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The following question-and-answer session was conducted with Adam Oliensis on March 19, 2006:QUESTION: How did you first become interested in trading the markets?
ADAM OLIENSIS: When I was 9 years old I bought one share of Automatic Data Processing (ADP). We had family in the business and, though they didn’t need it, I wanted to express support and solidarity. The company and the stock have been a real American success story. I held that one share until it was 32 shares...and it was at the same price point that I had bought it at; $44. So, I’ve always been aware of the stock market and of the power of compounding.
Then in the ’80s I got a hot tip on a stock from, of all people, a singing teacher. I averaged in at about $6. The stock ran to $60. I remember scanning the New York Times stock quotes as I was standing in front of Grand Central Station. $60! It was a 10-bagger! I could hear my grandfather’s voice in my head, screaming “Sell! Sell! Sell, Adam! Sell half!”
I called my broker from pay phone on 42nd Street and Madison Avenue. I said, "I want to sell half." He said, "Adam, I’ve seen stocks like this go to $90." I acquiesced to the greedy voice in the telephone and not my grandfather’s voice in my head and I held the whole position. That was on October 2, 1987. On October 19 the stock dropped into the $20s. I ended up selling for 1 5/8 sometime in 1989.
It wasn’t until about 4 years later that it dawned on me that it would be a good idea to invest in computers. Then about a year after that I got married and started having kids. That’s when I became seriously interested in investing.
In 1995, I began educating myself on fundamentals. In 1996 I started exploring technical analysis. I read everything about TA that I could find and started playing with charting software. I began trading more actively and in 1997 I started trading options pretty seriously. By 1998 I was in it full-time and started developing a loose following of people to whom I would e-mail charts.
I really sort of backed into the whole thing and it took a number of years before it turned into a primary occupation.
QUESTION: Which do you prefer, short-term trading or longer-term trading?
AO: I prefer short-term swing trading and day trading. I’ve found some technical keys that make the statistical risk/reward scenarios over a period of days (and sometimes weeks) pretty advantageous and clear. As with the weather, I find it’s easier to forecast over shorter time frames than out a number of months or years.
AO: I love the fact that every day, every signal, unfolds as a mystery. It’s a puzzle. We try to set up what we think are statistically likely scenarios, but we never know where we’ll be at the end of the day until we see it unfold.
AO: I treat losses and drawdowns in 3 ways.
Intellectually, I try to understand them within the probabilistic context of my Dynamic Trading System. They’re inevitable and necessary. No trading system in the real world wins all the time. And I make every effort to keep that in perspective.
Spiritually/psychologically I try to look at each loss as a golden opportunity. It’s an opportunity to utilize discipline, to stick with the strict parameters that are laid out when each trade is opened. It’s an opportunity to make certain that I haven’t become complacent, arrogant, or numbed to what "risk" really means. And it’s an opportunity to humble myself as well as to make sure that I react correctly (with discipline and without hubris) when I am "wrong."
Emotionally I react to each loss as though it’s a complete and utter catastrophe. As a professional trader I’m not supposed to admit that, but I hate losing. I hate hate hate it. I’m bad at it. I’m a bad sport about it. Not much anymore but I used to stand up from my chair and scream at the market. I screamed at my monitors the same way I screamed at the TV when I was 11 years old for the Green Bay Packers’ defense to strip the ball from the Vikings’ running back when the Pack was down 23 points in the 4th quarter. And that character flaw, that relentless competitive stubbornness, my natural inability to take a small judicious loss, is precisely why I forced myself to develop a trading system that would keep my “head” probabilistic about both wins and losses.
After years of practice, now I’d say I react with about 65% of the equanimity I would hope to achieve if I were really an evolved person.
AO: First and foremost, define the maximum risk that you are willing to take, set your loss-cut, and stick to it. "Survival" is the most important thing in trading. And here’s the most important understanding to have before trading, I think:
TRADING-CAPITAL IS SCARCE. OPPORTUNITIES TO TRADE ARE PLENTIFUL. BE STINGY WITH WHAT’S SCARCE AND BE PROFLIGATE WITH WHAT’S PLENTIFUL. IT’S BETTER TO MISS ONE OF THOSE PLENTIFUL OPPORTUNITIES (THERE WILL BE MORE TOMORROW) THAN TO LOSE SCARCE TRADING CAPITAL (THERE MAY NOT BE MORE TOMORROW).
It’s fine to be stopped out of a position and take a small loss. It’s frustrating, it may make you want to pull out your hair or stand up and scream but it’s fine. The most important thing is to avoid big losses and to live to fight another day.
As a corollary to that rule:
ZERO AND INFINITY (WINNING AND LOSING) ARE NOT SYMMETRICAL. ZERO IS A LIMIT THAT IS OFTEN REACHED. INFINITY IS UNATTAINABLE.
If your account goes to zero, you’re out of the game.
Look, if I lose 50% I have to make 100% to get back to breakeven. And if I gain 50% and then lose 50%, I’m at 75% of where I started, not at breakeven. Losing is much easier than winning. And money management along with risk control are the cardinal rules of trading--more important than chart reading, more important than understanding the economy, more important than deriving valuation models or growth projections, and more important than optimizing gains.
And finally: find a trading methodology that gives you a good idea of your statistical probabilities in trading, then use the method, stick to it, and keep a probabilistic perspective about it. If you don’t, your ego will get involved, your temperament will get the better of you, and there’s a real good chance you’ll end up putting not just your net worth but your self-worth in jeopardy.
QUESTION: What are your favorite markets that you like to trade and do you ever use options?
AO: At this point my favorite markets are in S&P 500 and NASDAQ 100 instruments. I trade in the SPY and QQQQ Exchange Traded Funds, the leveraged Rydex funds in these markets, in the E-Mini Futures markets for these indices, and in the SPY and QQQQ options markets.
AO: My most memorable trade was one of the single stupidest things I’ve ever done. It was late 1999. I was very, very long Qualcomm (QCOM) stock. And I had much less experience than profit with the tech bubble at maximum expansion and on the verge of popping (which, of course I didn’t know). I had taken all sorts of profits from trading in the options markets, piled them into Qualcomm stock and Leaps, and the stock was rocketing up skyward on the strength of some freakish liquidity factors that were probably resultant from the Fed’s fear of the putatively impending Y2K crisis (remember that one?).
If I remember correctly, Qualcomm was in the mid-400s, and I sold short calls something like a hundred points out of the money against my long position in the stock. I figured, hell, if the stock goes up a hundred points I’ll be overjoyed to be called out.
Well, the stock went up 100 points and then some. And I ended up buying back to cover the short calls at a huge loss on the calls, which effectively raised my cost basis on the stock...all this just as the NASDAQ and tech stocks were priming themselves to enter the worst cyclical bear market in 70 years.
I had become so intoxicated by the upside that I had was insensitive to risk and stupidly violated my own trading plan. It’s the single worst trade I ever made both in terms of the size of the losses I ultimately incurred and in terms of the whimsical impulsiveness I exhibited in violating my plan.
AO: Test your indicators. Don’t trust what other people say about MACD or Stochastics or moving averages or RSI or directional move indicators. Look at your charts. Observe them carefully and make note of your impressions. Then find a charting program that allows you to TEST your impressions, observations, and indicators. See if what you think you see is in FACT profitable. See if your indicators do what you think they’ll do and what they’re "supposed" to do. And in your tests determine where your stops should be. Otherwise you’ll be guessing, you’ll lose confidence in real time, you’ll impulsively violate your plan...and your losses will effectively become very expensive tuition.
AO: After years of "wandering in the Sinai," I have cut way back on the indicators I use. I LOOK at a lot of indicators but I USE my Dynamic Trading Oscillators explicitly. I look at Bollinger Bands and MACD. And I look at the VIX, the VXN, the Put/Call Ratios, the New Highs, New Lows, and historical Volatility. I could go on and on. I’ve probably done extensive research on hundreds of indicators...but I USE the oscillators I derived myself.
Fundamentally, I look at a host of factors each week in my Weekly Wrap-Up. I look at the market’s PE, earnings growth, which sectors are displaying upward revisions and which sectors are suffering downward revisions, interest rates, the yield curve, Equity Risk Premium, and finally my Risk Adjusted Fair Value calculation, which is a variation on the Fair Value calculation that the Federal Reserve employs.
AO: The worst mistake people make is to either not have a trading plan or to have a plan and not stick to it.
AO: Money management is probably the first, second, and third most important thing in trading.
AO: My Dynamic Trading System (DTS) swing trades signals, both long and short, derived from a set of proprietary algorithms applied to the DTS Oscillators. The DTS was developed via extensive testing in over the past 7 years' data (in bull, bear, and flat markets), and applied through seasonal and cyclical filters. The System has enjoyed a very profitable statistical edge in the past and we continue to tweak the System to learn from the markets in real time.
Our approach is probabilistic. The System places trades that, based on historical testing, have an optimal probability of profitability. We try not to get too involved in any one particular trade, (we want to avoid my doing a lot of screaming) but look to measure the System’s results over months and years of data.
AO: That there could be somebody who knows everything. And that it could be "me" (oneself). In real time, we never know what the market will do next. Trading is not about being right. It’s about maintaining a probabilistic approach to what is likely to be profitable. It’s about being disciplined, and it’s about recognizing an optimal time to acknowledge when a trade is not working...and then maintaining discipline and exiting.
AO: That’s a really tough question. I think it depends on the market, the time frame, and a variety of underlying conditions. Right now I’m enamored of slight violations of support or resistance that FAIL. For instance, the SPX has just broken out to a new 4-year high. Should it FAIL to hold above 1300, one could well imagine that a lot of new longs in the market who are buying the breakouts...those longs will turn into sellers should 1300 fail. So, I guess in terms of formations right now I’m enamored of fake-out breakouts and shakeout breakdowns. I really enjoy the reversals that follow these.
In terms of indicators, the most reliable ones I know of are my Dynamic Trading Oscillators. I do not know of any other indicators that have been as rigorously and successfully tested. I’m sure there are others out there. But these are the most reliable ones I know about at this time.
As for the future, I continue to research different time frames and various markets. And we hope to have new products available for shorter-term day traders as well as for players in international markets later this year. |
