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¶ Michael Katz Episode Introduction
What's up everyone? I'm your host, Aaron Firefield. This is episode 205, and returning to the show is Michael Katz. Mike, of course, is an active equities trader and managing partner of proprietary trading firm Seven Points Capital. As this is Mike's third appearance on Chat With Traders, I figured we'd tweak the format a little bit. Previously, we did more or less a regular interview. That was episode 156. We also did an episode analyzing how Mike traded the Lyft IPO. See episode 173.
And now, this time, Mike is answering your questions. So that means each and every one of the questions I ask Mike during this episode were submitted by listeners of the show. There were many great questions sent in, of which I sorted into four categories Strategy, Trade Management, Trader Development, and lastly, proprietary trading. And as usual, Mike is a standout guest, so I'm sure the next 60 minutes will be beneficial. Here we go.
Because there's a whole bunch of questions here. I'm not sure if we'll get through all of them, but we'll see how we go for time. So what I've done is I've taken the questions, I've kind of organized them a little bit, sorted them into categories. So the first category is broadly around strategy. And these first couple questions, uh, more specifically are with regards to kind of developing a strategy.
¶ New Trader Strategy Development
So the first question I'll throw at you, Mike, uh, what are the best strategies or setups to learn for new traders?
Good one. Good question. I think as a trader, we have to be in a mindset where Our skill set matches the the skills that are needed for any particular strategy, right? So if if my skill set is not on par with what's needed, then I'm gonna have a hard time. So as a beginning trader, while s a lot of strategies might really look interesting or very sexy, I just have to make sure that.
They're not too difficult to execute, right? Because then I'll run into some trouble, I'll be deterred really easily, and I won't be able to execute, and I won't be able to enter that flow state. Um so for beginning traders, I would say strategies that help you join trend without chasing are probably my favorite, as opposed to strategies where
you are trying to fade a trend and and pick a reversal. Those are very popular beginning traders, but I think they're more difficult and the reward to risk ratio is not great there. Um, so I would say strategies where you can buy a dip in an uptrend, whether it's a pullback to a moving average or a pullback to a previous breakout area. Um, in an uptrend, those are really good risk-reward strategies that you can join with the bigger picture, what's going on there? Um, you're buying.
cheap stock in the short term with the big picture in mind, those tend to be easier strategies for beginning traders and vice versa for shorts, right? If it's something selling off and and trending lower. Um you're looking at bounces to join um the downtrend, bounces to get short.
How do you go about developing new strategies?
So I kinda like to develop new strategies. First, theoretically it's gonna make sense to me. I like to back test where I can. I like to try it small on a very small scale. Like think of it like a lab where if It's like a lab where there are a bunch of strategies in there and we're trying different things and if it graduates to becoming a real strategy, then we allocate more and more capital to it. But developing these strategies takes the form of first it's got to make sense for us.
Um I like to think that there is a there's a thesis behind why I'm in, right? So big picture, is there a catalyst? Is there a catalyst that's going to get the stock to move? Is there a catalyst that's going to get large participants to want to transact and get and cause an imbalance in the symbol, right?
Uh that's the main thing that we look for. And if that's there, then the next thing we want to try to figure out is what are some optimal entries where we can risk X and potentially make multiples of that. That's what I'm looking for. So when we're developing strategies. We're really interested in what's the catalyst?
What's the reason I'm in there? And then what are the best spots to get in there and risk very little to make more? And then when they do graduate out of the lab that we call it, um, then we start allocating more capital to it. And it's just keep sizing up as long as it keeps working. So development some of it is with coding, some of it is with uh back testing, but a lot of it is for us as as discretionary traders is uh trying it small and uh sizing up on what does work.
¶ Adapting Strategies, Finding Edge
And I presume a lot of the the thesis for these strategies just comes from screen time, like being there, observing the market.
Absolutely. Absolutely. So You know what gets a stock to move'cause you've seen it before, right? So that's where screen time really comes in handy. Uh you know that if a CEO gets ousted, that's not good for the stock. Hence Nicola is gonna be heading lower and Um there's d certain catalysts will get a lot of order flow to wanna come and participate. And that's where you wanna be. That's where you have the largest imbalances.
And um screen time t teaches you that. So over time it's really a good idea to take notes of these catalysts, the ones that cause these massive moves one way or another. And then you start taking notes and and developing strategies around that. And before you know it, you've got yourself a playbook.
As a new trader, should I look into new strategies because of a slow market? Although I'm still trying to master my first strategy. So I think the r rationale behind this question is This person has probably heard someone say, you know, master one strategy before you go on and try something else, but perhaps that strategy isn't as of effective in a slow market. So should they continue sort of pushing on to try and find another type of strategy that might be more fitting to the current market?
Yeah, I'm I'm all for that. I'm all for trying new things, but definitely do it on a small scale, right? You don't want to try anything new and size up early on. You wanna first figure out that there is edge there. You want to figure out um when you're getting in, when you're getting out, how much you're risking and make sure that um you're not going um very hard very very uh very soon early on. So I'd say, yes, gets quiet.
Try different things, but don't risk your whole account on it and then size up if it does work. Now Beginning traders and developing traders and experienced traders, you know, one of the challenges is to sit on your hands and not do a whole lot whenever the market gets quiet, right? You want to hit it whenever it's really busy, you want to hit it whenever the opportunities are there. And then just do a lot less.
when it gets quiet. So you guys have to be careful not to fall into the trap of it's quiet, therefore I'm gonna try new things, therefore here I am now all of a sudden very active. It's okay to try it on a small scale to see if you can figure out some Set ups but make sure it's not just to get you to You know, get very active again. Right.
How to chase edge and constantly shifting markets. And I guess this is probably quite relevant given the sort of market conditions we've seen over the past, you know, twelve months or so.
Oh yeah. I I don't like chasing edge. You know, chasing edge has that connotation of whatever's working now, I'm running after it and I'm sizing, I'm always behind the curve. That's kind of how I see chasing edge. Um, first of all, I want to know what to expect from my strategy. So when it starts to underperform. I can figure out if it's me that's underperforming, is it just a bad market for
for uh this particular setup or it has has the setup lost edge. Yeah, I really want to try to figure that out um before I start chasing the edge and and moving on. Um I know what I want to execute, what works for me. And while sometimes it does slow down, I'll do less in them. Um but just make sure that you're not chasing edge, always chasing the next thing that uh that's looks like it's working by the time you realize that it's already changing.
¶ Short Squeeze and Reversal Strategies
How to detect a short squeeze? Now these next couple questions I think are probably gonna be around shorting parabolics. which often occur from a short squeeze or can do.
Sure. Yeah, we see that a lot. We have a lot of these low floats that can really get extremely parabolic and trap a lot of shorts. How do you detect that? Um what we've noticed with a lot of these symbols that do end up trapping shorts and creating a squeeze is that whenever they look like they're weak, they're not really going down. So You have to spot what isn't happening and should be happening. So if a
Trash name looks like it's going lower. It breaks previous support and it just peaks below it and has no follow through. That's information, right? That's telling us there isn't any follow through. There's a lot of soaking, a lot of buying going on there. That's a lot of times a precursor to a squeeze later on, right? So that's the first thing we'll look for. The other thing we're interested in is the time of day. A lot of these low floats that end up running and and having a multi-day run.
They're making new highs after ten thirty, eleven o'clock. Most of these low floats, when they gap up, they're fading sometimes pre market. They've already given up a lot of the gains. Sometimes they've given up a lot of the gains by ten, ten thirty and they continue lower. So if they're making new highs after ten thirty, eleven o'clock, that's another huge red flag saying This is potentially a squeeze that that uh there could be a squeeze coming here.
So those are the two main ones when you expecting something to happen and it doesn't, just be careful and make sure that you know where your exits are before you even get in. That way if it does not work, you not just being forced out of the trade, you already know where you're getting out beforehand.
Just as you mentioned pre market there, I'll ask you this question which came through. Is pre market trading bad or as bad as the retail world says it is? So let me just rephrase that. I mean, what are your thoughts on pre market trading?
Yeah, we trade actively pre market. But we want just trade anything, obviously. It's gotta have a reason for us to be in there. It has to have volume. When you pull up the chart, when you pull up the stock, it has to look like it's the market's already open and has to be trading with that type of liquidity. Um otherwise we won't look at it, right? So
We're okay with trading pre market. It's just you got to make sure that it's not something very thin, that uh you're not being moved around and being um squeezed one way or another because there's no liquidity. That's the main thing for us. If it's got liquidity, By all means, we traded pre-market. We have no problem with that.
Okay. Now just going back to the parabolic moves, so I just previously asked you how to detect a short squeeze once the squeeze is over. Obviously I'm sort of simplifying it here. How do you sense when a top may come in?
Okay. So to answer that, let's back up a second. Let's talk about the short squeeze again. What are the precursors for that short squeeze? If you're trading a low float, let's say there is five million shares that's available on the market, right? There's a float of five million and it the stocks are already traded. Twenty, thirty, fifty, a hundred million shares.
by 10, 11 o'clock, right? And it's not really going down. What does that tell you? It tells you that there's a lot of shares changing hands. There are a lot of participants that are going in and out. And chances are whoever wanted to sell that, got the the ability to sell it there. And if the price didn't really go down off of that, We what we see with a lot of stocks that end up squeezing really hard is we have this theory on the desk that there's somebody that comes in.
Some big player that corners the float and says, Okay, you will anything you want to sell, I'll buy it. And then when they own most of the float, then they run it up and then they they decide where that um where where to sell you the stock, right? So the shorts are pretty much in really bad shape. And they're at the mercy of whenever that individual wants to sell them those shares.
So when something is running like that and it's it's a real parabolic, it's uh the the slope is accelerating and it's going higher and higher and you know it's halting left and right and everybody's excited over the symbol. Well, for that participant to be able to get out, he's gonna leave a footprint behind. And that usually tends to be with a lot of volume also at the top. So we look for their the parabolic. How do you know that it's the top?
y you look for the big volume. You want the volume because that's where the shorts are being forced out of their positions. That's where they're giving up. And that's where whoever cornered the float is saying, Hey, I will sell it to you here and they've decided when that happens. And from that point on, I'm guessing that that parti particular participant is now just selling on the way down and unwinding everything else that they have to sell.
Okay. This next question may sort of be referring to what you were talking about there, but how do you use order flow for execution on uh reversal setups?
Yeah, exactly. So if it's extended, order flow could come in very, very handy. The velocity which the the tape is printing is important. The size of the prints is important. And um how they're they're being absorbed by the level two is also important. So if all of a sudden
The stock has gone parabolic and it's extremely extended. Let's say one ATR away from VWAP, two ATRs away from VWAP, um, very extended from short-term moving averages. And all of a sudden you have a lot of volume, the velocity picks up. and you have these massive prints that are going off, massive offers are coming in. That tells us that the smart money, the large players are selling there. And then if if you see overso
s a certain amount of soaking on the offer. So let's say it is a thousand shares displayed and all of a sudden tens and hundreds of thousands of shares traded at that price without that thousand shares budging. That tells us also that there's a lot of selling there. So reading the tape there does come in handy, but you got to be able to act quick and respond to that. So volume, velocity, and soaking.
When shorting a parabolic move like we've been discussing here, do you scale and slowly add into a top or do you wait for a clear lower high to get in short?
So the safer way to do it is to wait for that lower high. Right. So as something is going up, is accelerating and it's it's peaking. Let's say now the top is in. If we try to pick this top, that's a very difficult trade and it's not really for beginners.
But that's where you get the most reward, right? But you have to be able to cut that trade off and move on and close it if you're not right and try it again another time. So that's a very difficult trade and it's not for beginners because a lot of times beginners will freeze up in that spot. And and not cut that trade. And something that's going as fast as it is, as this symbol that we're talking about, that can get far away from you really quickly and it could get ugly, right? So
That top tick is very difficult. Our traders do it. Some like it and some do really well at it, but it's not for newbies. If you wait for that drop, right? So if if a top is in. The shorts covered, they gave up. The chasers got caught, they chased in. smart money is selling there, chances are you're gonna have a big drop because there's that vacuum now. There are those buyers that were chasing it up and bidding it up and not getting filled. Guess what? The volume traded.
And now they're all filled. Who else is there? Nobody's there left anymore to um to buy the stock up, right? So there's a big drop. And that's what the front side traders are looking to catch. But then that lower high that comes afterwards if it's not able to make new highs on the next bounce. The curl down there, the age pattern, lower high, whatever you call it, that's a safer entry. And now you have a defined spot to trade against that high.
Therefore, if it does make all new highs again, then you're getting out. But that's a safer play, and um that's one that we like a lot.
¶ Small Cap and General Setups
This next question is not necessarily in regard to uh shorting parabolic moves, uh but just in general, how do you scale into positions and adjust risk accordingly?
Unless my position is going to be so large that I have to scale in without choice, I really prefer to do it in one or two shots. Uh I I like to go wait for the spot, wait for my timing, wait for the opportune time to hit it, and then and then just go all in whenever whatever my risk allows me to go in. Um I find that that's better for me because it allows me to sit on my hands more and wait.
as opposed to having some on and then scaling in and then allowing it to go against me and adding that's not the type of trader I am. You know, there are traders out there that that's what they like to do. They'll as the higher it goes, the more they'll add, the more they like to trade, and the more they'll short.
or as as a stock is dropping and they're buying and they're keep on adding as it's going lower, they might start with a starter and and and get bigger as it confirms. Me personally, I don't like to trade that way. I like to just wait for my my opportune time and if I'm right and then and I'm I have been able to spot that inflection point where once I'm in there should be no turning back.
And then that's a great spot for me to enter. And I wanna have the full size on at that point. And and if it's not that spot, it's very easy for me to tell because the trade's going against me and I can get up.
Other than parabolics, what's one of your favorite small cap setups and what are some things within the setup that you're looking at to enter and exit the trade?
So parabolics is definitely a big one. Um the H pattern afterward after the parabolic, that's key for us as well. So something that's been running, drops hard, is not able to make new highs. That's uh that's a secondary setup there. Really good. Um you rarely see
these small caps with like a rounding top. You know, rounding top means like every time it makes a new high, it makes it by l uh l lower and lower amount where it kind of slows down, momentum is slowing and now it's shifting to the downside. A lot of these small caps that um that we're talking about, they mostly end with some sort of acceleration to the upside and then just a sharp trap right afterwards. So
As far as small caps, those are my main ones. Once it's once it's backside Once it's already shown that it's backside, then The uh the uh the other thing that we could do is just get in on bounces. If it's a downtrend and it's backside, we're looking for pops, we're looking for sharp rallies that, you know, maybe it's short covering, maybe it's just some PR. Um, some nonsense move and we try to get in on those bounces. So those are the three real ways that we'll get in on small caps.
What if um moving away from small caps, are there any long or short setups that are kinda like your go to?
In general, just any long short setup? Let's see. So in this market since since we bottomed in March, we've had a really strong rally off the lows, right? And the the spies have put in pretty much a V bottom. Nobody really expected that. And
Mm-hmm.
We've had a lot of market leading stocks that did extremely well. You know, the Amazons, the Zooms, the C R M and Nvidia, so many symbols come to mind where Not only did they bottom, they extremely outperformed the market. So one of my favorite trades these days is to just look for these symbols that are really strong. Uh they they um might fit the canceling model where you know they have they're they're growing really well. Um they they have a new product that's disrupting the market.
their segment. Um it's really strong making new highs. And I tend to focus on the long side in those. I try to find dips within the trend or I try to find continuation patterns like flags and pennants. to join the trend. But having that big picture of hey um Peloton, they're really cornering the market, if the growth is r is through the roof, um the stocks acting really well, let's find ways to to to trade on the long side during the day. I'd rather not short those.
Um and those ways might be like like I said, patterns uh such as retracements to to a previous breakout. flags and some failed short setup. So that's key right there. So big picture, it looks really good, right? It's strong on the daily. Lots of catalysts driving the stock up higher. And then when we zoom in, whatever would get me in on a short setup, If that starts to fail, if a a level gets broken and it can't follow through, now that becomes a long signal for me.
Okay.
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¶ Managing Risk in Hype Stocks
Someone has sent in a question here, which I think is quite interesting. Would love to hear how the firm traded big hype stocks like Kodak. How do you manage risk with these massive spikes and stock holds? Max day losses, sticking to trading rules, managing emotion, etc.
A lot of these symbols are just really wild. Um You know, as a trader, you look forward to these types of symbols. You're like, yay, Kodak can go from twenty to sixty in one day. You can have SPI. The other day we had the the stock go from a dollar to forty. And then back to fifteen, I think, in the same day. How do you manage risk as an intraday trader? It's just incredible. So as as
Traders, we love that. We want the volatility and we can't wait for a symbol two to move like that. But now when you're wearing your risk manager hat on and you're monitoring traders and you wanna make sure that nobody blows up, that you wanna make sure that everybody's you know, in in a good spot to try to capitalize on it rather than get hurt, then it's you gotta approach it a little bit differently. Um one of the takeaway videos we did recently was about SPI and I had to call a meeting
SPI and co you mentioned Kodak, but it's the same idea. SPI, uh midday, we called a meeting, uh, we all jump on a Zoom call. And I said, guys, what the F are we doing here? Everybody is trading front side. Everybody's so convinced that the stock is going down. Meanwhile, the stock's eighteen or fifteen or whatever it was.
And e everybody you look you look at my screen and everybody's short. And it's like it's a nightmare as as a risk manager because you're like, Well, how many times is each trader gonna try this thing bef before they realize Okay, maybe it's not going down. And then it really starts to add up. Right? So
On our part, it's it's it's really important to to monitor those symbols and to be in touch with the traders throughout the day and just make sure, hey, make sure you're we waiting for your setup. Don't just be in emotionally because you know it's going down. Make sure that you have a reason to be in. Preferably wait for that backside because once the backside is in, it you know, that's gonna be easier. But then you look at SPI.
And this thing kept halting left and right, went from twenty to thirty to forty. And then from forty I think it opened down to twenty five. Um, it was just incredible. Um it's very hard to manage risk that way. So
A lot of the traders just end up leaving it alone and saying, I'm I'm gonna wait. I'm gonna wait for this thing. I don't care if it goes from forty to twenty five without me, but maybe When it goes to twenty five, it gives me a trade where I can try to make five, ten, fifteen dollars on the way down. Um so it's really hard. How do we manage it? Position sizing.
Um just constantly being in touch with the traders, making sure that that that they're not just trading emotionally, not just in and out for the sake of being in and out. Really wait for for the best set ups in it.'Cause if you if you're If you run out of ammo.
then you're not gonna be able to hit it. The opportunity looks great, but if you're out of ammo, a lot of times you're not gonna be able to hit it again. So It's important to um just size down and we have traders just have no interest in trading those days in those symbols because it's just too difficult.
So when you have these like extraordinary situations like this. Do you increase the amount of risk that you're giving yourself on that day? Um are you a little bit more flexible in that regard or is it still just the same as any other day?
So each trader f has a lockout and we call that a speed bump where they once they've hit a certain max loss, they they they are locked out of trading. At that point they have to chat with their manager or with me or with Mike and um explain why they want to be unlocked. Right. So if if it seems that the trader is
It's just, you know, hit a few bad trades. It happens sometimes. You get a streak of of trades that don't work. Um, there's still opportunity there. Uh traders thinking clearly, then we give him an unlock and and he can keep going. He gets more risk. Um but if if we see that it's that the trader is not put on the best trades till now. He's trading emotionally. He's afraid of missing out on the trade constantly.
Um just getting back in after closing the trade. These are things that uh we don't like and um they probably won't get unlocked that day. They'll have to come back in another day.
¶ Fundamentals Versus Price Action
I think this question ties in neatly with the previous one. um around Kodak and S PI. Uh there's a question here with regard to S R N E. I'm not familiar with the story behind this, but I presume it's probably much along similar lines. When you see a stock like SRNE gapping and developing bullish price action, do you stay bearish due to its fundamentals and filings or neutral and obey what the chart says?
Right. So S R and E is that COVID stock that is is working on on developing a drug for for COVID. It's been in play. It's been it's had a lot of strength. The the fundamentals say that this is a toxic stock. Every time it gaps up, there's an offering. They don't make any money. This this is gonna go back down. And now here you are. You're short, and you know that the stock's going lower, but the stock is not, right? It's it's heading higher. So
We we are price action traders. We can have a thesis, whether it's fundamental or whatever it is, filing. But if the price is not adhering to what we're we need the stock to do, then then we have to get up. There's just
Thank you.
There's nothing else to it. You can try it again another time. Uh maybe at a better opportunity, maybe at a higher price, maybe another day. But you you can't just be in there and say, well, this is a This is a trash company. It's gonna drop an offering. I'm gonna sit here and wait for them to to drop that offering. Or it's such a garbage company that uh every time it's run up it's failed before. You can have a little bit of bias, but
You can't just sit there and and and watch a thing go against you and keep running. You have to have the point where you're getting out. And it's better that you have that spot. beforehand, you know what that is. Otherwise if you don't have it, then
This the stock's gonna find that spot and get you out. It's gonna force you out. It's happened to me so many times. You know, I in preparation for this, for this uh chap, I went back and for the last couple of years I pulled up all my biggest winners and biggest losers. And I just you know, I started looking at the biggest losers. I'm like, man, every time I get into a stock and and I don't really have an idea of where my stop is, where I'm gonna call it quits on this symbol.
Um, that's the one I really get hurt in. And it instead of me deciding where I'm getting up, the market decides that. And I say usually not at a good spot.
Yeah, I think it's if you don't cut the trade quickly and you let it run against run against you too far, it's like you don't want to be cutting the top, right? It's it's that fear of cutting the top.
Thank you.
Exactly. Exactly. And that's what you see with these symbols when they're running, right? Like you see a trader get in. They'll short it and then it goes up and they get stopped out. And the worst thing for a trader is the second they close it out, the thing goes right back down. And they're like, oh shit, I gotta get back in. And then they chase in when it's going down. And then guess what? It's an uptrend. You just shorted the bottom of a pullback in an uptrend. And now it's going back up.
And I if if you if it yeah, you really wanna know where you're getting out, let the let the price tell you where yeah, your fundamentals are right, but right now is not the right time. Try it another time and give yourself the ammo to try it a couple of times. I are there traders that say, hey, this is A garbage symbol. It's five, it's ten, it's fifteen. And guess what? I'm gonna keep adding. And I've got the bankroll, and I can keep adding.
And it's not gonna phase me. I know the end result. Let's use laughing last. Are there traders that could do that? Yeah, I'm sure there are. I know of a couple. But for the most part, I most traders just puke it out at the worst time and and don't have the bankroll to be able to ride that out. So yeah, I I I'm I'm all for just saying, hey, I've been wrong. Let me try it another time.
Right. So this next category of questions I've put into trade management. That includes risk. Obviously we've talked about risk a little bit here, but there's a few more questions on that topic.
¶ Adjusting Risk on Streaks
Uh how do you adjust your position size and daily risk after having multiple red days consecutively? And how do you approach it when on a winning streak?
Good one. Good question. Because we're faced with that every single day, right? It's either we got to size down or we got to size up or we just stay the course. Cut in half. If I'm having a shitty run, cut it in half. My whatever my lockout is on the day, cut it in half. And if it's I'm still not running well,
Cutting half again and keep doing that until I can get a green day, until I can get another green day, and I can get a consecutive run where I'm having some green days, some momentum. I'm thinking clearly again. I've got my confidence back. And then let's size back up. So if I'm not running well, just cutting in half and cut in half again. And keep doing that until you've got your footing, until you stop that slide, stop the bleeding.
And then there's always gonna be a time to make that money back. But don't try to do it whenever things aren't working. Don't try to do it whenever either you're you're not reading the market well. or your strategy's not lining up with the market well, or for whatever reason, we don't care why, just cut in half and do less. And then get your footing and and size up when the time becomes right. And to answer the second part of that question,
How do you size up? Um, you know, Stan was been on your show before. He kind of came up with this basic idea of: hey, let's take our 21 day average of our green trades, of our green days. So the average green day for the last 21 days. And make that your lockout or some variation of that. So that when you do get locked out, you're kind of like just giving back one day's worth of losses, right? One day's worth of gains. So if my average
Winning days X for the last twenty one days, that's my lockout. And then What that forces me to do is all of a sudden I'm like, wow, I wanna put this trade on but I I'm really gonna be selective because I wanna make sure that average stays high because that's what's gonna get my lockout bumped even higher.
Right. So traders become really aware of what they're trading and why they're doing it. Is this going to be the one that's going to allow me to bring up my my average higher? Because I want to keep sizing up. Some metric of w your average winning day. Because you really don't want to give back more than one or two winning days. If you give back a month's worth of trade uh of d of P and L in one trade, then it's just it's it's a tough spot to be in as a trader.
I like that concept. That's that seems quite clever.
Yeah, and a lot of guys started using it. Stan kind of made up this cool spreadsheet and and he chatted about it with our traders and more and more guys started using it and and yeah, we we like it a lot. It's just if you're not Making X on average per day, you really shouldn't be losing that much.
¶ Exiting Profitable Trades Effectively
Yeah, yeah, okay. Nice. During periods of tilt associated with one particular setup, giving back a month's work of profit, do you size down on that particular setup only or do you size down for all of your setups? Um did that question make sense?
Yeah. Yeah, yeah, for sure. I mean if if I don't care why, if it's a one setup or if I'm not trading well, if I'm giving back a month's worth of PNL in in one trade, then I've I've got to size down. Cause I'm I'm emotional. I'm probably gonna try to make it back. Um that's a pretty big loss to lose one month's worth of PL. So yeah, definitely size down overall, not just for that setup.
For short term equity trading days, uh maybe weeks. How do you trail a stop? I guess asking you this question, it's probably more appropriate to ask about on an intraday basis. Yeah. How do you trail a stop or do you have a fixed target for where you exit the position? So I guess kinda talking about two different things there. Trading a stop for managing the trade and then finally exiting the trade.
Um when I get in, I wanna have an idea of what I can potentially make on the trade, have some sort of a target. It's not a hard target where if it gets there I'm closing the trade, you know, I'm up three hours, thank you very much. I'm done. No. It's more of like well, I can kinda target
three Rs, five Rs, whatever the setup calls for. And and that's kind of where I'm targeting. But I won't get out there just because it's hit it. I want to try to make more. Um and as far as trailing goes, I like to trail to previous pivots. I don't like trailing by a fixed dollar amount, like by trail the symbol by twenty cents or fifty cents or some or one ATR I've seen traders do. I just like to say if there's a trend.
Let's say the stock's going up and then every time the stock pulls back, it makes a higher low. Well, if it's not able to get below a previous low, That's a good spot for me to put my stop because it's proven that there's support there. It's proven that there's an inflection point there, that the buyers are in control, the sellers couldn't out overpower the buyers, and the stock went up from there. And
That's how I tend to trail my stops. Just move it to right below that spot. If it breaks that, then that means the trend has changed. Otherwise, I want to keep going and staying with the trade.
Uh this next question the person says I have been struggling with my exits lately. What criteria do you consider prior to exiting a profitable trade?
Okay. Good. So this is kind of a follow up to the previous one. And I should say that, you know I I don't only trail my stops, right? So I do also take pieces off as it's working, but I do want to make sure that I have some for the bigger move. Right. So if uh if I'm trading a setup where on my parabolic
I am looking for, you know, a stock that's running up. And I'm I tend to see from my from the from my history that I will make anywhere from like two to three Rs on average on that setup, but with maybe like a 75% win rate. then I I'm kinda going for that two to three to four R range, right? And I will trim when when the when the stock gives me that.
Right. So a lot of it is very s setup specific. I'm gonna trail my stop very differently for something that's parabolic and is now just coming back in line and and and coming back to the averages and coming back to earth. And I'm gonna trade trail that very differently than um a short that's trending down and making lower lower, lower highs in in lower lower, lower high.
setup I'm more likely to just trail it with with pivots. Just let it keep going and stop me out whenever you re reclaim a previous high. Whereas if it's just more of a retracement, uh mean reversion type of a trade, then I I'm kind of going for that preset number, like two, three, four hours, give it to me, give me that high win rate, and I'm out.
What would you suggest to someone who usually scalps out too early on trades?
Force yourself to to trail a little bit. Maybe not the whole thing, but some. And and also try to explore what might be causing you to take a trade-off too soon. Is it because you're too big and you see it, you see the number on your screen and you see the PL and you're like, I gotta grab it. And and that gets you emotional? Or is it maybe that you don't have a predetermined list of of why you're allowed to exit? Right. So make a list. What are the reasons that you're allowed to exit?
this particular setup. One might be approaching support. One might be, let's say for short, you're approaching support. Another one might be the trend has changed. It's now a positive trend. Reclaimed highs. That's another reason. Um uh PR hits, uh it gets extended to the downside, uh it gets power at the inverse of parabolic, it really shoots to the downside, volume kicks in.
All the longs panic out. That's another reason to exit. So each setup is going to have that set of rules for me and say, these are the ways that I'm allowed to exit this particular setup. And now I c have something to hold myself accountable to. I have I can grade myself and say, okay, at the end of the day, what do you give yourself? What kind of grade on your exits? If you don't have that list, it's kind of it's gonna be very difficult to know what you did wrong.
¶ Trader Development and Elite Traits
This next category of questions of classed as more development type of questions. First one being I'm currently a breakeven trader. How can I get to the next step and become a consistently profitable trader?
Just keep at it. Nobody goes from consistently red to consistently green and becoming a superstar overnight. So whatever got you from going to from uh, you know, consistently red to break even. Yeah, you know, in this market. Yeah, it's it's an accomplishment. So whatever got you to that point, keep at it and and keep improving. Cut out the the cut out the mediocre trades. Cut out the ones that are like, okay, should I be in it? You're not sure.
Leave them out. Just focus on your best trades. And a lot of times that will get traders to the next level. And now just focusing on really good trades.
What software do you use for backtesting and tracking data?
I've gotten better with Python over the years. So a lot of my backtesting I do in Python. I get the the tick data and then I load it and and I work on it in Jupyter Notebook. We have other tools available, you know, such as Trade Station and uh some guys using Thinkorswim and different ones there's Quantopian, there's different ones out there. Um, but I personally lately have been I've been doing a lot in Python, just downloading raw data and and just building a back tester.
from scratch. It it's a little time consuming, but it really gets me gets me involved with the data and I and I know what I'm looking at as opposed to just looking at the results.
I can appreciate that answer. Love it. Do you track statistics on your trade setups? And if so, how many trades do you consider to be sufficient sample size for analysing?
The more the better. Um I definitely track the stats on each setup. Um I'd say at least thirty, forty trades is is the minimum just to say, hey, this this has enough data to go on. Mm. But I definitely do track the more the better. And I like to track them by setup. Trader View is a good tool for that. Uh some traders have different accounts for different setups. So, you know, on their front end they're they select which account they w the trade goes into. So that that helps them
in in couple of ways. One is that They can track the stats a lot easier. It's already segregated in separate accounts. Um and then the other is that it gets them to to think about the trays that they want to put on, see which bucket it belongs in. Does it belong in this tr in this account or in that account? It it allows them to be more selective.
In your opinion, what characteristics separate mediocre, consistently profitable traders from the very elite traders?
Yeah.
Oh man. Let's see. So I'm gonna answer that two ways. One is pre-corona and then post-corona. How's that?
Okay, go for it.
Pre corona it's been i uh you know the it's the mindset, that entrepreneurial mindset you're always learning, you're always adapting, you're always trying to get better. You're very aware of your stats, you're very aware of of what you're doing and what's working and keep doing more of what is working. Just just cut out all the noise and cut out all the mediocre trades.
that tends to elevate traders to the next level and and elite traders are definitely doing that. They really have a very good understanding of what it is that they do well. what segments of the market they read well and and they focus there. They're not they're not scattered. Um and and yeah, that's it's still very true, pre or post corona. Now that we've kind of been through corona and we've we've had the crazy volatility and we've had traders do extremely well.
Um I've seen traders all of a sudden just have positive performance really elevate them to the next level. It it gave them more confidence. It um some of them made good money and now they're not worried about money as much. So now they're really more focused on the trade. Um so post-corona, I would say also it's just It comes to you. Over time, you gotta see it and it you gotta go through really good periods and
You you've got to have some success and all of a sudden that brings you to the next level. It gives you the confidence. You're not thinking about the money anymore. Now you're really zoned in on the trades. Um and I've seen that with a few traders where, oh man, where did they come out of? Like all of a sudden they just putting up insane numbers that uh we weren't really expecting beforehand. So um, you know, two prone answer there. And at the same time some people are just not
not gonna make it in it to be an elite trader. And I'm sorry to say, you know, some people are just gonna be consistently profitable traders, great traders. good traders, but not everybody's gonna be an elite trader. Um some some of it does end up being talent. Everybody can get to the point where they're like, okay traders, consistent. profitable traders, but not everybody's gonna be able to get to the point where they're superstars.
¶ Seven Points Capital Trader Hiring
Uh this these next questions are all around prop trading and questions around seven points. Now obviously it's you know, doing this episode wasn't intended to be a promotional piece for seven points, but there's a lot of questions around it. So it's you know, people want answers to these types of things. Um and and this first question might be a little bit similar to that last one. I'm not sure if it's worthwhile asking. You can tell me to move on if if you think so.
But with the current team at seven points, what's the number one skill attribute that your most consistent trader possesses?
Yeah, just being able to sit on the sidelines and wait for their trades. The best traders are just sitting and waiting and they're really pushing it hard whenever it lines up. Whenever their setup lines up, the timing's right. They're really pushing it hard and then they're just doing a lot less or very little of of everything that uh that doesn't meet that criteria.
In general, how long does it take for traders at seven points to become consistent in the case of no prior trading experience? And I'm not sure if you actually hire anyone with no tr prior trading experience, but Um yeah, feel free to answer that however you see fit.
Yeah, we don't really hire traders with no prior experience. Um we tend to focus on traders that have some profitability, some consistency. Even if it's just where they've been trading for a year or two with a small account, but they're learning the ropes, they're they have the passion for trading. They they can't get enough of it. They're learning, they're reaching out to people. Um
Uh, you know, you go on on some chatroom and and you become a millionaire. It's not like that. So yeah, that usually tends to weed out a lot of the beginning traders that are not going to make it.
if they've been doing it for a year or two on their own and now they're getting to the point where they might be at break even on their own and now you put them under a trading umbrella where they have support from other traders, they have managers, they have uh feedback from other traders, uh they have
They have capital, they they're not just, you know, trading a tiny account. All of a sudden those traders have a chance of making it and becoming a lot better. So we don't really hire traders with with zero experience, uh, but we will look at traders that are still early in their development and have have shown that they they do have that chance to make it
So how long would you say it takes a trader to become consistent? Obviously there's there's no one number there, but just broadly speaking, sort of a an approximate on an expected time frame.
Yeah, it's it's really on a case by case um basis. We have had traders that, you know, can come in and sit down and within a month or two, they're already putting up some really good numbers. And that that does happen sometimes. Then we have traders that have been with us for
a year, year and a half, and if they're just still not doing great. And we're never gonna tell them, look, it's not working out because they're not really losing us money. They're maybe making a little bit of money. Uh we're just constantly gonna try to help them improve and make them better.
Uh but I'd say on average, six months, a year should be plenty of time to become consistent and And making progress, especially if you've done a lot of the basics on your own for a year where you learn a lot of the basics, if you know what I mean.
Thank you.
¶ Prop Firm Pros and Cons
What are the advantages and disadvantages of trading at a prop firm versus trading your own money?
Yeah, so the big one is capital. You know, if you if you have a small account and you're limited to PDT and um you're not really able to trade freely, that's a big one. Uh capital. Another one is just the support. having access to other traders that are trading well, are consistent, are profitable, have winning strategies and being able to get exposure to them.
Uh a lot of traders what we have is the little clusters where um even though uh that's not the trader's manager, that they'll have a lot of clusters and discussions. uh throughout the day and and they'll send each other report cards and and they'll send each other their journals. So having exposure to winning traders is is definitely a big positive. Um, I think another big one is just having someone to hold you accountable. That's key. So if you're if you're constantly making the same mistake
Somebody would say, Hey, why are you c repeating these mistakes over and over? Let's work on putting in some processes in place to help us get rid of this mistake that's r constantly coming up in your trading. Um so having someone to answer to and to work with you on on on becoming a better trader. And
And risk manager also, right? How many times do you see traders on their own blowing up? Um an SPI or a Kodak? Um I I mean doesn't mean that we don't have bad days. Well we definitely do. It's just We have these hard stops. We have, you know, my my partner Mike who's just tremendous with managing risk and dealing with the with the back end of the business. He's he's the one I gotta go to and say, hey Mike, I'm locked out.
Uh even I have to do that. I'm locked out. Um what do you think about me ki continuing to trade right now? So I even I need to have that. Um
that backstop, that guardrail in place that says, hey, you cannot blow up, you cannot risk your whole career just because you're having a bad day, just'cause you're emotional, just cause things aren't really working for you. So guardrailing place to say to help traders um not blow up and and help them from Just getting in the in in trouble and uh keep them out of trouble from themselves.
Mm-hmm.
Uh any disadvantages?
Yeah.
Disadvantages. I guess maybe if you're if you have a certain trading style that doesn't mesh with the firm that you're joining. uh that might be one. So if you just gotta make sure that the the firm that you're joining, uh the the strategy that you like to trade, the type of trader that you are kinda aligns with with the firm that you're joining. So if you if you're if you're a futures firm if you if you're a futures trader and you're joining an equity firm
that could be one. If you're one that likes to swing for the fences and takes huge drawdowns and you're okay with that, but the firm you're joining doesn't let you draw down that big, that could be uh a disadvantage. Um you know, you might be a profitable trader. You just you're just taking big drawdowns. I mean that's how you trade.
While it's not the most efficient way to trade, you're profitable. So that could be a disadvantage, but I think in the long run, uh definitely a lot more advantages.
¶ Advice for Joining a Prop Firm
Do you think beginning retail traders have a chance or should they try joining a prop firm at first chance?
Yeah, we get that one a lot. Most prop firms are probably not gonna be able to give you a seat and allocate capital to you. If you don't have some experience. If you're completely uh a beginner, you're new to the game, there's a lot to learn. And you're not gonna be able to hold down a seat and a prop firm while you're learning those basics. So Learn as much as you can on your own. Learn about the market structure. Learn about what you want to trade. Is it equities? Is it options? Is it
futures uh what are you looking to trade and then learn what type of setups make sense to you. Try different things, but make sure that you're you're doing that on a very small scale. You don't want to risk, you know, your your livelihood. You don't want to risk your savings. Thankfully these days it's very easy to open a small account and uh no commissions and try things on a very small scale. Um and then
Find yourself a mentor, join a chatroom here and there. Join a chatroom for a month or two, see what you could learn from there, join another one a month or two later, see what you could learn from there, and then pick up some skills and then you say, Okay. I've tried it. I've gone from consistently red to less red. Maybe now I'm a break even trader.
I've realized that this is not an overnight success story. Um I've realized that it takes a lot of hard work. Um I'm amped up for it. I'm willing to put in the time. And I've tried it on a small scale. This is kind of what I'm interested in. And can I find a prop firm that can uh I can align myself with and now become better with them? I think that's the best way to do it.
¶ Prop Firm Operations and Growth
What role do Quants have at seven points, if any?
Um we have quantitative Traders where they're doing a lot of back testing, data mining. We don't do automated trading. But um, you know, we do use data and quantitative data to to figure out setups, to figure out what works, to write our indicators, to write scanners. um and and back test ideas. But um I would say we're more discretionary than than
Does seven points also hire swing traders?
Yes, definitely. A decent amount of my gains this year has been on the swing side. I think since the first time we spoke, my my personal trading has changed to the point where I'm doing a lot more swing trading the the firm as a whole. We're we're we're holding positions overnight a little bit more. So if somebody has a a good strategy that that has edge, that doesn't have blow up risk overnight, uh we're definitely open to that.
I'm just curious to know myself a little bit about some of those swing trades. Like um do they start out as a day trade which works, it's, you know, picking up momentum in the afternoon, you feel like there's gonna be a gap up the next day. Is that the type of swing trade you're talking about, or are you sort of riding a a hot sector or W what's gonna get you interested to to swing a position?
Yeah, some of it is the a day trade that translates into an overnight trade. Um, never when it's a losing trade. So the only way uh a day trade can become an overnight hold is If it's a winning trade. We never want to extend uh more time to a losing trade. Uh but most of the trades they start out with swing in mind. They stay are swing set up. You know why you're in and um you know where your your out is, you know where your stop goes.
Um the sector is hot, like in E V market right now, all the E V stocks are going crazy. Um th for a while that was good on the long side with some swing traders, then on the backside as well. Well um pot stocks for a while were extremely hot. So yeah, when when the sector becomes hot, that could be good. I personally have been doing a lot of swinging in these market leading stocks that we mentioned before, the Pelotons, the Zooms and
Uh, have, you know, the a l a way of of ranking these stocks that if they're outperforming, they're acting well. Um, I'm not just interested in day trades, I wanna hold them for the bigger picture as well. Mm-hmm.
Okay, cool, cool. How can someone who wants to transition from a different career get a job with a prop trading firm? I appreciate this might be a little bit similar to some of those those past questions, but um i it's an interesting way to put it.
Yeah, definitely. It's it's similar to before. You're gonna have to learn a lot on your own. You're gonna have to learn the basics at least on your own. Um, I wouldn't be so quick to transition from current career. What a lot of guys do is Uh what we've seen work is if somebody is transitioning from another career, they start out small.
They're they're trading part time. They figure out a way to make the two work together and slowly when trading is proven that uh the th that it's it's profitable enough where they can um live off of it, then they they do more of that and then quit their their career. So I wouldn't quit your current career in hopes of trading, replacing that, especially if you're sitting home
Because of Corona and now you have some free time and you're in front of your computer, you got your Robin Hood account going and um all of a sudden you wanna become a prop trader. Just make sure that um You know, you prove yours to yourself that you can do it and do it on a small scale and then the market's not going anywhere. Um, there's always gonna be a time for you to be able to quit your job and do it full time.
🔊 Whispering
It's the same as an in house trader. Maybe with a little bit stricter because they're not sitting right next to us and Um we we it's a little bit more involved with managing that trader, but it's the same idea. Uh they have to be profitable, they have to show that they're growing, that they have strategies that are scalable. Uh a lot of times what we come across remote traders is they might have they might be profitable, but their strategies aren't really scalable. You know, so if they're
trading off of one very small edge that um does can't really handle a lot of size, we're not as interested in that because um there isn't a lot of room to grow there. So Um as far as remote traders, we're we've actually hired quite a few because of Corona. Now that everybody's trading from home, our offices are all still closed.
And um it's gonna remain that way for a little bit. Um we've we've definitely hired some remote traders and um they've been great. Some have been some some great pickups and um they've been able to integrate into the firm really well. It's the same idea. A good trader that's gonna sit next to you is going to be a good trader if he's sitting home remotely, involved with the team or just right there live next to you.
Last question Mike. Any chance you're going to open an office in London?
You know, we talk about it a lot. Uh as a matter of fact we just have uh a recent By the time this this airs we'll probably have uh a trader in London. He's he's uh studying for the fifty seven. Um will it translate into an office in London? Maybe. Um we'd love to have a place there. Yeah.
That would be cool.
Yeah. Right now it's just um it's gonna be one trader in London. But if we can find enough talent, our thinking is where if we have a good team, if we have a good s um per trader that can st start an office and and surround himself with talent and there is that talent pool there, then w we're interested in opposite opening a location.
there. With with with Corona things are a little bit different and a lot of new officers are taking a pause, right? Um, but uh overall, yeah, we'd we'd love to have an office there.
Okay. And what about Australia? Office coming soon?
Let's do it. You know, that the time frame's a little bit different. Now how does it work? Um Yeah.
It's true.
US market.
I don't know, no.
Yes. So you trade mostly Australian markets.
Yeah, a hundred percent. I think I think the market I'm not sure what the the time difference is at the moment, but I think it opens around about midnight here. And then closes around six, seven AM in the morning. Something like that, depending on daylight savings, et cetera. So it's definitely the graveyard shift.
Yeah, exactly. Mostly focusing probably on Asian markets. But uh again, if if the opportunity's right and we're aligned with the right people, it makes sense and we hit it off well with them, uh we are interested in other offices. It's just
It's gotta make sense.
¶ Episode Conclusion and Contact
Awesome. Now I'll just throw in here, you know, if you're interested about the hiring process and learning more about sort of the back end of a prop firm, et cetera, um, check out the episode I did with Mike Mangery. Obviously I'm speaking to the listeners here. Uh Mike Manjeri is uh co-founder and partner with Mike Katz, and we did a podcast.
Uh, I don't know, it must have been at least like six months ago, probably longer. Um, but I'll link to that in the show notes, so there's a lot more information around uh this particular topic, which you'll pick up in that episode as well.
Yeah, that was a fun one.
Yeah, yeah, Mark was excellent. Well, we've got through all the questions. I'm actually quite surprised. There was a lot there. Uh we've definitely covered a lot of ground. Um, nice, precise answers throughout, I think definitely helped. So um yeah, that was amazing, Mike. I really appreciate you.
making the time to do this and I'm sure uh everyone who's submitted questions and and had answers will be grateful as well. So yeah, massive thank you. Um it's been an absolute pleasure to have you on the podcast again and I'd love to have you back sometime.
Uh it's it's always fun chatting with you and uh what you've created here is just amazing. I I'll say it again. And uh thanks for having me on and uh just stay safe and I wish everybody lots of health and success.
Thank you. And if someone wants to find out more about yourself, uh Twitter is probably a good place to go and maybe the Seven Points website. Uh would you like to share both those things?
Sure. So it's uh sevenpointscapital.com. And then uh my Twitter handle is at Michael underscore cats one one. Um, yep, that's the one. A lot of different uh Um impostors out there. So at let's see, at Michael underscore cats eleven.
Yeah. Yeah. Twitter's a a proper mess at the moment with all these fake accounts popping up.
I know, it's just every every week there's one of them popping up and then, you know, these um the community keeps on sending me these images of of how they're trying to extract money from them. It's just terrible. And I don't think you even get that check mark anymore on on Twitter, right? They don't do that.
Yeah, I don't know how all that works, but I mean that would definitely help because it it's not good. I mean, people sort of using your name to try and scam money out of people like it's Dodgy as well.
Yeah, so if if anybody reaches out to you and uh it wants you to trade n Nigerian dollars or whatever, Zimbabwe money or crypto, that's not us, okay?
Make sure you're following the real the real Mike. All right, Mike. Let's call it a wrap. Uh thanks once again and we'll chat soon.
Thanks, bud. You
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