you looking for as far as entry?
Dave: I’m looking specifically for technical setups on the stock that I’m trading, as well as the futures. I primarily watch the S&Ps, but also watch the Nasdaq, although not quite as closely. I’m mainly trading NY stocks, although I do trade Nasdaq, too — but mostly New York stocks. The stocks that I traditionally trade — IBM, AOL, EMC — typically have the same chart pattern on a shorter time frame. I’m using a one- and a five-minute chart, and if you overlaid IBM’s one-minute chart or EMC’s one-minute chart on the S&Ps, they’d mirror each other pretty closely.
What I’m really looking for, if we’re trending up on a one-minute time frame, are pullbacks to the 20-period moving average, or any sort of a pullback where you consolidate for a few bars and then start to take off again. I’m not trying to sell those rallies on uptrends. I’m simply waiting for the stock to come back to me. Trying to pinpoint the entry is really where the difficulty lies in terms of learning how to trade. The spotting of the setup is pretty straightforward — it’s actually knowing when to press that button. Our time frame on these trades is less than five minutes, so you’ve got to be real precise on what your actual entry point is so you get almost immediate gratification. If you’re trying to take stock on the offer — which is what we’re trying to do, we’re not trying to buy on the bid and sell on the offer — you want to make sure that right after you buy that stock on the offer, your goal is for that thing to go bid immediately and then they start taking the new offer.
Brice: A lot of people find one-minute bars too noisy, but it sounds like a must for your style of trading.
Dave: It’s not too noisy for what we do. (The “we” here refers to the trading firm at which Dave is a partner…more on this later.) If your time frame is pushed out a little bit more, like maybe a 10- or 15-minute duration trade, it’s way too noisy, I agree 100% — but for the way we’re doing it, it’s essential. What you also need to use in conjunction with the one-minute is a tick chart. That’s what really enables you to pinpoint the entry point for the nickel. The one-minute chart gives you: “Hey, there’s a setup coming here, better start paying close attention,” but the tick chart actually enables you to find the specific entry point.
Brice: It sounds like you just trade a few select stocks.
Dave: Most of us trade one or two stocks — and this goes for pretty much everybody on my office — and we trade them pretty faithfully day in and day out. My basic philosophy is if we’re trending up on the one-minute chart on both the S&P futures and the stock I’m trading, I’m probably looking to buy pullbacks on that stock. Conversely, if the trend on the one-minute chart is down, I’d be looking to sell short rallies in the stock.
Brice: You mentioned you trade IBM, AOL, and I think EMC. Do you prefer listed stocks?
Dave: I don’t know if I can say I prefer them, and I say that only because I’ve never traded Nasdaq stocks consistently enough to really make a fair assessment either way. My opinion on New York vs. Nasdaq is that I find much greater depth of liquidity on the New York stocks — and we’re trading the larger ones — we’re trading IBM, EMC, stocks like that. If an opportunity presents itself, I can get 5000 shares of a stock pretty easily without having to get 20 different prices. If you try to buy 5000 shares on the Nasdaq, you’re probably getting it at 10 or 15 different prices. My opinion is New York offers me much better liquidity. much better depth, and if you go to most clearing firms, the commission rates on New York stocks are almost half of what they would be for Nasdaq stocks.
Brice: What is you average point gain per trade?
Dave: I would say the average winning trade is anywhere from .20 to .30; the average losing trade should be anywhere from a nickel to ten cents, but it tends to be in the nickel range. Statistically, we’ve got a good ratio there, enough to compensate for the times you give away the nickels. Our strategy is really based on, “Is the trade working?” If it’s working, you’re hanging in there. If the trade’s not working, there’s nothing to argue about. You simply get out of the trade. It’s very, very cut and dried. Even though you want to have a mental stop loss — say .20 – .25, if the trade’s not working, there’s really no reason for you to stick around.
Brice: How many trades do you make per day?
Dave: It depends on the volatility, but on an average day I probably do 20-30 trades; on busy days sometimes 75 to 125.
Brice: What’s the best trade you ever made?
Dave: Usually they’re news-related trades — Fed announcements are traditionally the best. We had a surprise announcement in April — it wasn’t my best trade, but it was certainly a good trade. If I had to think of one trade — about a year and a half ago we had a surprise half-point interest rate cut. I went to get 6000 shares of GE, and I think I got 4500 of ’em, but I made two points in a matter of two minutes.
Brice: What about that trade in April?
Dave: I went for the throat on that one. I tried to buy 10,000 shares of AOL; I only got 6300 of ’em. It didn’t move up that much — it only moved up about 3/4 of a point — but at least I was in the position to potentially make a great deal of money on the trade. It just didn’t really pan out that way.
Brice: Did the decimals change your trading much?
Dave: For the first month it was horrible, just horrible. We were getting pennied to death. You’d take stock on the offering and someone would put a penny above us. I was reading about hedge funds and institutions complaining about decimalization. Apparently there was a meeting between industry people and Richard Grasso — this is my understanding — and it was ironic because literally a day after that happened, we started seeing nickel spreads again. It really gave us the vitality back again. That first month after there were decimals I was starting to seriously question the viability of remaining in the business because it was a real pain. (laughing)
Brice: You’re a general partner in a trading firm. How did you get involved in that?
Dave: My current business partner and I were at another daytrading firm at the time, and one of my old trading buddies — the one who kind of got me over the edge in terms of trading — he left and hooked up with another clearing firm in Chicago and set up an office. They were a small clearing firm at the time, so they were hungry for business and willing to look at smaller client bases that didn’t generate millions and millions of shares per day, and we contacted them. We were anxious to start out on our own. We thought we could do just as good a job as the place we were at, or better. We said, “Let’s go for it.” We formed our own trading firm back in September 1997, and it was a good decision in the long run. The first year was a little difficult, but after that, it really panned out.
Brice: That’s a full schedule, between your personal trading and the running the firm.
Dave: But it was essential. I don’t think anybody can run a good trading organization unless they themselves are also trading, unless of course you’ve got someone that is working for you or a partner with you that is going to become an anchor trader. You can’t build a trading organization unless you’ve got one or two anchor traders; you’ve got to have people in there that point the way for newer traders.
Brice: How do you separate the person who really wants it from the person just blowing smoke?
Dave: What I’ve found is that people who come in and don’t know anything about the business, but they do want to do it, have a tendency to do the same thing I would do, which is to say, “Listen, I really don’t understand this business whatsoever. Can you guys help me?” We ask questions with regard to card playing to try to uncover what their thought process is in terms of poker and blackjack, even if they don’t play the game routinely, if they know the concept behind the game, which is: you fold, you fold, you fold, and go for the throat when you get the big hand. If they can understand that, and perhaps have a competitive/athletic background, that’s what we’ve been using as a judgment, and it seems to have worked.
Brice: Why do you think traders sometimes do what they know they shouldn’t do, and not do what they know what they should do?
Dave: When you’re growing up, everybody’s conditioned to fight in the face of adversity and stand your ground; that’s the logic that most of us learn as we grow up. I think a lot of times people take that same mentality into trading, meaning: “The trade is going against me.” That’s adversity. “I’m gonna stand my ground. It’s a good company.” I think that the reason people do that is the way that most people are conditioned. Of course, the underlying theme behind that is fear and greed. Most people don’t want to admit that they’re wrong on a trade. I see that in newer traders in our office. For some reason it’s very difficult for them to admit that they’ve made an error on the trade.
Brice: What advice do you give to a new trader?
Dave: They really, really have to want to do this. It probably was for me, at least professionally, the toughest thing I’d ever done. From a mental standpoint, it really tested me. My first advice is: Do you really want to want to make a go at this? Because it really tests you in every possibly aspect — financially, emotionally, the whole nine yards. Beyond that, if you pass that kind of litmus test, I think the best way to learn this is to sit with people who are actually doing it successfully themselves. I say that because we’ve done it here with numerous traders over the years and going back to my original turning point in my career, I was with someone for one day — granted I had already been trading for eight months so I already had a level of experience — but just seeing someone do something and do it very well, you know, really pushes you over the top. If you can immerse yourself around other successful traders who are trading the same style that you wish to trade — basically mentoring — I really think that will help you short circuit your learning curve. It won’t eliminate it, but it will take a few months off of it, and maybe save you some expensive lessons.
Brice: What books have been important to you in your trading?
Dave: I’m glad you asked that. Market Wizards, without a doubt. I remember reading that shortly after I graduated from college. Somebody said, “You know, David, if you ‘re curious about trading, read this book.” And I did. I’ve probably read it 20 times since, both of them. The thing about the book is it’s not going to teach you how to become a trader, but it reinforces the underlying themes that are inherent to all successful traders. I can’t really make a final judgment on it just yet, but my initial thought on the book that I’m reading right now is that it’s tremendous, and will hopefully put me on to my next stage of trading, and that’s the new book by Alan Farley, “The Master Swing Trader.” From what I’ve read of it so far, it’s excellent. I’ve seen him speak a couple of times before. He’s a very knowledgeable guy.
Brice: What do you do in your off hours?
Dave: Exercise. Mountain biking. Running. I’m an avid boater; my wife and I love to go boating.
Brice: What kind of a boat do you have?
Dave: I have a Sea Ray 240 Sundance. We like cruising to Catalina and stuff like that on the weekends. Not every weekend. We do a few trips during the summer.
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Below are a few trades Dave made earlier this week:
Chart 1 is a one-minute chart of IRF with Bollinger Bands and slow stochastic. The point is that if the trend is up on the one-minute chart, I buy pullbacks. If it is down, I sell short rallies.
Trade 1: Bought 1000 IRF at 64.58 Sold 1000 at 64.83 Profit after commissions: $208
Trade 2: Bought 1000 IRF at 64.70 Sold 500 at 65, sold 500 at 64.90 Profit after commissions: $216
Trade 3: Bought 500 IRF at 65.10 Sold 500 at 64.20 Profit after commissions: $42
Trade 4: Tried to sell 500 short at 65.30, but missed the entry. I never chase stocks if I miss my initial entry point.
Chart 2 is the June S&Ps with the same settings.
Chart 3 is a five-minute S&P chart. While I do not use this chart to determine entry points, I do use it to let me know which way the short-term trend is as it relates to the stochastics. If the stochastics are crossed to the upside and trending up (points A and B on Chart 3), I usually will not go against that. As a result, all of the trades I did in these charts were from the long side until that changed at around noon PDT.
While these trade setups look relatively straight forward, the actual entry point is more of an art. Picking just the right time to pull the trigger will mean the difference between being immediately rewarded and sitting with the position, nursing it until the market kicks in your direction.
The stochastics I use primarily as a “filter” to alert me when a trade is setting up. If the stock has pulled back or rallied up and the stochastics are on the verge of rolling over, or turning up, it signals to me that I need to start looking much more closely to the order flow of the stock to determine the exact entry point.
The S&P futures are my primary indicator. The stocks I normally trade — IBM, AOL, MWD, etc. — don’t usually stray too far in the opposite direction from the Spooz. As a result, the futures give me that very brief edge I need to get in before the stock begins to move.
My exits are determined primarily by whether or not the “move” is still going in my direction; at this point I am not using pre-determined exit points. Is the move going in my favor? If yes, hang in, maybe sell half. If not, get the heck out and lock in profits.
While many traders will sell short rallies in up-trends, I feel that they are lower probability trades. My goal is to make money each trading day. While of course that is not always possible, I try to put the odds in my favor as much as possible.
I’m anxious to offer you much more insight on the particulars of my trade entries and exits at TM2001.