081: Alan Farley – Breaking Down Breakouts and Dynamics of Price Movement, with The Master Swing Trader

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Welcome to another episode team and I want to say just real quick thanks to everyone who has been tweeting about the podcast over the past few weeks. It's been really awesome to go back and forth with many of you. So thanks, Haig. And if you're not following me on Twitter, you can do so at ChatwithTraders. Now, our guest for this week's episode is Alan Farley, who took his first trades in the late 80s.

Allen is an active swing trader and most of his positions take place in the US equity market, although he occasionally trades index futures and currencies too. In 2001, Allen released his first book, The Master Swing Trader, which might just be the best-selling book on the subject. He's also a regular contributor to the street and investigators, having written hundreds of articles over the years.

Some of the subjects you'll hear about in just a moment include the unusual way in which Allen got a well-rounded education of financial markets. Some of the big lessons that shaped him into the trader he is now, in particular, the concept of convergence and divergence. Plus we talk about the dynamics that generate price movement and heaps more too. Anyway, here it is, I'm Aaron Firefield and this is my conversation with Alan Farley.

So hash Damon, what's going on? Oh, uh had a nice day. I had a I had to ask you a question. Do you know uh you know Chris Shea? Chris Shay. No, it doesn't ring a bell. Why is that? I was in Brisbane in uh two thousand five. I did a program for Uh Davin Clark up in Coulomb somewhere and then we Yeah. And then we went down to Sydney and Chris Shea was like his partner at the time. They were trying to start some business. Right, right. Is he still trading today? Do you know?

Uh Chris, I don't know, I don't think he was ever a trader. He was tr more trying to do the like Mark Douglas thing, you know. Oh, okay. Yeah, like more of the psychology kind of mindset aspect of it. Yeah, right. Yeah, and Davin and I I mean Daven and I had a good time and you know I've seen him since. But uh that was my trip. They paid for me. It was nice. They paid for me and I spent

10 days in Australia and I'm I did a couple uh I did some work for them, so I got paid for that as well. So it was kind of cool. Good stuff. Good stuff. Have you been back since then? No, no, nobody's invited me. Sad, but true. All right. Well when I have the the big chat with traders conference, I'll fly over.

Sure, anytime. I'm waiting. So yeah, no, it's really cool to be speaking with you, Alan. Um Jeff Davis actually recommended that I uh try and get you on for an interview. Uh do you know Jeff? Uh yeah, well say I don't know where I know half these people from, but I've known Jeff for about uh somewhere between five and ten years. You see you just start communicating with them. My id my identity and connections have changed so many times.

that I don't know where people know me from, but I've known him from somewhere. Maybe I met him at like trade shows back in the nineteen nineties. I can't. But I but Jeff's a really good guy. He's really smart too. Yeah. And and I like him because he teaches me a lot of stuff about very, very short term things. Yeah. No, he was awesome. He was really, really cool. Uh we got a lot of great feedback from his interview a couple of weeks back.

Um yeah, and when I was doing a little bit of um poking around on the internet, uh doing a little bit of prep for this interview, I noticed there's um you've done a hell of hell of a lot of writing. Um, especially for like Investopedia. uh the street and and those types of sites. How long have you been doing that for? Um I started writing for the street and

2001. In fact, um the reason I started working for the street and I it was after my book came out. I I wrote two books. I wrote The Master Swing Trader in 2000 and I wrote uh the Master Swing Trader Toolkit in two thousand nine. So when I wrote the Master Swing Trader, it did really well. That was like December two thousand.

And things really started to move for me. Actually got back. I took I took two thousand and one off'cause I didn't know I didn't know how to trade and write at the same time. A problem I've since solved. So I just took off the year and wrote that book and uh

So I was getting back into trading and uh the book was doing really well. And then nine eleven came along and the street dot com lost two people in in in the World Trade Center. Oh. And they needed to replace them. And I'm one of the people they called.

I had uh Jim Kramer was on the phone. This is like four days after nine eleven. Jim Kramer's on the phone with a guy I knew from another site from um oh it was called Trading Markets dot com. I did a I wrote for them for like six months. And they asked they asked me to write for him and also to do a newsletter.

And uh I stopped writing a daily column for them in two thousand twelve, but the newsletter which I did in I started in two thousand two, I've been doing for fourteen years now. And that just thing just that that's like an energizer button. It just goes on, it keeps on ticking and ticking and ticking. And so I gotta thank her for that. After I stopped writing that stuff for the street, I started writing uh Investopedia asked me to do some work for them.

about two years ago and that's just blossomed. They let me do my thing there, which is write uh m stock analysis, after stock analysis and commodity analysis. Which is what I love to do. I can whip that stuff out real fast. And it helps me. That's my research at the same time. I trade the same stuff I'm I'm I'm looking at for somebody else most of the time. For sure. For sure. No, that's really cool.

All right, Alan. Well probably the first thing I I'd like to ask you about and where we'd like to start is um how you first got into trading. I think you were in your early thirties when you first came to trading. Uh what got you into this? Well, I think I was actually a little bit late because my son was born in nineteen eighty seven and I never had any money management skills. I never

I never owned any stock. I never took any financial courses in college. I did none of that. I but I was a I I was a I had a strong major in math at that time. So I always had a good mathematical background. And after our first child was born, my uh my wife and I are talking. I said, well, I better I need to learn how to invest. This is like, you're right. I mean, I'm I'm I'm a pretty old dad, so I was probably maybe 35, 36 at the time. And um, and so I started from scratch.

And the first things that I came across and I think it was the uh uh he was born in it it's so funny, he was born in uh October eighty seven, the October crash happened two weeks after he was born. So I mean his timing was pretty pretty spectacular, you know, and that got my interest as well. And uh I started going to the library on weekends and I did mostly value line charts.

One of the first things I've discovered is that how much more I like technical analysis than fundamental analysis. Fundamental analysis, I felt like, okay, I'm not an accountant. I'm gonna have to do this my way. And uh so I started down the the TA path. And uh I learned most of the stuff I learned early on was from going to Barnes and Noble and just sitting there on Saturday and Sunday, picking in their business section, picking up uh T A books, which are horrendously expensive back then.

and sitting there and reading for three or four hours. And I did that for

for months. Uh, you know, and started p and then I then I I st then I started to get into some trading and it was almost the same time. I did a little bit, say between eighty eighty eight and and ninety one, ninety two. But when uh when copy served uh uh uh when when e-trade went to compute which I was thinking ninety th ninety three uh and that was the first portal where you could sort of do more than one trade every three months. اي اي

I'd been on CompuServe already and I also hooked up not only with E Trade, but I also hooked up with the investors forum at at uh CompuServe, which was sort of a precursor to America Online. And now back in the day, this is in ninety ninety three, there was no

There were no sort of like disclaimers for the internet because the internet didn't really you know it didn't really ex it existed, but it didn't have the World Wide Web to for its base. So CopySurf had a proprietary interface. Nobody thought twice about talking to each other. And in this investors forum were currency traders. Merrill Lynch traders, uh uh underwriters, VPs, everybody in this environment in which they could talk freely. They didn't feel like they were.

sharing trade secrets because we didn't nobody realized that the internet was a big deal then. So it was like a small group of people sharing trade secrets. And I actually learned from a from a technical analyst from Merrill was m was my first teacher there. I then became um I I loved I loved the online thing, which is obvious from from everything I've done since that time. And so I became what was called a Sys op there, which is like S Y S O P a system operator.

And I so I was the guy and I shared shifts with other people who would download the entire w bat database. uh the between say a a four hour period. And then I had to go and filter that database and send it back up in in as f as quickly as I could. And we got that down in real time, but you get You get maybe 400 messages an hour. And so I'd have to scan through 400 messages. And so I started speed reading everything about the financial market. And I did that for for like three years.

So in addition to the trading stuff, I got a really nice education and everything else because I was reading all the stuff that Oh, the the bond guys were speaking about and uh and the underwriting guys were speaking about and the sales guys were speaking about. And so it was a real nice rounded education that I got from them. But I really picked up most from they had a small Trading a technical analysis section. And then I went out on my own with uh well through e trade. I uh

Uh yeah, I I'm sure you're why I should probably stop somewhere in here, but the story's really interesting how everything just progressed in a very, very nice pattern. At the time, I was also the boss in a Uh and a huge claim operation. I have like a hundred fifty, hundred and seventy five employees over over five states here in the western states. I so I was in Denver. I used to go out to Oregon and Utah and Wisconsin and Arizona and California. And uh I also had the only modem in the office.

Because we we got a modem which was very expensive uh in order to uh send requests for for cr to the crime bureau. Uh you know, for fraud. We use it for fraud. And so uh I I had to put the it the the mode in my rooms. So in addition in my office, and I was like one of the only people in the office. So in addition to um, you know, having having one of the first modems, I also have one of the first private connections that I was able to go and hook up all my trading stuff.

To the company modem. And I did that for four years. And believe me, the day that I got laid off from that job, they had no idea what I'd been doing sitting there for four years. And at the same time we the the company went from like had a hundred fifty employees

And by nineteen ninety-eight, which is when I left, I had something like 14 employees. So I used to get done with my work after one and two hours, collect that salary, and then go and trade for the rest of the day. So it was a really it was a really nice start. I was very, very fortunate.

Okay, okay. That's very interesting. And there's a couple of things I'd like to pick up on there. So probably the first thing would be that you came into trading um right after the eighty seven crash. I mean, this was probably a time when I imagine most people were trying to get out of the market and probably scared of the market.

Um, did you have any concerns at that time about starting to trade? Well, no, you know, you really don't because you're so risk unconscious, you're so risk stupid at that point. You know what I thought the greatest thing in the world was? And this is the first thing I ever picked up, and it was from a newspaper. You picked it up, and I just would look at stocks that were like,

A dollar or under. And I would say, oh, it's got a low this year of 47 cents and it has a high of 73 cents. I can make what, 20, 26 cents? All I have to do is buy the low and sell the high. That was my mentality. It wasn't sort of this grand investment scheme. Uh it was just the stuff that I noticed instead of sort of the fundamental, I better get a portfolio and diversify it.

and, you know, do my do my MPT and, you know, go in and uh learn my risk management. I would the first thing I'm doing is looking at the numbers, which is always my thing. I'm I'm a pattern guy from the word go and seeing these numbers of high love, open, high low, close.

And that's what got me started. I said, well, if it's going to be low at some point and high at some point, I just have to figure out when it's going to be low, when it's going to be high. So I mean I uh I didn't have the risk consciousness. And and if you take a look at the eighty seven crash, it wasn't like

the two thousand uh bear market or the two thousand seven bear market. And it wasn't really it was more like the twenty nine and that it came out of a parabolic uh parabolic rally. So all that happened is you gave up fairly short term gains. So the market bottomed out very fast after that crash and stole, if you look at on a blip, and I probably yeah, I have I have a spider well I have a spider here. If I look back at that thing and you go back twenty years.

You know, uh you go back to monthly. I'm not sure you could even see the crash on there. I'm looking okay, I'm to nineteen ninety five. Yeah. I'm looking at nineteen ninety five to nineteen eighty five to nineteen ninety, and you don't see a crash. And that's sort of the way uh eighty seven was. It was a very odd animal because the m the mark

uh you know, I'm gonna say you kids today, but you know, uh experiencing it. The market was coming out of uh the Cold War, you know, and uh all the w all the everything with the bridge the ball the walls were falling down and all these silicon tech companies were coming up. It's a very interesting time. And so everybody was very optimistic and upbeat.

Plus we were baby boomers in our thirties, just hitting our prime time in uh in in capital. We're just starting to make the most money in our lives. So it was just perfect timing for us. I mean, uh millennials have sort of the opposite timing. They're they're moving into a an environment of uh

you know, uh uh lack versus abundance and and and and uh the sea levels and and pollution and sourcing and and all kinds of things in a very manipulated stock market. Central bank Controlled A H F T controlled capitalism, world capitalism. Different animal in the nineteen eighties when, you know, Steve Jobs was still, you know, not a billionaire, you know. He was probably a millionaire back then, but not a billionaire.

Yeah, yeah, absolutely. And one of the other things you said which I found particularly interesting was the cost of technical analysis books um back during that time. Also, I understand that commissions during that time were very expensive as well. Can you give us an idea on how much you would pay for a round trip of commissions and how did this influence your style of trading when starting out? No, I d I just posted a uh I found an old thing, I don't know why. It was a handbrick inquest.

Uh Quest, Quest, whatever their name was. They I remember they broke up around the t turn of the millennium. And they were the discount house back then. And this was something like 92, 93, because it's right when Telet was starting out. And so on the same pages they had for Telet was the first sort of cheap data vendor. It was. And and this is their price. Their cut rate price was fifty dollars in and fifty dollars out. And that was for a hundred shares. There was a scale after a hundred shares.

So not only did you have that, you had on top of that, you had a you had to pay more for each hundred plus You you had the spread and the spread was going to be 19 in Nasdaq in the 1990s, the spread was 50 cents, 75 cents. So you were assumed that if you're gonna if you're gonna buy something, you're gonna hold it for a couple years. And then sell it because you had to get past that transaction cost. And you needed that p time for the transaction to eat up the transaction cost.

And so yeah, it was a fifty each way. So what you did was that your stock your stock certificates were like they're they were like um, you know, like your like your diploma in high school. You put'em in a you put them in a in a draw. You know, and you looked at it from time to time and then you got value line week to week and you look at the chart. If you were a TA guy, is it is it an uptrend or downtrend? Or if you're a Dow Theory guy.

And uh, you know, I mean e trade changed all that with with discount fees and they were still expensive. I think it was what 2995 each way or 25 each way to start out. Even going up into ninety-eight to two thousand. Uh I remember w the heyday of the uh level two uh uh uh uh shop. It was uh oh, what was it? N maybe you saw nineteen ninety five each way, twenty each way. And that was the same time you were starting to get all the rebates with all the different guys coming in with Instant and

Uh I all the names. I can't remember the names, they all were bought out by each other. And so if you routed it one way it was one fee. If you routed it another way, it was a different fee. So uh yeah, but the cost structure was coming down. It really collapsed after the bear market in two thousand to two thousand two.

And uh for me it was interactive brokers. They were just the they're they just wiped out everybody else. Uh maybe they weren't the first, but they did it best in terms of bringing it down to a buck or under for a hundred shares. Yeah. I mean that's so crazy to think that, you know, round trip of of commissions was over a or a hundred bucks plus a a really widespread, you know, only what, twenty, twenty just over twenty years ago?

You know, we now complain if it's anything more than a few bucks, so that's really interesting to hear about.

So how did that affect your trading? Like how long were you holding positions for, you know, obviously having to factor those transaction costs and how long were you holding trades for on average back then? So two to three months minimum. I didn't even think about day trading until maybe ninety-eight, ninety-nine. And even in ninety-eight, ninety nine, it was way too expensive for me. And I was out full time trading at that point.

You know, yeah, I'll have to flip what thirty times a day and I'm gonna have what, six thousand dollars in transaction costs that I have to overcome in order to make a profit. I mean, you know. I w I want to live to be a ripe old age and that's not the way to do it. You're gonna get real stressed out if you do that. And I know a lot of friends who made lots and lots of money and really burned out badly because of, you know, the the high intensity of it. They couldn't maintain that.

So that's why I mean I focused on swing trading, which has always been my thing. I mean I uh uh the swing trading to me and at the very beginning I wasn't sure exactly what swing trading was because I didn't really see much of a difference between day trading and swing trading. Swing trading is more like position trading, but position trading was too the definition in many people's minds was too long. That was like weeks to months. So swing trading is more like days to weeks.

And uh I've been f in a fortunate position where I where I've been able to contribute to the definition of swing trading by writing Probably I think it's still the best-selling book on swing trading that would that's ever been written, Master Swing Trader. I was told, because McGraw never told me. McGraw never told me the exact sales figure. But they told me it was their it was their the best selling book in their textbook division between nineteen between two thousand and two thousand ten.

and and best selling market book in their textbook division. So, you know, that to me tells me that I it it affected a lot of people. But I really don't know. I never asked for that for the exact figures of it. But so uh in a position like that, not only could I define swing trading, but I've done my best to try to define things like double tops, double bottoms, support and resistance. Cup and handle patterns. Fibonacci levels, all this stuff in which there's some sort of sort of Catholic

The handle could has to go back to this extension and it can't go to that extension and it has to be this long versus this long. Well, you know, the market's not gonna give you all that. The market's gonna give you eighty percent of that and the eighty percent of that translates into a five or ten or fifteen percent edge. You know. So that that's always interested me.

So I've gone and done my best to dr to redefine it. I've said it so many times now and uh not only in the books but being able to put it in something with a PD on the name of it at the end of its name that it'll i it'll find its place into history and that's That's my that's one of my ego goals, you know, is to be able to do that, to contribute to the dialogue on the financial markets in the same way that maybe Elliott did back in the nineteen thirties, you know?

That's that's all I wanted to accomplish and I think I've probably done that by putting a whole bunch of stuff out there that should have changed definitions. Yeah, yeah. Well I gotta say, congrats on on the huge success of of the book. We're definitely gonna dig into that a lot more very shortly.

One of the things I want to ask you about, uh, while we're still covering your your sort of your path to becoming the trader you are today. I think you mentioned at the beginning that you had a a teacher or a mentor who was a technical analysis from Merrill Lynch. Yeah. Um how did you link up with him and what were some of the big things that he really tried to drum in and and teach you about?

His name was uh John Yerko. He was uh from Bayonne, New Jersey. And you can imagine that even even Australia pr they probably know about Bayonne, New Jersey, which is one of the uh cancer hotspots of the country, and John in fact you know, uh passed away uh when I knew him from uh complications of his of his environment. So John yeah, we he was a technician at uh at Merrill Lynch and uh he had to he had to leave in his last years'cause he was very

He was a very advanced diabetic and his vision started to go. But he taught me about levels and he taught me to think contrary. He taught me which indicators to use to keep it very, very simple. Uh he he taught me how to use indig indicators in conjunction with each other.

uh some very, very basic tools, uh, but uh more about the price pattern, the price pattern rules. From the price pattern, price pattern creates the indicators, not the other way around. Using the indicators in order to improve your vision. And not just for confirmation, not just for signals, because you rely on signals, you're not gonna see all the all the gray between green and red, you know. And so uh he taught me to really pay attention to the price structure.

I so I believe I've gotten more out of that from uh from him than anyone else. My other fantastic teacher, and I'm sure I'm gonna I'm probably missing half your question, but it brings it as a good point to bring it up, was Lyndarashke. Uh Linda her full name Linda Bradford Rashke, one of uh one of the market wizards.

And someone who I've had I had dinner with in uh two thousand and the last time I saw her was probably two thousand eight, two thousand nine. She calls me by my first name and that makes me feel fantastic because I think she's one of the most awesome TA and training people in existence. But she taught me about convergence divergence, which is, you know, you try to

I've got my share of Twitter followers. You try to jam it into their heads about convergence divergence. You try to repeat the the lesson in ten different ways. So that everybody from every sort of blockage they have in their brain and their heart, they could see what I'm talking about with convergence divergence and still they don't get it. And convergence divergence is godly, meaning that you could translate that that into into money.

And so uh it's it's a very, very important concept that comes straight from her. And she also taught me the other thing, which is about volatility expansion and contraction. Uh my first book talks about n positive and negative feedback systems, which is sort of an offshoot of trends and ranges. And it when you're in a range like we're in a massive disgusting range since two thousand fourteen.

You know, at some point and it's like at the last third of every trading range, you start to g it starts to go from a negative feedback into a positive feedback where the signals start to start to pile on top of one another. You know, and and then it becomes a a stairs that's the price is climbing on. And uh that uh that sort of positive feedback system, if you pick that up early, you get into you get into breakouts and a or breakdowns much, much earlier than than

your say the signals are going to be. You're gonna be in that thing days before you get your sort of signals from that stuff. And that's always been mine to be, you know, the old trading adage about how you're supposed to uh You're supposed to, I've got to get this right, I've got to do it wrong. You're supposed to react, not anticipate. That's a whole school on that. To me, it's you anticipate rather than react.

You get your technicals as perfect as possible and you and then you you you you find your spot well and hopefully no one else is there when you get to that spot. Yeah. Yeah. And I gotta say, Linda is really awesome. She was actually on the podcast. Um I think it was uh episode forty eight. So if anyone listening wants to listen to that episode, uh just go chatwithtraders dot com forward slash forty eight and you can hear a an interview with uh Linda Rashke uh right there.

Now I feel like I should probably ask you uh to expand on convergence, divergence a little more. Like why is this so important that that we really understand this concept? Well I'll tell I'll go straight to Luna's definition of it. Um uh convergence divergence is created by uh any two points. Any two points in the market are gonna either agree with each other or they're gonna disagree with each other.

Now there's so much you can do with that. Someone who uh who who can't filter is gonna go, well, then everything is gonna be convergent, divergent with everything else. But someone, if you have analytical skills, you're gonna go, well, some things are more important to be convergent than other things. Convergence, again, is when two points. uh are doing the same thing and with divergence and two points are doing a different thing. A bearish convergence is when the the

The thing that's weak is doing something that it should have done that was strong. And a bullish divergence is a thing that's supposed to be weak is doing something that's stronger than you expect. So I know that's that's a that's a kind of definition that's gonna th some folks are gonna take ten years to figure that out. But I mean it's really nothing more than a a ten second little little equation.

But convergence divergence, classically, it's gonna be f I I use it in probably two, maybe three different ways. Number one, I use three three main uh financial instruments, and that's the SP five hundred, NASDAQ one hundred, and Russell two thousand. Those three are gonna form convergence divergence relationships up the yin yang. And if you go back, start at 2000 and just go by month by month and look at the convergence divergence relationships created by Pure Dow theory.

Uh, which one is leading the other one in price? Which one has broken out to a new high or fallen to new low compared to the other one? Uh which one is leading a rally, which one is a laggard in a rally. That's all that that's godly information too. That's why Uh a week before the SP five hundred topped out six, seven days ago, my whole thing was as an SP five hundred rally.

The NASDAQ 100 is lagging, which means it's a bearish divergence. And then that bearish divergence, you're not going to get a breakout. the SP five hundred can can break out, can hit a new high, but no one's gonna follow it. And so you're gonna get some sort of weird new high that's gonna trigger a trigger a failed breakout.

So a convergence diverse divergence relationship. Russell 2000, which is small caps in the states, you know, it's slightly different animal. Sometimes it's very important and sometimes it's not important. And that takes years and years of sc you know tape reading, but anybody who wants to look at the NASDAQ NASDAQ versus the SP five hundred, that's where you start. The second uh one is with some uh very simple rel relative strength, relative strength oscillators.

Two main relative strength oscillators uh is are uh are for me are are stochastic. I I use some RSI, Wild's RSI, but mostly stochastics. I'm you know, keep it simple. George Lane, what was it, nineteen sixties he put that together. And if you if you become a a student of stochastics, it will it will guide you for the rest of your life. Um so stochastics in which uh there's buy and sell cycle.

So convergence to divergence is how's price moving in respect to daily, weekly, and monthly buy and sell cycles. So we have we're on a monthly bicycle. Uh everything's on a monthly bicycle after January and February bottom. So if prices if price is falling, that's gonna be a bullish divergence compared to the monthly bicycle.

So that's when you start to look at pullbacks and dips and buying lower prices. But you also have a weekly because it's a three-dimensional chessboard. And the weekly has spent And so, you know, that's that chessboard of figure out where you buy if you're trying to buy pullback. Uh if you have convergence in the indices where everything is strong and you're trying to do trend following, where everything is weak and you're trying to do trend following.

You know, and uh you take a look, take a look at September two thousand and eight and uh see where they were uh where the averages were in respect to each other and respect to the high highs and lows in the past eighteen month months and a predicted that after the uh it was at uh Paulson's failure in September two thousand eight with he I think he stopped short sales with the banks or something.

that the market had hit a high, hit a big high, banks hit a a monstrous high. It was like a massive short squeeze. It was like fifteen, twenty percent. And then the market collapsed into into October. Well, it collapsed and went into that positive feedback loop to the downside, all on convergence divergence relationships that locked into convergence.

Everything. NASDAQ said I'm selling. The SP 500 said I'm selling. Everything said it was selling. And then the b at that point, the secondary markets fall apart because You know, I was I was focused on equities at that point. At this you know, in this in this world you don't, you focus on everything. But at that point the secondaries followed. Then crude oil followed and and uh and the metals followed and everything followed except for the fierce stuff.

You know, that's when that was it seven in December 2008. That's when b then bonds took off, you know, because that was the bond trade. That's where it started. So anyway, that's convergence and divergence. A third way that it's uh it's used is actually in conjunction with Bollinger bands, because Bollinger bands are two things. They're volatility, it's a volatility indicator, but it's also a relative strength indicator.

Uh because you're looking at prices relationship compared to a top and bottom band and a central mean or a mean reversion point. I used to call it I call it a central tendency point. It's the uh you know if you stretch the rubber band, it's gonna

flop back to the twenty day SM SMA or whatever he uses your for your time frame uh in in Bollinger bands. And so if prices stretch too far, that's a I gotta get this straight. That's a uh that's a bearish That's a bearish divergence because it's stretched outside the top Bollinger band.

Which means it's gone too far too fast and it's overbought and that kind of thing. So that's a that's a bearish divergence. That's a that's a bullish that's a bearish divergence. Uh, you know, when it does that. So but that's the relationships you get into. Yeah, yeah, okay. And I presume considering the the amount of articles you've written, um, over the last, what is it, fourteen, fifteen years.

um that you've probably written something about this which maybe has some visual examples. Maybe if you've got something like that we'll we'll dig it up and we'll um link to it in the show notes. Um how does that sound? Yeah, it's my if you if go just to my contributor under uh investipedia dot com and I'll send you a link for that. Okay. And uh that'll that hooks up all my articles. It's got the article listing.

And the current numbers, and this is kind of awesome because this is just this is a personal, this is pure ego and absolutely nothing else. My um my number is I think three hundred and thirty eight articles now that I've written for them in uh since October of two thousand fourteen. Wow. It's kinda fun. It's a solid effort. That's a badge of honor. That's all. That's a lot of writing.

Okay, so just before we get into more of the specifics about how you trade today, one of the things that I'd like to ask about is Even though and I'd like to ask most guests who come on, even though you had these mentors like you mentioned, um, the technical analysis uh guy at uh Merrill Lynch and even Linda Rashke Even with these mentors and this guidance, what were some of the biggest challenges or setbacks that you had to push through as a developing trader? Losing money constantly.

That's a that's a pretty big setback. Yeah, I mean honestly, uh, you know Uh uh for the first uh two or three or four years, everything I tried turned excuse me, I'd use my use my right expression here. Everything I tried uh didn't work. I lost lots of money. And uh the the thing that the thing that's turned me around is losing some of my passion and not being uh losing some of my excitement and my passion and losing my fear at the same time and concentrating on the numbers.

and letting the numbers guide me rather than, oh my God, we're gonna go bankrupt and we're gonna have to sell the house, you know? And once you concentrate on the numbers, you concentrate on levels. And you start concentrating on seeing that everybody else is your competition, not your friends.

Everybody's your competition, not your friend. And I I could I could thread that needle because I'm also a teacher. So I could separate out the two and I also I mentor other people, but there's certain things I keep for myself still.

There's certain things where, you know, I've that I just I try to get out there, but I just keep those for myself, little bits and pieces of my my systems and how things have worked over the years that I'll probably wind up never sharing with people because at the the bottom line is, you know, the Farleys have to eat, you know. I I was still working in the insure industry during those those four years when I was losing money. So I was getting I was getting it back. I was very, very protected.

I was I was losing my uh losing money every year, but I my last years with insurance company, I was making six figures. So I was getting the money back. I was ki I was keeping the uh trading account size up. Then I lost that job. I I didn't ask to lose it, I lost it. And that that was that was trouble. I I had a hard time uh for the first three months. And then I started getting my equilibrium. And uh I started to I started to become a break even trader for the next next couple of years.

And no one's gonna like this answer. But but at this point now I've been doing it for so long that I can actually give the answer and it's an answer which is probably poison for trading educators. I make money now because I I don't have to trade all the time. I make money because I don't need it. I make money every year and my returns are ridiculously good because it doesn't matter as much anymore.

That that thing that's something which is very Uh it's a great truth of my life, you know, which I wasn't able to make money consistently in until I had other sources of money. And that that's what worked for me. Uh, that I lost that I was able to reduce my passion because it wasn't like, well, goddammit, if I don't do something this week or next week. The uh the family's gonna suffer. Well, as soon as I did that, my returns, even down to a daily level, have they blossomed.

They blossomed. It makes me crazy. But that was really the thing, was was sort of giving that up and and giving up the passion I had for the market. That was that was the thing that turned that's that's turned it around for me for sure. You know, and that again didn't come until oh, you know, until I I came back to trading after two thousand and one things started to

'Cause the other stuff took off and I said, Well, what the hell? I just thought I was still trading and all of a sudden the training started doing well too. It also it's it saved my ass, you know. The um uh you talk about how the difference between needing it and wanting it. In 2007, I'd built up a really nice retirement account.

And I was just putting I was putting the the the the trending earnings and the and the and the and the and the writing stuff into a into a large SEP account, which was a um, you know, it's a that's like IRA here, self-retirement account. And I uh sorry it was at Schwab and at that time Schwab Schwab salespeople were real real pushy. I had them put in in July of 2008, take everything. I had already gone into cash. I had them take everything out of money market.

that they wanted to put me in and I put them in I I just had them put me into whatever the sweet money market was and I said, I just want cash. I want nothing else. Because I mean the market worried me. And then I missed the crash. I missed it completely. I had exactly the same amount of money in March and April of 2009 as I did in in uh in July of 2008.

And that was because that I I didn't I didn't have to make it there. If the market was going to crash, I could let it crash. I'll just go to cash. My newsletter was a hundred percent short. I play on the short side as much as I want. I don't like playing on the short side when volatility is fifty, sixty, seventy. I can't handle those swings. And that's what it was like on some days back in the fourth quarter of two thousand and eight. And then in March of 2009

From that level head and all that money back. And then I started buying. I bought Apple. I made like what 380 points on Apple between 2009 and 2019 or 13 when I sold it. It was some ridiculous number. I made like a hundred points. 120 points on IBM. You know, the stuff that came out of that was just ridiculous, you know? And it was because I didn't have to

I don't have to trade 2008 if I don't want to. And that was a very big lesson for me as well about uh I tell you, you know, the return since 2009. Uh I I had trouble in 2010 and 2011, because the algos. You know, the robots took over and what uh the flash crash was the first time we realized the robots were there. I mean we knew where they were there, but that's when they exerted their influence and realized that the robots were really dangerous. And uh

Uh after after the flash crash in in uh May of two thousand nine, I started to be c be at peace with them. We I put out an olive branch. I complained and bitch about'em, but That's what the new market's like. That's the it used to call it the axe back in the level two times, you know. The the the algos are the axe. And if you can read what the algos are doing, whether it's Just sort of sweeping out stops or front running.

little movement or trying to make sucker moose retail at highs and lows, which they do all the time. If you just sort of get a read of that, you know, your life is a lot easier. You d you don't have to be long every day. You just wait for the big stuff like tomorrow's a big day, you know? And uh and and really being in peace with them is imp improving my returns the last four or five years.

It's been it's been really awesome. I just it's it's a ridiculous market. I it's one that's real hard to trade to people, but if you know how to trade it. It's really not that hard, you know. That's a very funny sort of dichotomy that uh you know anybody who sort of has to tell other people what the market does.

That's that's a like a private joke. It's not not that we mean to do it. It's but it's so hard to explain it. When you explain it, people look at you with sort of those dead eyes and go, you know, they don't understand you. But if you just are at peace with the algos and ju and Just let'em play their games. They're not they're not bad masters either, you know? They're really not very bad masters at all.

That's actually a topic I want to bring up with you in a little bit when we get into breakouts, because I think it'll be very relevant to uh that subject.

One of the things I found very interesting in your response there is you said that you became a much better trader once your passion for trading started to sort of back off a little bit. Seems quite um the opposite from what most people would say is like you've got to be very passionate about this to, you know, succeed as a trader. You're sort of saying that when your levels of passion sort of uh dropped a little bit, you actually became a better trader. I don't know if that's cause you were

Sort of coming at this with a different perspective. I I think it's a prerequisite for success, actually. I think if you're too passionate, you can you can make money but you're gonna lose it too. You have to overcome your greed. Uh I don't know which is harder for people to greet or fear. I mean I know it's sort of like there's so many cliches tied to it, so but it's really, really

Hard to tell people. You've got to detach from both of the stuff, you know, you get the greed and the fear. And the more you do that, your systems may work. You don't know if your system's gonna work or not until you look at it. without those blinders on. And of course there's there's pr professional trainers of people who do it every day. And that's something that we We we have our handle on, you know, but the majority and y you you see them, they struggle.

And they hide the fact in a struggle, especially'cause the so many so many white males who drinked that they're the ones that don't want to admit it, they don't want to show their sensitivity, they don't want to admit that they're wrong. But you know, you know that they're losing money. So, you know, you Y you you you're compassionate uh and they have to I I don't say I I was was it easy or hard for me? I just had the opportunity to not be greedy or fearful.

Other people have have to do it their own way if they want to succeed. You could be uh, you know, passionate. Passionate is good, but passionate gets you to the starting line in a lot of ways. You you want to get you're trying to play catch up with passionate. At some point you when you become a master, your skill is not really passionate as much as you better damn.

Damn well, do what your skill tells you to do a hundred percent of the time, or else you're gonna you're in trouble, you know. That's more important than your passion at that point. Uh you're passionate because you're an aspirant as opposed to a master or a journeyman or a advanced adherent. I mean whatever, according to your profitability.

You know, uh aspirants are the most passionate. Uh uh new money, you're passionate. You know, uh a regular good P L, you feel real good about that. And then when it becomes you know, a part of your life, your life energy. In other words, you need it to pay the bills, you gotta be a lot less passionate about it because you can't.

You can't risk losing it as much. There's always the risk is there, but you have to you have to create a little you have to create a little more. It also means taking less risks. And also for different people, that means different things. And for some people it means size, for some people it means l holding period. Some people it means the markets they trade. For me

It's it's mostly keeping track of of how much I keep in cash at any time because I mean I like to trade. So I always like looking at my cash word and saying, you know, that's stuff that's not being risked. And that's how that's how I manage it. Yeah, no, I think that's really well said, Alan. I I like that answer. Are you ready to get serious about trading? Then join Tasty Trade, Investopedia's best platform for options trading in twenty twenty six.

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So moving on, you've been trading for I think it's coming up to thirty years now. Could you tell us a little bit about how you trade today? Like obviously you've read in the book Master Swing Trader. Are you still swing trading to this day or do you also do a little bit of day trading as well? Like tell us a little bit about your approach today. I day trade when I have to.

And I day trade when I see it. If I see something that looks like a day trade, I'll take it. Of course, I mean I want to take it. You know, I I get that excitement and jump in and take care of it. Uh, other times uh I'll day trade and I just don't trust the market. So in other circumstances uh I consider overnight risk and there's too much risk, I'll I'll dump it and take the money. And I take a lot of heat uh in my

Uh uh my newsletter is a swing trading newsletter. When I say, Oh yeah, by by the way, I day traded, so I really don't have anything for you today. And I take a lot of heat for that. But day trading is a form of risk management when you're a swing trader. You day trade so you don't have to hold things overnight so that some poll about Brexit comes out that kills you in the morning. So yeah, I mean you day trade as a for because at the end of the day you're not gonna have to deal with it.

And so, you know, I don't day trade all the time. I much prefer holding positions overnight. Um I'm I'm holding I'm holding uh the Nasdaq one hundred overnight right now. Uh that's uh you know that's a swing trade. It goes de it's gone down for a week and I'm trying to pick a bottom. That's definitely that's one definition of a swing trade. I got bullish divergences up the yin yang where I'm at here now.

So I mean, uh, that's a that's a swing trade for me. It'll only work. I don't think it works if you sell it tomorrow unless you have to. It hits your stop loss. Uh if if it works in terms of upside.

I probably unless I get a spike tomorrow, I might have to hold it till Thursday or Friday. So, you know, I'm not sure how I'm gonna how long I'm gonna hold it, but it's definitely a swing trade. I'm looking to buy uh buy this when I want and then sell when things get wild, which hopefully they will during triple witching at least.

So yeah, you pick a spot for that. Um I'm holding um I'm holding some pullbacks on breakouts. I love pullbacks more than any other things. I don't trade continuation trades in this market.

I haven't traded a clean breakout trade in for every you trade it from level A to level B and then you get out or you trade it from level A and then you stop out. You know, the breakouts are failing left and right. So it's a very it's It's i it it's nice to be com positioned when you get the breakout, but it's also nice to sell the breakout'cause you you ex expect or suspect that it's not gonna hold up. So you know, a lot of timing stuff it's again very tough to do.

Uh very tough to teach other people. Uh I'm I'm pretty comfortable with it and I try to teach other I teach folks about it all the time and hopefully they get the message on it. And what markets and products are you trading? Obviously you mentioned the NASDAQ 100 there. So you're trading the indices. American stocks. to me th it's godly. I don't have to go to any other markets. I'cause I could trade uh if I wanna trade gold I'll trade GLD. If I wanna trade copper I'll trade J J C. Um

I won't trade USO or UNG if I want to trade energy markets because contang Contango just wait wipes you out. I'd probably trade like Halliburton or whatever, you know, stock of the day kind of thing. But uh but US stocks. I mean You know, futures is a special animal. I'm just not a specialist in futures. I'm a specialist in equities. I know things about them other people don't know. So it just ki I I keep an advantage with it.

I follow Forex. I traded it for a couple of years. I don't want to get up at two in the morning. I really don't. You know? I mean, uh the euro moves all the time. I I traded the Aussie market, Aussie dollar, for a long time. I really enjoyed it because here it was like about About six till nine o'clock, it was fun, you know? And I really like it better than a lot of other markets. But uh I got stuck. I just I just If you do four X, do Far four X.

What I what I have a hard time is listening to Forex guys try to understand the SP 500. Good luck with that. Good luck with that, you know. Come see me sometime if you think you're gonna understand it. Yeah, there's a there's a precious few who can, but if you're a f forex guy, you know, I'll learn about the euro from you. But if you wanna learn about the S P five hundred, you're gonna need to come to me, you know?

And so uh I I like that. And and it also it's also builds a nice community. There are a lot of people here in the States. It's all we do because it's what we got. You know, uh one thing about about Australia too was always always resource. uh centers like br like Brazil and I spent time at São Paulo too and just there's

You can't avoid trading resource stocks in Australia. I don't know how it's even possible. Unless I guess you're a forex trader. But even then you're you're trading resource uh stocks because you're trading your you're trading the the Aussie trades like a resource stock, like, you know, the Mexican peso, you know.

And so and uh it's to me I I like the versatility of US markets. You know, still we we still have eight thousand things to trade. Yes, there's uh there's definitely a wide selection, plenty to choose from. So

I think I read this on your site or I heard you talking about it in a video and I thought it would be really interesting to bring up here, um, seen as we're talking about swing trading. Um and you you said that many traders get into trades without actually understanding the dynamics of what makes those positions move. So could you speak to us a little bit about the dynamics that generate price movement and what we need to understand about that that sort of concept?

Okay, two sides in that. Number one is the price structure itself. And number two, where you get on board and where you exit the price structure. Um there uh uh a classic sort of we'll call it TA uh one on one. Classic sort of horizontal line that's h support and resistance. Exceeds that support and resistance level. It it constitutes a breakout. And breakouts are bought through a breakout strategy and a breakout stop loss. And you risk a pr this percentage according to a breakout.

strategy. And to me, that stuff is just so I call it 1980s, it so not doesn't work anymore and you'll get killed doing it. Um uh the price structure dictates what's going on at a at a break at a breakdown level, assuming you could you you're you're you're identifying the breakout and breakdown level. Uh classic example since we don't have we don't have examples here, we're so we're we're we're dealing with audio and we're we're gonna have to describe it.

Uh uh price comes back to a stock comes back to an old high. So that high's been there for 18 months. comes back to that high after eighteen months. That high is at sixty dollars. Well, it goes down to thirty, thirty-five, builds a base, comes back up to sixty. Goes to sixty-one, people buy it. And I'm going, why? There's nothing that says that stock won't turn around and come right back down. That doesn't constitute a breakout.

The breakout is constituted by the price action that goes into that level. And so you could get almost anything into that level. You could get uh you could get the the fifth wave exhaustion climax of an Elliott five wave into that level. You can get uh you could get three little bases that go up at fifty, fifty-five, and fifty-eight.

So that it's been at fifty-eight already for three months. And so when it goes from fifty eight to fifty nine, sixty doesn't look like a lot. It's just gonna go straight through and you get this legitimate wide range breakout, this big tall bar. volume coming in, uh excitement makes the evening news. Because you already had built up those levels, the price structure had had put the wind at your back. It was a tailwind.

At the time that you reach a breakout or breakdown level, you have to go through a series of tests. The series of tests are does the volume support the breakout or breakdown? Do the relative strength cycles support the break or breakout or breakdown? Uh does the pro does the structure of the rally into that level support the break out or breakdown. Does the mu this is the tricky one, number four.

Does the market support the breakout or breakdown? In other words, if you're uh the SP 500 and you're at the uh lower half of the trading range and one of the SP 500 constituents components, It's traded to the top'cause it's a relatively strong sector. Let's say it's some food stock that doesn't care that the banks are doing bad.

When that food stock breaks out and the SP five hundred is sitting and selling off that day, do you really want to own that food stock? Or are the HFTs going to get you because they're going to execute highly correlated ETF strategies that sell the entire component base in order to drag down the index. So that's a background number four. Does the SP 500 uh uh di is it a bullish rebearance divergence the time that you're looking at a break out of breakdown?

Breakouts and breakdowns to me occur in three stages. Legitimate, quote unquote, we'll quote legitimate. And each of one has a trades tied to it. You have sort of the action phase in which price lifts off. go exceeds a prior high, goes under a prior low. Then you have sort of the identity of that breakout.

Some of them will, you know, create it'll be it'll be a big, it'll be a big gap, big volume, big high. That identity is going to create some sort of climax, some sort of high. I could be very close to the old old breakout level. Then you have a reaction phase. The momentum that created that breakout is past. And now sort of the other sides come in and going, well, I'm holding the position. Do I want to get out now? Short sellers are going, Well, has it run out of steam? Don't want to sell now.

Uh technicians are looking at it going, oh, I've got divergences. Do I wanna re you know redo my call now and send that a downgrade or an upgrade? And so that whole process is going on. It's a reaction phase. Reaction phase is sort of a classic buy the dip phase. that an illegitimate breakout when suddenly comes back to a big breakout level, you want to own it.

You want to own it because damn it, you want you really wanted to own it when it happened. And now it's come back to that price and all the technicals are good. You want to be an owner. So that's the reaction phase, legitimately. And that that reaction phase can take place in lots of different ways. Then you have the confirmation stage of when price comes back to the high of the initial breakout.

Now when price comes down this is another thing when you get into fractals makes people's minds crazy. When price gets back to the high of the initial breakout, it is in essence returning in a smaller fractal of doing the same thing it did when it broke out.

It's coming back to an old high. So it but instead of looking on a weekly chart, you're looking on a 60-minute chart or a daily chart. But the same processes are in motion about that high being exceeded or and going to an action-reaction cycle. But anyway speeding up this the story. When price exceeds that confirmation high, It's it it's quote unquote confirmed. It confirms the breakout in the larger scale. So th that weekly breakout's confirmed when that higher high is exceeded theoretically.

There's a lot of ifs, ands and buts and bruises and bumps in what the action reaction resolution or climax or confirmation s uh cycle are uh is gonna produce. But theoretically what happens and it happens quite often. is when that hits the confirmation stage, it's like dominoes.

The daily's gonna hit a confirmation stage, that 60 minutes gonna hit a confirmation stage, and you're gonna get bullish convergence. And what happens in bullish convergence? Price surges forward and you have a very nice confirmation trade, which is a trend following trade, which Uh it's happening in smaller time frames, but we're not seeing it in weekly and daily because we're stuck in the big trading range.

So you kind of described what was it, four factors that sort of make for a a solid breakout opportunity and then the three phases um of a breakout once it actually happens. So whereabouts in all of that do you prefer to enter into this trade? Like you said it's not ideal to enter just at the break of a a a line of resistance or support. So Uh whereabouts in in these in this in this phase do you ideally take a position? No, there's at least four different trades here.

And I'm looking, uh it depending, I mean, uh at any given time, if if if I'm watching it and this is uh undergoing a process, this is this is how I would trade it. If I thought the breakout was legitimate, I'd try it again before the breakout and take it higher. If I if I saw the breakout happen and I wasn't in it, I'm not going to chase it. I'm going to let it find its high and pull back.

If I'm in it letting it s find its high and pull back, I'm very focused on the breakout trade, on the pullback trade, which is what I've been doing the last couple of days with the market dropping here in the States. So I've been very much involved in buying pullbacks in breakouts. Uh if I'm uh uh if I'm a skeptic and I get this wrong and I'm long overnight and I'm wrong and the market gabs down, I'm looking at failure trades.

Uh it could be that a pullback gaps through a breakout level and it drops right into the 50 day EMA and a major Fibonacci retracement. It could be I will get a stronger sell signal on a

on a p on a pullback or a gap down in the morning than the buy uh th I excuse me, I g I I gotta back up a second because I'm gonna I'm gonna give it to you wrong. It maybe I'll get a stronger buy signal on a gap down in the morning than the buy signal I got today that brought me into the position that I'm holding overnight. So I'll say that again. I may get a buyer a a stronger buy signal on a gap down into a major level tomorrow morning.

Then the buy signal I got today that brought me into the trade. That gap down into a buy signal is a failure strategy or a failure swing. In other words, some failures will go and produce buy signals, not necessarily when they fail. But if they come into a major average, you may want to take a shot at a 50-day moving average, or when they leap behind something like a bear like a bullish island reversal and gap back into that same pattern.

that I got stopped out of the first time, then you will get a a supplementary sell signal. So there's like a third uh third trade right in there, maybe even a fourth trade right in there. And then a fifth trade. would be um uh you know, I my my initial if I bought if I bought a dip tray was to sell. the test of the high of the breakout, but then if it broke out from that high of the breakout, Uh the confirmation trade there would give me a fifth or a sixth trade on it.

Am I gonna take all five or six trades on any given thing? No, I'm work I'm watching dozens. little sort of buffet of the stuff that's working today. Today it might be breakout trades. After the Fed it might be some a continuation strategy. So I'm trying to be in tune with where the SP five hundred and NASDAQ one hundred and Russell two thousand are today. Okay. So you so you kind of described six different trading opportunities uh within a breakout or breakdown scenario there.

You know, for someone who's maybe a little bit less experienced or someone who's only been trading a couple of years and still kind of learning the ropes, would you suggest that they just try and maybe if if breakout trading is something that really appeals to them

Do you think it would be a good idea that they just try and pick one or two of those uh out of the six trades that you described there and really focus on those? Or you know, it could I I'm sort of presuming it could be quite easy to get caught up in trying to watch too many things at once.

Yeah. And if you're gonna get uh if you go to one or two of those strategies, you better become really good at it. And you also need to learn the tests and filters you need to place that position through in order to get the right information. because there's certainly every breakout's gonna have come with a set it's like it's any diagnostic. If you can't do diagnostics on the trade you wanna take, then you shouldn't take the trade in the first place. And diagnostics is the TA that you trust.

You're gonna look at the things you look at to tell you whether you believe price is gonna move in the direction you think it's gonna move in. For me, it's uh where's stochastics, where's the five three three on my three produ uh on my three timeframes? Um where is uh where's on balance volume if it's a daily trade? And I only use on balance volume in in daily scale. Uh if is on balance volume supporting a daily scale breakout? Um is where the Bollinger Bands uh does the breakout push

push the Bollinger band through the top of the top band, r you know, right away uh setting it into an a an overbought status, which is kind of dangerous to buy into. So I mean, I've got my

my quantitative and qualitative information that I'm applying at each of these testing points and if it doesn't meet my criteria, I'm not interested in the trade. And that's, you know, if you want to do it for it's not even do it for a living. If you want to be consistently profitable, that's what you're going to have to do.

So if that causes you to f be forced into like a little bit more research, it's a research you're gonna have to take if you wanna trade. You're not gonna find sort of easy way out. But yeah, for your first couple of years, you probably wanna you wanna look at the entire process because that press the process is gonna be break and bread and butter for you.

But you're also going to want to decide, well, you know, it's like me. I like, I like dip trades better than anything else. Doesn't everybody? Dip trades are fun. You know, so you know, pullbacks to support levels are fun. But, you know, you want to know, especially why you're wrong. Well, you know, why are you wrong when you're wrong?

There's that's the the losses give you as much information. And what kind of do you go into? I I've been in some volatile markets when, you know, you'll get some dip where you know, look what's uh to here, Tesla Motors is just getting clobbered in the past few days. You get you get some sort of like wild price action. You go, do I really want to put my money into that situation where I could be three, four points wrong in the space of three minutes?

So, you know, it's like, okay, you know, so you have to you have to decide what your risk tolerance is at the same time, you know, in addition to which you're gonna trade. Sure. Okay. Yep, no great answer.

So just moving off that a little bit, um, I'd like to ask you a few things about uh stops. So how do you think about where to place your stop losses? You know. uh many traders are concerned with stop gunning and, you know, uh brokers knowing where their stops are and that sort of thing. Is that really a a genuine concern that people should have and what's in Obvious Yeah, you go.

I think it's a a massive concern. I don't think you should pay physical stop losses. I mean that's uh you know, I'm sure I'm sure you g you're also talking about mental stop losses, but physical stop losses, yes, I don't think they should be placed. Here in the States it's a invitation to disaster. Uh, if you can't watch the market all the time, that's a problem.

Okay. And maybe you want to put in sort of end of the world stop loss, but an end of the world stop loss as we saw during the flash crash in flash crashes in May twenty eleven and in August twenty fifteen because you know, the industry is reluctant to call out a flash crash, th those stops are subject to to stop running. Um, so you know, it's a different question from where it goes because I certainly have mental stop losses. I know where I want to be out of a trade.

You know, you have your reasons for being in the trade and there should be technical, numerical reasons. When those numerical reasons are broken, you need to be out of the trade. That could be a that could be a moving average. That could be a trend line. There's nothing wrong with that. It could be a Fibonacci retracement. I'm Fibonacci crazy. I use Fibonacci on everything.

And uh so you but you also want to look at sort of a let's call it an opportunistic stop loss where you're willing to get out of any trade. Just'cause the market's doing something that's wacky and you don't understand. And so, you know, you go, Okay, this is a g uh I I think I need to be out. Maybe this isn't the best price. I'm gonna try to just get the best price in this sort of time frame given the circumstances I have, and I'm gonna go back to the sidelines. And so that's sort of a

That's an opportunity cost stop where you just don't know what you're getting into. So you're eating the cost of the transaction to get back to the sidelines. And I do I I I trigger that sort of stop uh uh endlessly. It may be the majority of my trades. Okay. I mean, not not placing a stop loss to me that just sounds very dangerous. Yeah, it's not dangerous at all if you're watching the market all day. That you're in a much better position.

If you're not watching the market all day, then if you're placing a physical stop loss. Now, are you watching the market and do you know your positions? If you're if you've got 10 thumbs and you don't know your positions, it's one thing. I could I I haven't placed uh I play I'll place a physical stop loss if I go out to the store or something like that.

You know, uh or uh are these on day trades. You know, physical stuff uh physical stop loss on swing trades, I I I probably won't place one. You know, but if I'm away from the market for an extended period of time, I'll close my positions out. Or I'll have enough faith in them that if they if they get wiped out, they get wiped out. And um I'cause I can't. I you can't. It's way too dangerous to do that.

Uh again, I'm taking some uh leeway here in saying that people pay attention to what they what they own. And maybe that's not true with everyone. Um if you want to do a position trade, do you place a stop loss if you want to position trade? I mean, yeah, you can.

Uh if I was doing it all the time, would I pay uh I I I've been doing swing I've been doing swing trades now, you know, relentlessly for for what 15, 20 years and almost none of them have tra uh stops on it. But it's again because I'm sitting here every day. I know what's going on with that.

So, you know, do do you are you a part timer? Do you have to put protection? Yeah, you have to protect yourself. But my feeling for a part-timer is that if you can't watch the market and you need a stop loss, you're probably trading way too big. You should be trading smaller and taking smaller profits and losses and and probably not getting stopped out a heck of a lot less.

And and sleeping at night just as well rather than getting a big position that you want to be right in'cause you know what? When you have a big position you want to be right in, I hate to break it to you, but you're not that s you're not that smart. when you have big positions you want to be right in. I know I'm not that smart. I know I'm wrong a lot more often than I'd like to be, but uh that's why I diversify through lots of different things.

And so if you get a s if you get a highly correlated event where everything goes in one direction, I think I think you're pretty much screwed regardless of what you have. I think if you're not sitting there you're gonna get your your stops not even gonna fill. So uh and that's what that's what the flash crash people found out. Their stops didn't fill for thirty, forty points. Okay. So let's just say for for those who are placing um physical stops, right?

Ideally they're in a in a place that's not obvious, okay? Uh where would you suggest is perhaps a a more advanced advantageous place to to put your stop loss um if that's something you you feel most comfortable doing. You're gonna have to go outside of a weekly range. And uh you also have to remember that the algos, one of the things they do is they

They look at average true range and they will always go and spike average true range to try to catch uh catch stops that are outside of a certain range. So if you think a stop a stock is only moving point seven, five percent or one point four percent a day on average and you put it at three point four percent out.

This algo is gonna find a way to increase volatility to get that stop, unless you you're in a v a directional market. If you're in a directional market, the algo's not gonna do anything about it. We haven't been in a directional market since 2014 uh in in in US equities.

Uh you know, I know I know I know the I know the uh Australian dollars had a has had a directional market in that time. You know, and other things have had directional markets, but we haven't had'em in in US equities or US uh US indices. So for us it's it's been very much uh uh uh a trap market where where the algors are playing with ranges to take out stop.

But if you're gonna do it, it really needs to be outside of a weekly range. Take a weekly uh one t usually technical way to do it is take a weekly Bollinger Band and keep your keep your stop outside the the the level of the weekly Bollinger Band. And that's going to tell you how much, how much the volatility stretching in that environment. I'm not really a percentage guy because percentage are kind of stupid.

People put percentages of total of their total uh uh account size because it sounds like a very structured way of controlling risk. But you can't control a risk if you're taking positions for the wrong reasons. You're already taking weight you've already destroyed your risk profile by getting the wrong stocks because your strategy isn't working.

So, you know, your your percentages aren't going to help you. Uh so if you're if you're still trying to be guided by finding your way in this uh dark universe of of profits and losses, uh you know, you want to get it out of the way of what's happening this week. Think in terms if you're if you're holding for in a weekly to monthly time frames, you want to get them out of the way of a weekly range.

Fair enough, good point. So last question for you, Alan. Uh before we finish this off here, are there any final words of wisdom you'd like to share with traders who perhaps feel as though they're not really making any progress and maybe just kind of spinning their wheels?

Well you you need to try something different. Uh yeah, I know everybody needs trading education. You're gonna get your share pre trading education. It's become as cheap as it ever has and become in the uh in the history of mankind with uh with the internet. But the problem with training education is there's so much of it available that you can't find the sh the stuff that works for you.

the stuff that works for you, you not only find through trial and error, but you have to you have to look yourself in the mirror, dudes and dudettes and and decide what's working for you and decide if you need to build your own system from scratch with what you already know rather than relying on someone who appears to be successful to you right now.

And once you start to build your own system based on your own intuition, your own input and your own skill set, then you'll start to put together a a a profitable system that meets your qualifications in terms of uh back testing. You know, I know everybody wants a back test, but you have to

You have to go and and trust yourself before you back test it. No anybody else's system, it's it's okay to take bits and pieces from but you're gonna have to come up with your own way of doing stuff. And that starts with the basics that I've talked about. I haven't talked about anything that's very esoteric.

You know, if folks don't understand me, I tell'em straight. You really look'em nine, you tell them the real straight stuff on how to how to make money in the market. And then they look at you like wide eyed, like they don't know what planet you're from. And it's really the same risk stuff that's been, you know, before the algo showed up, before SO showed up, before Portfolio Insurance showed up, before Nanifty 50 showed up. And that's that's risk management. You gotta control your losses.

You know, and then you control your losses and find your own way of doing things. You'll you'll build a winning strategy. Sound advice. Very good, Alan. Well where can listeners go to find out more about you? Where's the best place? The best place right now is in in Investopedia and I'll I'll post that link for you, but it's kind of a long link. I'm in the process of giving you giving them over most of my stuff. Uh uh but you can find me also on uh Twitter at uh MST.

Trader, M S T T R A D E R. And I've got a very nice following and uh you're welcome to come by and say hi there. Okay, excellent. And where can uh someone grab a copy of your book? It's available on Amazon, right? It's available on Amazon. It's also available now in seven different languages. Uh you can get it anywhere in Asia. It's in uh it's in Japanese, Korean, and uh Chinese.

Uh I know it's in German, it's in uh Portuguese and Spanish and Russian and French, excuse me. Wow. Very cool. Very cool. Well I'll make sure to include a link to that uh in the show notes at chatwithraders.com. So Alan, thanks. a heap for coming on the podcast, man. It's been a whole lot of fun speaking with you and uh I appreciate it. You've reached the end of this episode of Chat with Traders, but rest assured there are more episodes.