156: Michael Katz – Day Trader, Green Every Month, Talks Consistency, Strategy and Doing Size

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Hey ladies and gents, thank you for joining me on the first episode of 2018. Let's make this a good year. Now the feature of this episode is an interview I did with Michael Katz. Michael is an active day trader and swing trader and he's also the managing partner slash co founder of a New York City prop firm, Seven Points Capital.

One of the things which struck me about Michael is the sheer amount of volume which he trades, which is most impressive due to the fact that he's trading by hand without the assistance of algorithms. In addition to trading big volume, I ask Mike to discuss things such as the strategies and setups which he trades.

both Momentum and Scalping. With access to thousands of stocks, how he decides where to focus his attention each day, His secrets to consistency, because Mike has been green every month for the past three years and possibly longer. And as we're starting a new year, I felt it was appropriate to ask Mike what are three things that traders can do to increase their likelihood of trading success in twenty eighteen?

So if you've been spinning your wheels, this is for you. Enjoy the episode, you good folks. I'm Aaron Firefield. With me is Michael Katz. New Year's, etcetera. Holiday was great. Lots of cold up here in uh New York, so we ended up staying in for New Year's. But uh it was nice. The kids stayed up and uh some family came over and ended up being a blast. Uh very nice. How many kids do you have? I got three. Three kids, uh two boys and a girl. I'd call it two bodyguards and a girl. And Okay.

And uh growing up fast man. And uh we got this nice big snowstorm here now that nobody was really expecting. And uh yeah, I ended up staying in home today. Figured I'll work from home. So that kinda worked out, traded a little bit in the morning and now Pretty much ready to go. Uh yeah, it was good. I mean uh I guess my Christmas and New Year was very different. It was uh stinking hot here in Australia or in Brisbane particularly. But uh anyway.

Let's uh let's waste no time. Let's get stuck into this. Um, what is your story? Like how did you get started in trading? So I got started in trading like most people do, right? Yeah. Back in late nineties. I was, you know, in my late teens and and I kept on hearing from my friends about all these internet stocks that were going up.

And for a while I said, I don't know what that is, what the market is but it just kept on hearing over and over from all my friends. It kept on making lots of money in the market. And so I decided to kinda look into it. Um and then basically I started doing some research, started asking friends, and I ended up opening a small account.

Uh a few thousand dollars back then trading those dot com stocks that, you know, went crazy throughout the bubble. And um obviously I blew up a couple of accounts real early, real fast. Uh but you know, started learning and definitely got more and more interested in in the markets and what it had to offer. So I started searching for for people who you know might be able to teach me what I should be looking at. So I came across a firm, uh Equity Trading Online and

It was run by uh by a guy called Gary Roth who uh was given these lessons on on how to trade. And uh so I attended and I really got hooked right away and uh I decided that I want to be a trader right then and there.

I've been keen to ask someone who was trading actively during that dot com era. Do you see any comparisons from the dot com period to what we're seeing currently in the space of cryptocurrencies? Yeah, I mean it's it's a great question. Definitely a lot of parallels Everything's moving with crazy volatility, lots of

you know, unexplainable moves both in in these coins and and some of the symbols that just, you know, these companies that all of a sudden announce that they have some something to do with crypto or they just added blockchain to their name and all of a sudden the stock goes up. Five hundred percent, right? We see that every day.

So a lot of parallels like that as far as, you know, unexplainable moves where uh people who know what they're doing are are being a little bit more careful and probably missing out on on some of these moves. And then you have the average individual that you know, knows a little bit less and is willing to take on blind risk and you know, that probably crushing it. And those are the parallels that I'm seeing.

And um, you know, I get phone calls from people all the time, you know, asking me about about these coins and honestly Uh crazy moves, lots of big gains people are having, but um while I do trade them, I I'm very skeptical and um you know I'm very short term in them. Do you think there are any differences though? Like, you know, obviously I asked you if you see any uh similarities between uh both of these things, but do you also see some some big differences?

The main difference I see is that in the dot-com bubble, the move started on Wall Street. Everything started on Wall Street and then When retail got involved, when the mom and pops got involved, you know, they caught the tail end of it. They had some good times, but eventually they um they got hurt when when the crash happened, right?

Uh I think with the crypto world what's going on is you have a lot of retail that's driving it initially, whereas you don't have the Wall Street support and you don't have a lot of the big trader support. Uh and then now we're you know, Wall Street's starting to get into into the space. So that's the main difference I see and I'm not sure how that plays out as far as, you know, is it a bubble, is there you know, is it gonna crash? That's the only difference I see because

Most big firms, you know, they're not gonna wanna put up a million bucks or ten million bucks with, you know, some unknown exchange somewhere. Um and and so I think that's been holding Wall Street back a little bit.

Yeah, that's an interesting point because I mean, we when you put it like that, it's it's pretty much the exact opposite to how it was with the dot com stocks, right? Yeah, absolutely. I mean I remember when I was trading back then, I would come in and uh towards the end of it, you know, in in the trading firm I'd have all kinds of people sitting next to me, people that were traders for a long time and then all of a sudden you know the cab driver.

and and, you know, the moms and the pops just sitting next to me and and putting up capital and trading back then and it was wild. There were some crazy moves, a lot of you know, a lot of volatility and and good trading. But, you know, that was the end of it when when that happened. So I I'm d also trying to draw these parallels in Bitcoin and and and coins in general. And there are some parallels, but the difference is right now I think are still there.

uh the key will be to see if there is really any value add with the with the uh cryptocurrencies. And I'm just really on the lookout. I'm trading them, but I'm always in the back of my head thinking, okay, Th you know, there could be a big crash right around the corner. Yeah, I mean I think that's that's probably a healthy mindset is to be a little bit skeptical. It's not gonna take a lot, right? Either the government cracks down or the SEC says

These are not, you know, you can't trade these. These are converted securities. So it it won't take a lot uh f to get a big move. But at the same time, you know, you can't miss out. You gotta be involved. That's it. Yeah, yeah.

Um, I mean it is very bizarre times. Like uh we had a few people around our place for uh New Year's Eve and Yeah, I I was getting asked questions about Bitcoin and or mostly Bitcoin actually, some of the other cryptos, but It was just like people who have no interest in it and these aren't these are more like sort of you know, my girlfriends, friends, partners and all that who sort of have a little bit of an idea on what I do and

Yeah, it's uh it was kinda bizarre to be having those conversations with people like that. But anyway, it is what it is. So um so you said that you blew up a couple of accounts.

uh early on. Was that during the dot com era? Like were you still trying to go long as these stocks were all crashing or what what led to you blowing up those few accounts in the early days? Yeah, exactly. So on the way up things were easy, everybody's making money. It wasn't a matter of if you were making money, it was just

how much risk were you willing to put on and how much money were you going to make on the long side, right? It was just a play of, well, what am I going to buy tonight? So it gaps up overnight. Uh and and money was easy, but then when it the market crashed, There was a huge wish to the downside. And, you know, beginning trader, I didn't know what I was doing and risk management was obviously very poor. And I ended up writing things down as they went lower and adding to losing positions.

And, you know, when the bounce didn't come, it was just a matter of getting margined out and and reloading and the same thing happening again. So the m the the key was obviously in hindsight to minimize the losses, but back then, you know, I was definitely not thinking that way.

Okay. So walk us through maybe the few years which followed on from then, like what happened between kind of where we're at now uh in terms of your uh career. Um and what happened, yeah, between then and and now where you've started uh seven points capital. Sure.

So I I feel like I'm very fortunate to have been in that position when after I blew up a couple of accounts We had the technology at that trading firm where, you know, back then everybody was placing orders through their phone calls and calling the brokers and paying crazy commissions and, you know, the specialists and the market makers were always screwing them on their orders. So when we had the technology and we used to go to their desktop and say, Hey,

I can offer you a trading platform. I can cut your commission in half and basically give you an edge. I decided I can I want to become a broker and start pitching some of these hedge funds and institutions, uh distributing platforms that were fairly new back then. And uh that bought me probably a few years worth of a window where I was still involved in the market, I was still doing very well as a broker and allowed me to get a screen time and continue to learn

what works and what doesn't work in the market. And you know, still losing money as a trader um early on, but it allowed me to to continue to learn and the screen time I think was key.

So at what point did Seven Points Capital um start to kick off? Like how did that come about? So when we were executing customer orders, working orders, we started developing a very good understanding of the microstructure in the equity space, understanding what's involved in in you know, executing orders, specifically large orders, and we started dealing with these floor brokers that on the New York Stock Exchange. And one of'em gave us an idea of how to trade certain

r uh edge that they had on the floor back then. The NYSC gave them an edge uh called parity so that they won't go out of business due to electronic trading. And uh we started trading that way and we realized, hey, there's something here. There's clearly an edge. And we took that and I said, all right, I'm gonna start focusing on this, start applying some of the skills I've learned over the years as a trader, and and started trading and very quickly saw good results.

And it then was just a matter of, okay, let's go out and go from just me and one other guy doing it to uh bringing on one more person and grow from one to two and when that worked out really well we went from two to four and so on and so forth and kept on growing that way. And before you know it, you know, seven points capital we decided

we're no longer gonna be executing customer business because the commissions were getting very skinny and we were just doing very well on the trading side. And the partners, well back then I mentioned Gary Roth. who has since passed away a couple of years ago, who was a fantastic individual. And uh Mike Bangieri and myself, we were running seven points And Mike Mangi, a brilliant guy.

who's really good at running companies, running personalities and dealing with individuals, has basically was pushing us to say, Let's go, let's start trading more and focus less on the commission side and before you know it, we turned into a trading firm.

Would you mind just uh explaining what is parity trading? I'm not really familiar with uh So parity trading, the advantage was that if you have a thick quote in uh in a low price stock, let's say back then Citibank was really active, uh there used to be a million shares on the bid. And with parity trading used to be able to buy on the bid through the floor brokers. and get a good early fill and collect a small rebate.

And just constantly make a market and that's as close as you're gonna get to a zero risk trade, right? Where if I'm able to buy on the bid when there's quite a bit on the bid. then I can either scratch when I see that the stocks going down and hit the bid and break even, or I can make money if it goes up. So it essentially gave you like priority in the queue position. Exactly. And the market was so dislocated and still is to this day that basically

Any flow that went to the New York Stock Exchange we used to be able to trade with while other market centers were just waiting there to get the fill. That seems like a pretty big advantage to have. I would think so. I would think so. It definitely is a big advantage. But since then it started diminishing because the NYSC kept on losing order flow um as more and more people wanted to go electronic.

Uh and all these other exchanges and dark pools popped up. Less and less would go to the NYSC. So they started losing that edge there.

Okay. Now so how has your edge evolved today? Like can you describe to us what sort of strategies you and also your firm are trading nowadays? Sure. So we took that and we were able to expand it and develop some market making strategies with similar concepts in mind. And in addition, we trade quite a bit of momentum strategy. So those are the two umbrellas that they will fall underneath. Uh I probably trade about fifteen different setups.

on a given day. And for example, on the momentum side, we're trading setups where I'm looking to join trend and look for certain patterns. where uh we've seen these patterns before and we have rules developed around these patterns and how to trade them and we'll look to join trend and capitalise in a move once it's already in force. On the market making side, it's you know mean reversion types of strategies, um having the ability to execute on different dark pools, exchanges, market makers.

um and um not have to pay a commission which is the structure at seven points capital gives us the huge edge to be able to trade very heavy and um scale size whenever we see fit.

What what do you mean by not pay commission? How do you get around that? So that's part of the the difference at Seven Points Capital, I'd say. Um at Seven Points Capital when we started out, we started out as an executing firm and the trading was kind of a side thing. And that grew into a a pretty big business. But w the model initially was let's bring in traders, let's back them, let's not charge them commissions because, you know, we don't pay commission. As a firm.

So it's our capital, no commissions, um no training fee and things like that. And it's just a matter of if if the trader makes money then the firm does well. But you as a firm used to have fees and Y you still don't have commissions as a firm? So we have a very tiny clearing fee which we pay our clearing firm, but we don't even pass that to the traders. And you know, as far as different exchanges and different trading venues, they could have either rebates or fees which gets passed through.

Yeah. Right. Would you mind uh talking a little bit more about uh how you're using dark pools? You mentioned it just briefly before. Uh let's go into that a little more like Uh what what advantage do you have by having access to dark pools and how do you use them? The advantage that we have using dark pools, I'd say, well, first of all, we connect to most dark pools out there, right? So whether it's the the big banks or the executing medium-sized brokerage firms.

That are ones that are executing large order flow. We connect to them. And we're when we see the order flow and the tape. uh printing a certain way. What we could do is we try to throw out feelers and and see where these prints are taking place. And a lot of times we're able to interact with large Block buyers or sellers, and we're and that gives us good liquidity. So if I'm in a situation where I know

I've seen this pattern before. Let's take for example something that's trending up and is now dipping into support, pulling back into support. And I I want to be able to get involved on the long side. joining the trend at a very specific spot at support. I want to be able to put on as much size as possible because that's a very low risk trade if I keep my stop close, right? So the dark pools

are are able to give us this advantage where we can get in and interact with some of the bigger traders and bypass some of the some of the HFTs. But is there not more volume traded on the actual like lit exchanges? I would say these days, yes, there's decent amount on the LIT exchanges. A lot of it gets internalized by the market makers, the large ones like the citadels of the world. And a decent amount also goes through the dark pools as well.

Okay, so so how come you're able to put on larger positions by going through a dark pool than you would going through a lit exchange? Because it could be that on the other side the the counterparty that I'm trading with saying, I don't want to trade with anything less than fifty thousand shares. Um, so they have a minimum quantity on their order.

And most HFTs, you know, they're buying selling a hundred shares all day long. They're not gonna interact with that. Most retail is not gonna interact with that. Um so uh the institutions wanna be able to trade with large players uh to get the order flow done without too much information leakage. Okay. And and having access to these dark pools, that's one of the advantages I'd presume of I've trade with a prop firm, right?

Yes, I would think so. So having access to multiple trading venues is definitely uh an edge that we have. Other advantages of trading at a prop firm, I would say, is depending on the commission structure, uh uh maybe a commission edge, getting good locates is is definitely a big edge, being able to to borrow stock that might not be available through your typical

e trade and and retail type of brokerage firms. Um let's see other edge I'd say is you just being around good traders that wanna share ideas, wanna wanna go over their day together with with the guy next to them and see what they did well and and what they did poorly and what they want to improve on. I would say those are the main advantages to trading at a better prop share.

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Now I'd like to go into a bit more hear a bit more about your actual marketing strategies because if I understand right. Uh, you guys actually do very little automation there. I would have thought that makes it very difficult to run market making types of strategies in US equity markets. So Uh the market making strategies are gonna work on very specific types of symbols.

We're not going to do a whole lot of that in some very high fly names, uh like Nvidia and Apples of the World, those symbols. I'd rather join trend and and try to capitalize on the move. Take a lot smaller size. and capitalize on on potential big move that's unfolding, right? On the market making side, it's probably, you know, lower price name, doing a lot of volume, might have like a twenty, thirty, fifty cent range on the day.

And you can go in there and trade size, ha know that you have liquidity. Um I can easily buy whatever I wanna buy and sell whatever I wanna sell without really moving the market too much. So what would be an example of of some stocks which you would which you would consider a market making strategy? I mean these days you have a lot of these names like the AMDs of the world, anything that's you know

Between five and twenty bucks and doing at least ten million shares a day, that's gonna be a good candidate for that. And so what would be your time frame on those trades? So on those particular trades, the time frame is probably I'd say minutes to an hour. Um, whereas some of the other trades we trade, you know, hour to a few days. Hm. So so what would define it as a market making strategy though, like you're obviously posting liquidity.

I guess um market making strategy is just what we kinda call it internally but it's If you want to just call it scalping where we're in and out uh decent size Sometimes adding liquidity, sometimes taking liquidity, um and trying to capture a piece of a range. Right. And you said your trading also consists of a lot of momentum trading as well.

If if you had to kind of break it down, what what percentage would you say, you know, of of your own PL comes from th these strategies which you classify as market making strategies compared to momentum, like where is the bulk of your PNL coming from? If you asked me that question a few years ago, it would be a lot more on the market making side and the scalping side and less on the momentum.

But um I'd say today myself and the firm as a whole, um a whole lot more is being traded on the momentum, pattern recognition, technical analysis and short term catalysts. That's where most of our profits uh come from these days. We still do a decent amount of scalping and market making.

But um well less and less. You just so much opportunity out there in some of these low cap names that are moving, you know, five hundred or a thousand percent in very short periods of time, or a large cap name like uh, you know, like an Apple or

Um like an Intel that, you know, has a catalyst, either fresh piece of news that we can trade for two, three days and move on to the next one. Right. Okay. Now one of the things which um which really stuck out to me when uh I was doing a bit of preparation for this this uh interview.

is the amount of volume that you're trading yourself. Um, you know, I I think uh you can correct me if I'm wrong here, but I think about on on average you're doing about fifty million shares per month, which seems like an awful lot. How are you able to trade you know, on average about fifty million shares per month as a click trader. So I think a lot of it has to do with edge reading order flow. having confidence in in what I'm doing.

And and it's the the actual method of how we trade, you know, hotkeys and having direct market access, connections to all these different places, uh allows us to to really size in when we see opportunity and and take advantage of it. So Um yeah, it's a lot of shares and you know that's kind of the goal of every trader. You know, you want to keep growing and and pushing it as as much as possible until you kind of see it.

that uh, you know, you've reached a max o of what you can accomplish. So how are you able to get so much size on though? Well a lot of it is not gonna be at just one price, right? So it's a lot of scaling in and scaling out at different prices, accumulating shares and and scaling out, I'd say.

Yeah, okay. Well we'll talk just a little bit about that. Like how are you scaling in, how are you scaling out, like adding reducing size, like how do you how do you think about that sort of thing?

It's kind of tough. So the the way I approach trading is I let's say I mentioned before we have fifteen different setups, right? Each one of those setups is gonna have its own rules of how I First look for the setup, how I'm going to put the trade on, whether I'm gonna scale in or put it on one shot, uh, where my stop goes, how much I'm gonna put on. Uh how much you're gonna put on in a very high conviction situation. So each one of those setups will have its own rules.

That I have written down on paper in my Evernote. And you know, every day I will measure my performance, not just on the PL, but also on whether or not I was able to follow my rules. And I think that's the big differentiator right there. I don't know if this is too much, but would you mind sharing one of those setups? Sure, so let's see.

A setup that I personally like to trade and um those who have seen our our YouTube videos at the end of the day, I go over this one quite a bit, um, is like a descending triangle in A low cap trash name, right? So when a low cap stock goes up, you know, a few hundred percent and finally starts to stall out and um puts in lower high and showing that it's now on the backside. I'm looking for a certain pattern and that would be a descending triangle, meaning that it it had a dip.

And the next time it came back up it made a lower high. And when the it had the next dip, it's starting to look like a triangle, right? And on that scenario, I know that on I have three ways I'm gonna enter that setup. One is within the triangle, the other one is when it breaks, and then the third one is if If it comes back to retest. uh a breakout level. So each one of those will have a rule and say, okay, when I get in here, I'm gonna risk

X dollars and then my stop goes above that high. And so very specific, very methodical. And every day when I see these setups, I will take a screenshot. Send it to my Evernote and that way it stays fresh in my mind. And my confidence grows whenever I do that, right? If I've seen a setup a thousand times.

And, you know, I know what the win rate's gonna be, I know what to expect, I know what it's gonna look like when it's about to fail. And I know where I need to really size in and and take advantage of a s of uh of a good opportunity.

Now, something like that, are you taking this trade every time you see a setup which fits that that criteria? Or are you kind of selective about which ones you actually execute on? So if if it meets my criteria and it's setting up as that particular setup, I have to take it. If I don't take it, then I'm just adding a lot more variation to the results and um you know, that's just gonna cause frustration. So I'm gonna try to take that setup every time I see it. Now, do I do it every time?

There are times where, you know, you're a little bit more gun shy, maybe because you're not running as well, or you might jump the gun where that setup hasn't really fully presented itself yet. And um, you know, it's and you should go in a little bit earlier. But um if I see it, I'm gonna take it and then at the end of the day I'm gonna measure how I did. Did I go in too early or did I completely

Missed a trade and why did I miss it? Mm. So just uh just going back to uh the volume that you're trading I guess I still have a couple of questions around that. Um

And this might take a little bit of explaining about how things work in the US uh equity market, but how much of your P and L or how much does rebate contribute to your P and L? Like is that a big part of your strategy? No, not anymore. I think it's there and it's useful to have access to that, but it's not the the driver these days. Um these days the HFTs who are co located and have uh fast connections and best hardware. And the special order types

Those guys are gonna be there much earlier than than me. So just trading for the rebates, that game is I think is done unless you're you know one of the best HFT guys out there. Now it doesn't mean that I don't trade for four rebates, you know, I don't try to be efficient and and maximize what I could get. But uh we don't specifically trade for rebate. That's not a big part of what we do. Okay. Okay.

What sort of stocks are you trading? I know you you spoke about this a little bit before and that setup you gave, you you spoke about trash names, which I'm which I'm sure are mostly the lower cap stocks. But Where is most of your volume done? Is it done on these big blue chip names where you can really get a lot of size on, or is it done in most in in low floats?

I'd say it's probably uh a third in these low price stocks that you could do a lot of volume, blue chip names, you could do a lot of volume, and then the other third would be um these low cap stocks. A and how many names would you be in and out of on any given day? Like how many stocks are you watching? I'd probably betray about eight, ten names on any given day. And some of those might be, you know, something I'm swinging for a few days.

or a couple of weeks or uh and I'm trading around a core position while others I'm just, you know, something with fresh news that um, you know, short term trading and I'm in it in and out. And probably putting on five, ten trades in that symbol.

So how are you d deciding if a trade is going to be just a short term intraday trade or something that you might swing for a couple of days? Most of the time when I put the trade on, I already know if this is something I want to swing. It's setting up as a swing trade in a different time frame. Uh for example in a fifteen minute chart or in a one minute chart on a one hour chart rather.

Uh, I already know that this is something that if it keeps on acting like it should, I'll I'll take it home and I'd wanna keep it for, you know, a few days, a couple of weeks, if it keeps acting right. So what might be a reason um a reason for you to swing. Like you say if it looks like it's you usually know when you're when you put a trade on how long you're going to hold that stock for, presuming it keeps acting how you anticipate it to act.

W w what would um what's the word? What would give you reason to think that this is a good trade to swing for a few days? It's simple, right? In this business it's it's mostly about green or red and um if if I put on a swing position and it's working, the earlier it works the better. And by the end of the day if If it's green and and it's working, then I'm gonna keep down one and and allow my exit rules to take over.

Um, you know, in this business it's a lot of bla it's a lot of black and white. Um it's very easy to know when you're wrong and it's very easy to know when you're when you're right. It's not like when you open a retail store you might need six months to to figure out if the business model's working, you know, you know instantly that the trade that you put on if it's right or wrong. And the best trades will start working right away.

And these eight to ten names that you're trading, you know, on average most days, um, how are you finding these eight to ten names? Like out of all the stocks you can pick from in the US market? How do you decide that these are a good eight names to be trading for this day? Yeah, so when we get in early, we'll start doing research. First of all see on the macro picture what's going on. Anything any news overnight overseas that might have uh moved markets or could potentially move markets.

Uh so do the research early as far as what's in the news, any macro themes that we need to be aware of. And then in the morning, whatever's gapping, whatever's got uh a piece of news, uh catalyst that might move a stock up or down and make a gap. Uh we're interested in that. And then during the day we'll use scanners that are looking for specific criteria that uh once it's met it spits out a symbol and says, here, look at this one. This is a criteria you were looking for.

What's some of the criteria that you might put into a scanner, just as an idea? Um, volume, volatility, range on the day, um float. Uh m mainly those are fresh news. Now these eight I keep saying eight stocks, but give or take, these names that you're trading each day, is it often the case that uh, particularly if you're trading a catalyst that these eight stocks or however many stocks are tightly Uh I don't know if correlated's the right word, but tightly linked, like in the same sector.

Uh no, they don't have to be. Um, for example, I could be trading Intel like yesterday I had some fresh news about you know, their security problems that they're gonna have with their chips. So that was really active yesterday. I was trading one semiconductor name and in the level two right next to it I could be trading, you know, a blockchain name, something that just moves because they got it mentioned in the cryptocurrency space. Right.

And your entries on on these trades, what are they what are they based on? I know you you've talked a little bit uh a little bit about using technical analysis. Is that what actually determines Your entry. Is that how you time your entries or are you looking at the order book or is there there's something else to it? For me a lot of those come together. So I would say it's reading the tape and order flow, um, technical analysis, good understanding of charts and volume.

And for me volume is very important. And in addition to that, I'd say what's moving the stock, what's the catalyst? And then if it's something that uh I've seen in the past that I've uh kind of uh encountered it to behave a certain way when that catalyst comes out, that also plays into it.

When you say volume is important, can you just flesh that out a little more? Like what do you what do you like to see in in the volume? Two main things and I'd recommend uh individuals who are interested about learning more about volume, uh the book by Anna Coolink. volume price analysis Uh for me that that helped quite a bit'cause I always knew the volume was important.

And I I just could never really understand and put my finger on exactly what I wanted to see until I read that book. And she kinda clears this up pretty well. Uh so volume with how it's um displaying itself between different bars as the as the bars unfold and as the chart unfolds. How different volume patterns develop with different chart patterns. And what I specifically like quite a bit is uh volume profile where

the volumes displayed on the side axis um and showing me not just uh the price but how much volume traded at different price levels. Okay. That's interesting. Because Is that uncommon for equity traders to be using volume profile? Typically when I hear about volume profile it's it's usually coming from a someone who trades futures, right?

Yeah, I think it's it's more common in the futures world than I I think we spend a decent amount talking about equity trades, but uh we we do trade quite a bit of of equities, futures uh options and and pretty much all the products out there. But I would say that um it it probably did start in the futures world and the reason I like to use it is it a it gives more context to support and resistance levels. So i turning points on a chart are are more important than if

There's a lot of volume that traded on that at that level. If that makes sense. No, it does. It does.

Mike, one of the things I'd like to speak with you about Actually there's a couple other big things I'd like to talk to you about. Uh the first being consistency, right? So for the past three years, I'm pretty sure you've been green every month. Now that's quite a an achievement. What's your secret to consistency? Great question. I think consistency is is what is really gonna differentiate the the

great traders from the ones who are just going to get lucky here and there. So what does it take to be consistent? I'd say first of all, you got to have a clear and definable edge. then you gotta always minimize your bad losses and just avoid those big losses that, you know, take a big chunk of your account that might take some time to work back.

Um so which is why I kinda scale back when when I'm not running well, when um my trading's not doing too well, I'll scale back. I'll I'll risk maybe half or quarter of of what I risk on on average. and and I'll do less when I'm not thinking clearly, when I'm not performing well, or

I'll really scale up and and put some serious size on and multiples of what I usually risk whenever I'm in the zone and whenever I'm I'm thinking clearly and and the market's lining up with what I'm thinking as well. So just being able to throttle the the risk that I put on I think is important. Um and then risk management is is pretty much everything. I know a lot of your guests uh do mention that quite a bit and

You know, I can't stress it enough. Risk management is is king, right? So what are some of the things you do to manage risk? Like obviously you mentioned a few there, but um can you go into that a little more? Like what are some of the Maybe the big takeaways which you could share about, you know, some of the things you do on on how to manage risk. Sure, sir. So before I put any trade on, I already know where I'll be getting out if it starts to go against me. I think that's a big one, right?

If you compare any retail trader to a professional trader, I'd say that's probably one of the main differentiators where retail when I say retail I mean just, you know, someone whom very new to the markets, not necessarily, you know, retail traders. But, you know, then they put trades on there

They're just hoping for the best. And if you ask them, well, what do you think is uh what are you gonna do if a trade doesn't go your way, they they never even thought about it, right? So I like to make sure I know where I'm getting out. before I even get in. And by doing that, I'm able to also figure out how much to put on. Because I want to risk a fixed amount, a fixed dollar amount on every trade, right? And in order to do that, I first have to know where I'm gonna get out when I'm wrong.

So that allows me to also size my positions correctly. So I think those are those are really important to the stop loss, focusing on where I get out, where does the pattern fall apart? is where where my stop belongs, right? I if I'm in the pattern, if I'm in a trade because of a specific pattern, then my stop needs to be

outside of the pattern where if if the stock or the future or whatever, if it goes there, then the pattern is no longer valid. So you gotta know before you put the trade on where you're getting up. Yeah. And another thing you mentioned uh just before was uh reducing size when you're not performing as well as you could be. How do you this might sound like a silly question and maybe an obvious

Uh, that would have an obvious answer, but how do you know when you're not performing well? Like is this is that after you've taken a large hit or is it anticipation that you might be due for a large hit like

when you might just come in one day and you might not be in sync with markets, you know, things just aren't working out, do you feel like you're out of touch at the moment and you should reduce your size before something bad happens? Like How do you know when you should be trading less size? That's fantastic, fantastic question because it's very easy to kind of blur the lines between, you know, be aggressive, be confident.

and and and state of course versus, you know, pushing it too hard and and uh just being stubborn, right? So the way I know that I need to size down is usually when I'm breaking my rules. So Every one of my setups as I mentioned has all the rules I need to trade that setup from beginning of the trade till the end, right? When I start to break my rules, that's usually a sign that I'm not thinking clearly, I'm not performing at my peak level, and that's usually coinciding with

with P and L also, you know, not not being there. So I'll I think that's a big trigger for me to s size down. But a lot of times, you know, you you can't tell right away, especially when you're in the trade, you know, you it might take a few losses. It might take, you know, um a few rules broken before you realize that you need to size down, you need to slow down, maybe take a break, take a walk, take a day off.

and and come back. But I would say the the rule breaking is is definitely a big one. Okay. Yeah, I think that that's a good point to note.

Yeah, that's a good answer. And one of the other or the the the first key you mentioned, um, or f first secret to your consistency, uh, was having a clear, definable edge. So how do you think about an edge as a discretionary trader? Like to to you, what does it mean to have an edge? Because I I think I've spoken about this on a a previous episode, but I think like someone who might be more of a quantitative algorithmic trader is gonna think about edge uh

differently to someone who's more of a discretionary trader. So uh you know, the way you see it, how do you think about an edge? That's definitely an ambiguous word, right? Uh the way I see edges Anything that I can do or I have access to that most people do not or or can't do, I think that's an edge, right? So if if uh if I'm able to

take losses quickly and and have good risk management where that really goes against human nature and most people can't do that, I consider that an edge. If I'm able to execute and have access to multiple dark pools and and you know, read the tape and have good order flow management. I should say actually order flow reading. Um, that's an edge too, right? I'm able to have my finger on

on the pulse of the symbol, the pulse of the st uh of the market, and I'm able to kind of become one with with the symbol. That's really the best place I wanna be, right? The way I can read the signs that the stock's telling me as opposed to just ignore it and and bring my own opinions. So being an order flow trader, uh being a pattern trader. uh and seeing where things f don't act like they should.

allows me to to kind of get a feel for what's going on. And a busted pattern I think is is a good way to to kind of reverse and go the other way because obviously what you were thinking is not is working. Um so I think an edge i is all those things. It's tough to define, but it's gotta be something that is not readily accessible to everybody. And it it's largely based on your setups as well, right?

Yes, yes, and the s setups and and the experience of seeing it before, right? Um I I'm a big big fan of of journaling. And all our traders, you know, they journal and and they have to email myself and some of the other senior traders every night, yeah, the the the trades that they did and the why they did it and were they able to follow their rules? Do they have to tweak their rules?

And and and I'm a big proponent of of of journaling. It forces you to go back and and review what you did. And I think any time you're doing anything competitive, whether it's sports or trading or poker, whatever it is Uh the idea is you gotta have a plan going in. You gotta try to execute your plan during the game.

And then at the end, after the game, you you go back, you watch tape and you you try to review what you did whether you did well and what you might want to tweak for the next game. So I think journaling is huge. Yeah.

This is perhaps a question I should have asked you uh a little earlier, but these set ups that you're trading How have you come to identify those setups? Like where do they come from? Was it just purely from screen time or was it from uh deliberate research? Uh how have you come to identify these setups as as having an edge? I would say that over time you you start to develop a trading method where you grabbing things from

here and from there and and you kind of putting together your strategy, your setups, but you could get little nuances from different places, right? So I love watching, you know, traders on YouTube. That's like, you know, that's like my my Netflix where uh I I wanna see what other people are doing. It doesn't mean I'm gonna trade that way, but I I always try to learn something from someone. Whether it's the guy sitting next to me

or the guy on YouTube and then I can't say enough about how much I've learned from your podcasts. I always want to try to get as much as I can from everywhere. And but I still have to bring it back and make it my own and add it to my way of trading. And I you know, I never want to follow anybody else. I never want to put a trade on just because somebody else said so. It's gotta be my own. But I'm willing to learn from everywhere I could learn from.

Yeah. I really like that. I think that's so important is to make ideas your own or like to to come up with your own ideas. Like you can take influence and ideas from other people, but ultimately you need to make it your own like I'm often surprised by some of the emails I get. You know, people were asking like who's a good person to learn from and I never suggest anyone. I mean

Yeah, I I feel like you you've sort of gotta come up with your own ideas, test them. It's not just like a matter of watching someone and then just replicating exactly what they do, right? Absolutely. Absolutely. I mean what works for me a very specific way, somebody else trying to replicate the exact same same setup with the exact same rules, even if they have it written down on paper in front of them, it's not gonna work for them because I might have traded this setup

you know, a hundred times and it's evolved over time. And I've made my tweaks and throughout time my confidence has grown in it and, you know, I I journal it and next time I see it, because I've journaled it, because I've taken a screenshot and because I've reviewed what I've done, the next time I see it, my confidence is gonna be that much higher and uh I'll see it much earlier than Then the guy next to me who's never even traded the setup before.

So um that's why I think following others and doing something because others are doing is it's not gonna work because your confidence in it is gonna be very low and what's gonna happen is the first time you're gonna take a loss, and everybody takes losses, right? The first time you're gonna take a loss, uh you're just gonna scrap it. You're gonna think, oh it's not

It's not working. I uh it's not moving averages that I have to be focused on. It's MacD or it's it's stochastic or it's volume profile or whatever the next hot thing is, right? Yeah, yeah. No, I completely agree. I completely agree.

Mike, just to take us out here, I said a little earlier there was two big things I wanted to talk you to you about. Um one of them was being consistency. The other one is, you know, I feel like this is an appropriate question given the time of the year we're at.

Let's say for someone who, you know, they they know the basics about trading, okay, they're not a complete newbie, but they've been spinning their wheels, right? They they haven't really been making much progress over the past year or two. They feel like twenty eighteen is gonna be the year where they th they start to succeed as a trader. What would you say are some of the

The the best things they could do to give them the best shot of making that happen. These might be basic things, but you know, things which m you feel might be fundamental for a developing trader to do. That's it's a great question. I wish I came across your podcast like ten years before I did. I mean, I would have done it a lot better earlier. But uh I'd say the first thing has to be set rules for each setup.

Don't leave anything for emotion and and know what you want to do before you even start. Right? Have have a business plan for each setup. It's it's extremely important. The other thing I'd say is surround yourself with with Good, smart people Um if you're if you're a retail guy, you're trading from home.

You might be on Skype, uh, you know, in a group chat with other good traders. Um if you're looking for a firm, you know, come, you know, look for a good firm that has good traders and and a good setup. Um so surround yourself with with good people that are are genuinely gonna teach you and work with you and and and mentor you on how to trade. I think that's big. And be careful because, you know, these days

You know, Twitter is fantastic and YouTube all that is great. Um but I think that some people might fall into the trap of of following some guru that, you know Has a trading room or has uh DVD just buy my DVD and you know you you'll do well or just let me you know mirror my trays and things like that. So you got to be careful with that.

um it's still gotta come back and be your own trades. You know, you see all these guys on on on Twitter and all over. Some of'em are you know, I'm I'm sure are pretty good, but for everyone that's good and and and and really trading there might be, you know, ten that's just looking to sell you something. So just beware of that and and, you know, it

Just feel feel your trades, you know. When when I have When I have positions on and uh and I have a couple of traders shadowing me as they're learning That feels real, right? And and that's the way I see it and and learning from someone where you can actually see what's going on is is huge, as opposed to um just following someone else. Uh I think that's very important. So s have rules

Be careful who you follow. There are some really great traders out there that are that are doing some great things. Um, you know, a buddy of mine smashed a bid. He he started a room, he's a l you know, a really good guy and he he trades well. So there are some people out there that that have a real service to offer and you know, you can really benefit from it. But you just gotta be careful not to follow too many gurus that are just gonna

Uh mix you up and before you know it uh one day you trade in one way and the next day you trade in another way. Of course. Yeah. And I mean I know some guys on Twitter who are very legitimate traders and have like a few hundred followers. Like So don't only go a follow account either because um

Yeah, there are some guys who keep a low profile but um also make some some very decent money. So yeah, solid advice. Um let's wrap this up, Mike. Um if someone wants to find out more about you, where is the best place to go?

So we uh I have uh Twitter. I've s this year become actually in twenty seventeen I become you know more active on Twitter. So it's uh Michael underscore cats k T Z. uh on Twitter and then uh we have our website sevenpointscapital dot com and I think those are the probably the easiest ways to to get in touch with us. Okay. Sounds good, man. Well I'll make sure to include those links in the show notes. Um, yeah, I think that's it. So

Yeah, let's let's end it there, Mike. I appreciate you doing the doing the chat. I'd like to say, Aaron, uh thank you for for what you do. The podcasts that you've you've been able to put together over the years are just fantastic. You're able to really tap into some some great minds and

I think you're you're doing a great service for traders and I recommend uh uh to all our traders to uh to follow you and to listen to every one of your podcasts'cause I think there's a lot of value added there. Oh, thanks so much. I appreciate it. You've reached the end of this episode of Chat with Traders, but rest assured there are more out of If you leave a rate.