265: Peter Stolcers - Taking a Top-Down Approach to Day Trading

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Trading in the financial markets involves a risk of loss. Podcast episodes and other content produced by Chatwith Traders are for informational or educational purposes only and do not constitute trading or investment recommendations or advice. And when most people hear about trading system, they think about some kind of mechanical, regimented type of system. It's a decision-making process.

And it has a flow to it. And the market is at the very top of that flow chart. And the market is about 65% of the total puzzle piece. And it still is for me. The market drives all of our decision making.

Yes, this is Chat with Traders. We're in episode two sixty-five. I'm Tessa, co host with Ian Cox, as we continue to bring on episodes of interviews that inspire and motivate or challenge and push boundaries. Today we have a special guest. His name is Peter Stolcers, who also goes by Pete. Seeing and feeling the intensity and chaos of the trading pits back in the eighties, Pete knew immediately that trading was the career he had to have.

Starting as a floor runner making five dollars an hour to later trading full time for a living. Pete discovered the importance of trading stocks with relative strength during the bear market of two thousand two. He uses a top down three step methodical or systematic process which helps him zero in on stocks to go long or short.

From longs to shorts, conservative credit spreads to high leverage options to occasional lotto trades, Pete fine-tunes his versatile strategies to go with current market conditions. Pete is a trading veteran with over thirty plus years of experience in the Chicago Board of Trade 30 year Bon Pitt. He also served as senior VP for a large brokerage firm. and has been one of the top traders for a prop trading company. He then went on to devote his time to build Option Stocker and founded One Option.

So without further delay, ladies and gentlemen, we're so pleased to present mister Peter Stolcers. Hi Ian. Hi Tessa. Thank you so much for the uh nice intro. And uh I'd like to congratulate all of the listeners who have been trading for more than 18 months because You have endured a bear market, very tough conditions. Yeah, Pete, uh where are you joining us from today? I'm just north of Chicago.

Okay. Let's dive in a little bit to your uh background. If you could share with us how did you get interested in the financial market?

Well, I originally got my degree in hotel restaurant management. Uh spent seven years in the restaurant industry and realized that I was not gonna reach my potential there. And while I was studying for my MBA, I began trading stocks. And eventually started to learn a little bit about options. And while I was doing that, a friend of my sister's was a market maker on the floor of the CBOE. And he invited me down to see what he does. As soon as I hit that trading floor.

I knew I had to be in this business. There was just this electricity that shot through my body. And it's one of those defining moments where you know. What you need to do. So then I spend every waking hour trying to read and learn about options trading and stock trading and eventually got my MBA and I was relentless.

One lesson for all of you prospective traders is that if you want something, you have to do everything imaginable to do it. And if you're relentless, you will succeed. So I Went to Chicago, rode every elevator, knocked on every door, handed out resumes. And eventually someone called me and they said, listen, I know you live in Milwaukee. You said you'd do anything. I have a runner's position open for$4.50.

Are you interested? And so I said, well, I gotta make at least five dollars an hour. And this was with MBA in hand. So uh I went down and interviewed, I got the job and traveled four and a half hours a day. For four and a half years. And I only made five dollars an hour for about the first eight or nine months. And then my career kind of evolved. But uh it's that type of attitude that breeds success.

So I started out in the 30-year bond pit, Chicago Board of Trades, still one of the most exciting environments I have ever been in. and eventually got off floor working for the same company and specialized in institutional option execution. And eventually the company was bought out by Mann Financial. I became a senior vice president, established one of the largest option order entry desks for institutions and retail traders, continued to do that until the year 2000.

And at which time I joined Terranova Trading. We're rated number two brokerage firm by Barons. And uh we had cutting edge trading technology. We were the sponsoring broker dealer for the archipelago ECN.

Which ultimately merged with the New York Stock Exchange. So had an incredible background in terms of seeing what traders had done both on the retail and institutional side. I've seen the trading technology side of it. And after two and a half years as senior VP for turnova, I decided that it was time for me to pursue my real passion, which was trading.

I was a kid in a candy store. I had all this trading technology and I couldn't trade. So I gave up my corner office and I took the biggest risk of my life, which was to start trading. And it was truly a career change, even though I had all of these insights. From the trading floor and all this knowledge. And I had been trading while I was in the brokerage industry, it was not the same as.

solely relying upon trading for your income. And I had a wife and three kids. So very intense moment. Uh I struggled. and eventually gained my footing and also started trading for a proprietary trading company. Would look at about 500 trades per day, execute about 150 of them, all option trades. became one of their top traders. And that process was like flipping charts constantly throughout the course of the day. And eventually you get very, very good at pattern recognition.

the edge that the company had had disappeared. But because of my chart reading ability, I was able to make money when almost all the other traders had left.

And that prompted me to start developing scanners and identifying and quantifying exactly those characteristics that made a trade a high probability trading setup. In 2009, during the financial crisis, perhaps not the best move, I started to plow a bunch of money into trading software. And that now is Option Stalker. And it's just a great. piece of trading software. So that's kind of where we're at at this juncture.

Great, Pete. Thanks for uh sharing all that. Oh, so um, what year uh did you get started trading in the in the pits there? How old were you? That was in 1989 and uh I was 28 years old. So I wasn't actually trading, I was a runner.

What what is that like? Uh that is taking uh large orders and running them into a mosh pit. uh with uh huge traders, people getting stabbed with pencils. They had to put railings around the pit so that uh people wouldn't get thrown out of them and uh you could stand in the pit. and lift your feet off the ground. That's how packed it was by just putting your elbows out. So uh did it fit the uh um often seen videos uh uh that we see in movies of people screaming uh holding uh

slips of paper uh above their heads. Is that is that is that remotely accurate? No, it's not. It is ten times crazier than that. Oh really? The these traders are fighting for their life. It's not like a rock concert. Every trade that these guys do, their livelihood depends on it. It truly is something that and they didn't allow cameras down there. Very, very crazy scene. So uh was it those with the loudest voices and the tallest who could reach the highest? Uh, did they have an advantage?

Oftentimes, yes, in terms of getting uh orders filled, they would have an advantage. So where you stood in the crowd made a big difference and being able to stand to uh closer to order flow. So yeah.

You you mentioned about charting uh and that you would look at charts. Uh now this is in the days before the internet. What kind of technology did you use and when did you start using it? How what was the format of you the looking at charts? Was it just all on the screen, simple line graphs or Well, early on, uh, I wasn't doing any charting. I was really focused on the execution side of the business. So not as much trading, but

By 1999, 2000, everything was going online and then trading software was very available. So I was using very similar charts to what you would see now. Realtic was the trading platform that I used. And you mentioned that you worked with uh institutions getting option orders in, is that correct?

Yes, uh way back when you had to have an exchange membership on all the option exchanges to be able to execute an order on them. And so we would be The executing broker for other large institutions like Goldman Sachs, Morgan Stanley, Ameritrade, PBS. Uh so we would offer that access to all the different exchanges with direct phone lines down to the floor in our own presence and our own floor brokers and independents that we use.

Do you know back then, to what degree did these institutions that you work with actually look at and or use technical indicators when looking to acquire uh or dispose of positions? Well, we didn't really know who was on the other side of the trade or what tools they were using to execute the trade. We only knew that. uh they had an order to get the trade done at a particular price and a particular quantity.

So it was our job to try and establish the price and to get the best price out of the trading crowd. But technology was definitely used by a lot of firms. Chicago research and trading, for instance, in the OEX Pit, which was the most liquid options contract in the world.

uh used TV screens and you could be a floor broker for them. And if the upper left corner of the screen went to magenta, you knew that your job was to do X. And another person trading for them, if they saw the lower right hand corner go to Yellow, they knew they had to do something different. So nobody had a complete idea what the total puzzle piece was. They all knew their own individual pieces of it. So technology's been around for a very long time.

Mm-hmm. Um back then, did they have dark pools uh or any other uh way that institutions could uh mask their entry into or out of stocks or options? Well back then it was uh much more a kind of a relationship and a network. So it wasn't done virtually, but it was done via phone calls. And so you would know who the other large institutional holders are of a particular stock if you're looking to buy or sell.

And so as a broker, you would go and you would shop that order. You knew that you had 50,000 shares to buy and you thought, well, I think I know some firms who have a position that might be interested in selling. And so the trade is arranged off floor and then crossed on an exchange. So the buyers and sellers meet. So in essence, it was uh kind of the same because the buyers and sellers were communicating, not necessarily in the public eye, public display.

So how old were you when you actually set up your first trading account? I was uh twenty-seven years old. It took me a while to figure out that this is what I wanted to do. And there are many uh members of mine who are much younger than that who are getting an early start on this. So it's pretty exciting for them. Yeah. Uh how about your coworkers when you were on Wall Street? Uh did did any of them trade? And did and if so, did you share trading ideas and and and or have any mentors?

Uh we did share some trading ideas, but most of them did not trade. It was very difficult because every trade that you would do, you had to have cleared. through compliance before you did the trade. So I would drive my compliance officers crazy because I'd constantly be running in there with trades I wanted to do. So it's very difficult to within a brokerage firm.

Well, did they come back and say, hey, why don't you just be a buy and hold investor so we don't have to spend so much time with this? Yes, they would. Yes, my compliance officers would go kind of nutty on me. So yeah, I tried to tone it down, but uh That's another reason why I had to leave the brokerage industry because I didn't need that hurdle and that obstacle. I wanted to trade.

How old were you when you were able to trade freely without having to go through a compliance officer? So in 2002, I was 42, and that's when I uh resigned from Terra Nova Trading and started to trade on my own. And it was a very difficult start. So I knew all the hardships I had seen. So, you know, one thing about my background is that I have seen it all. I have tried it all. I know what works, what doesn't work. I know it from the institutional and the floor side to

personally trading to watching thousands of retail traders and watching some of the really successful larger traders trade. So I knew what the obstacles would be. And eyes wide open, I knew that this is a career change for me. And when I started trading. It was one of the toughest market conditions I've seen. I had about$250,000 in capital and$150,000 was my stop loss.

And so I was preparing that it would not go smoothly, but it was very disheartening. The first eight months uh the market had this Chinese water torture drip, drip, drip lower and than just the tightest. Trading range. And we had come out of the tech bubble and we were preparing to invade Iraq. And so nobody was really willing to stuck their stick their neck out and do any kind of big trades. And I was leaking oil. Plus I had my expenses to cover.

It's a grueling period. And uh so I kept my wife apprised of what was going on. And uh my friends, my family, everybody wondered why I was doing this and they were concerned. It's very isolated feeling. So you didn't have uh any fellow traders to uh um commiserate with or uh to talk this over did you feel did you trade alone?

Completely alone, yes. Uh and very isolated. So uh I spent all of my time just doing research and analyzing and uh The good news is that I was learning and I was learning under the toughest market conditions. The reason I congratulated people who have been around for 18 months because last year was a tough year, very, very choppy and uh difficult. uh time to learn how to trade. And if you've been trading for a while, difficult as well because you've not most people have not seen a bear market.

But in 2003, March, April of 2003, the market turned around. We invaded Iraq. Mission accomplished. George Bush on the aircraft carrier after two weeks. Uh and the market lifted off. And all of a sudden the lessons that I had learned that I did not realize I had learned all of a sudden came to fruition. And it was kind of like shooting fish in a barrel. Very, very easy.

Interesting. So uh what were uh some of the lessons you learned both uh during your time uh in Wall Street, uh having to deal with the compliance officer, and then after when you left?

uh during the bear market of 2002, what were some of the uh types of strategies or stocks or options you'd pick uh and what did you learn during that process? A lot of it was really identifying uh patterns, trading patterns that worked. And I also gained a real appreciation for the importance of the market. And so I started to develop a trading system. And when most people hear about trading system, they think about some kind of mechanical, regimented.

uh type of system. It's a decision-making process. And it has a flow to it. And the market is at the very top of that flow chart. And the market is. About sixty five percent of the total puzzle piece, and it still is for me. The market drives all of our decision making. So if I'm looking at what was happening and why I was leaking oil, it's because of the market. The market conditions were extremely tough.

Even within the market conditions that I was faced with, there were still really decent trades that I had. So what was distinguishing the good trades from the bad trades?

And what I started to realize was that, hey, you know what, these stocks are holding up extremely well. In fact, some of them are ticking higher. When the market is going down, they are strong relative to the market. And that became a major tell for me because it was a sign that institutions were in their mind. Seventy five percent of all stocks follow the market. Well, when they don't, there's a reason for it. And these institutions don't necessarily care that the market is going down.

today or tomorrow, they're looking a year out and they're accumulating shares. So when the market goes down and the stock stays flat or inches higher, you know that the smart money is in there buying. And so that became another part of my systematic trading approach. And I had realized that and I had recognized it. So that uh became one of the cornerstones to my approach.

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So you're noticing uh these stocks during the bear market of 2002 either not falling as much as a market, starting to uh firm up. Uh, and in some cases start to trend up even as the general market uh goes down. So were those stocks, did they outperform the market as well when the market turned around in in uh early two thousand three? Exactly. That's exactly what happened. So

Uh the edge that we employ is, and you have to have some type of edge. You need to understand what the edge is, and more importantly, you need to understand why it is that it works. And the reason that this edge works is that when the market is going down, and let's say that you feel, okay, it's bottoming, and now I feel the market's going to reverse and it's going to go higher.

Let's say you get the market wrong and you're trading SP 500 futures. If you were early and the market goes down, you are going to lose money, period. However, if you use a long stock position as a surrogate market position, and that stock has relative strength, The market could go down, but because the institutions are in there bidding for that stock and wanting to accumulate it, that stock will tread water.

sometimes even go higher. So even though your timing might have been off on the market, you're not going to have your head handed to you. That's a huge edge. Now, if the market does go higher and you got the market right, that stock is going to take off. It'll be like throwing gasoline on the fire. And so the whole concept is really to follow the smart money.

And does the same apply for during uh say a bull market, if a particular stock or sector is starting to weaken and starting to go down and flatten? Is the same r works the same in reverse? Absolutely. You can see which stocks are already starting to leak oil before the market rolls over. So they are weak relative to the market. Institutions are profit taking. And those stocks are starting to roll over well before the market does.

And then finally when the market starts to crack down, the bottom falls out of these stocks because there's no one bidding for it and the stocks have a lot of uh selling pressure on them.

I see. Are there any particular stocks or sectors that you see right now that are exhibiting this uh behavior of starting to decay even as the overall market remains fairly strong? Well, the market is starting to get a little bit toppy this week. Typically we don't see that type of selling pressure until mid August to late August.

Lots of reasons for it. Not going to quite get into it, but the bid net remains pretty strong into megacap tech earnings. We'll see how Apple comes out. Actually it did. I'm looking at it now. It looks like there's a positive reaction to Apple. But tech stocks have run up so much that uh they are a little bit frothy, and some of those names we are starting to see some toppy price acts. So you're seeing the stocks pulling back off of these highs.

And they're weak relative to the market. And uh that would be the sector that I would be looking at if the market sets up for a short here. I think tech stocks have some pretty good downside to them.

So you mentioned in in your videos that uh your first step is general market analysis and you often mention fundamental viewpoints. To what degree has this has the tsunami of money printing in the last few years distorted normally important economic and interest rate impacts on the market? With some examples uh that I've seen.

For example, like the Turkish, Argentinian, and Venezuelan stock markets are up uh seven, nine, and seventy-five times in the last three years, despite rising interest rates. and collapsing economies due to massive money printing. How how is money printing affecting the economic fundamentals and the analysis of the markets, or is it?

So personally, uh, I don't assume that I'm going to be smarter than Goldman Sachs or Morgan Stanley or or the big money. And uh a lot of the research reports that they publish, you'll often see those. Analysts are wrong and they're scrambling to kind of catch up. I am very aware of the fundamentals. I do a lot of research on.

the current credit environment and on the money printing and where the economic data points are coming in. And that is part of my market analysis, but it's more to have awareness. Of what the potential speed bumps might be, and if there are any snags that could be coming up. but I'm not trying to predict what the outcome will be. I think that's where a lot of traders get into trouble. Instead, what I do is I use technical analysis and I watch the market.

And when I start to see those double top lower high. and those breakdowns with heavy volume, then I know that there's heavy selling pressure and that the institutions are exiting the positions. So I really use the fundamentals more for awareness. so that I'm aware of everything that's going on, but I use the technicals to drive my trading decision. Mm-hmm. Uh so if uh you see, for example, bullish fundamental news that is perceived or should be bullish.

But the markets actually respond negatively. Do you pay attention to that as a say a key turning point where uh the buyers are fully committed in and and that likely this is a a turning point because if the markets can't rally? on good news, then maybe a decline is in order. So let me give you a couple of really good examples. Uh and this you can all verify this in my YouTube videos. I post a couple of them a week and you can go back years and pick out some inflection points in the market.

See if I got it right. But uh in twenty twenty. I was reading about China and how their economy had completely shut down. Chinese New Year, streets are quiet. There's this virus thing going on. And so I was very aware of it and I thought, you know, this is a really big development, and that is going to catch up with our market. But our market continued to grind higher and to make a new high. And so I was very passively participating in that rally.

And by the end of February, took all those positions off, went to cash. And then I started to see the market declining. So I was aware of the backdrop, but I did not start shorting until I saw that actual breakdown. Another example would have been in the uh fall of 2021, we had a Fed that was going to start tightening and inflation was running rampant. So all of a sudden we started to see signs of selling pressure. And when the market doesn't rally into year end.

That's a warning sign because there's a very strong seasonal bias. And so all of a sudden. I start to see signs of lower highs and some selling pressure. And sure enough, by 2022, you could start seeing uh those technical breakdowns. That is when we start short. Because, you know, and to give you another example of uh why this approach works is I went through the tech bubble. I went through the irrational exuberance. I think Alan Greenspan uh used that phrase in 1997.

By any valuation models, yes, the market was way overpriced, but guess what? It went a lot higher for the next three, four years. So anybody that was shorting based on valuation. They were carried out in body bags.

Uh yeah, we we often hear the uh the phrase, don't fight the Fed. So does it surprise you that we've had such a rally uh despite uh rising interest rates on uh rising uh A market rallying on low volume. How do you look at that? Well, the volume hasn't been too bad the last three months, actually. It's been above average. And there have been pockets where you'll see a nice rally and it has come on decent volume and the price action has been very tight.

with little retracement. And so the reason that that orderly price action is bullish is because every time that sellers try to take profits, the bid is replenished and the buyers are still there. And the reason that I believe the market has been grinding higher is we didn't know what was going to happen when the Fed started to hike interest rates, the most aggressive rate hikes that we've seen in decades. Well, the notion was this is gonna ruin our economy.

We're going to see an economic collapse here and the bottom is going to fall out. And so over time, and now that the Fed is close to the end of their tightening cycle, the bottom hasn't fallen out of the economy. And so now that threat is starting to dissipate. And that's why the market bid has become strong, to your point, trillions of dollars. Printed. Imagine that. We have inflation and trillions of dollars been print have been printed. Gee, I wonder where that came from. Yeah.

Anyway, uh the money has to go somewhere. The threat of a credit crisis is uh starting to be diminished because we haven't seen any follow through to the bank situation earlier this year. We needed to wait a few months to make sure that there weren't any other cracks in the dam. And right now.

Things look pretty good on the bank side. The financial stress test came through and the Fed feels that uh the banks are able to withstand any kind of Major recession and the threat of a major recession is also pretty low right now. Hmm. So then um maybe the solution uh for all of this is to print even more money than you can make it, right? Why would any of us ever want to work? All we have to do is print money, right? Yeah.

So the underpinnings, they don't look good. If you look at credit on a consumer basis. on a municipal basis, on a state level. on a federal level. If you look globally, it's not a good backdrop. But if you would have gone on that notion and started shorting, then you would have probably been short in the year 2000. And you can't try to anticipate what is going to happen when it comes to uh

credit and the market, you have to go with the flow. And that's the technicals are going to keep you on the right side. And the technicals are going to tell you exactly what the smart money is doing. And that's why I rely so heavily on

Mm-hmm. How does your general market analysis influence your various strategies of how to go long, short, and for position sizing? That's a very good question. Uh so in terms of my strategies, it's a matter of the longer term perspective. And then the context of how the short-term move fits into that longer-term context. So for instance, uh if I start looking at what strategies we used and I we'll get into options I would imagine a little bit later.

If you're an option trader and you're interested because you think I'm going to talk about options, uh it let me be clear that you get the market right, you find the best stocks, you get the stock right. If you get those two pieces of the equation right. Then option trading is easy and you could do almost any option strategy you want and make money. Some strategies will be more uh lucrative, they'll be optimal.

But you have to focus on those two pieces because they are critically important. So with regards to COVID, when the market started to tank, it fell very, very Sharply in 2020. And yes, we did short intraday, and there were some really big moves in March. But then as the bottom started to fall out, we started to see just this massive spike in option implied volatility. And we started selling puts because we were selling.

I remember selling Google uh six hundred and fifty dollar puts and the stock was uh that the stock would have had to fall have fallen another fifty percent in a month. We were generating uh 10, 15, 20% returns on these stocks by selling out of the money puts.

Knowing that this was a gigantic overreaction and that the the whole market would absolutely have to implode, and that just simply wasn't likely. Um, so as the market started to kind of catch a bid and it started to stabilize, we shifted into selling out of the money bullish put spreads put spreads, still some market threats, still some uncertainty on how

COVID was going to impact the economy. So distance yourself from the action, take advantage of high option implied volatilities and time decay. And so yes, the market uh drives all of the decision making. So last year a good example and and sometimes you have to lean a little bit more on swing trading. And when we had zero percent interest rates, the market would just kind of float, float, float higher. The intrada trading ranges were very, very compressed. And so you had to rely more on

Swing trading strategies and selling out of the money bullish put spreads. Last year it was completely different because we had these gigantic overnight moves down. And then we had these big snapback rallies the next day. You didn't know what was gonna happen if you look at a chart from twenty twenty-two. Giant candles. Well, the intraday ranges were huge. There was no reason to take overnight risk. You had these giant moves intraday. All you had to do was day trade and focus on day trading.

Mm-hmm. So during twenty twenty two, uh, with that kind of volatility, did you focus more on just going, say, short very sh uh short term as in day trading? Stocks, uh long or short, or did you also use options as a strategy during that market environment? And if so, what kind of strategies did you use? We're primarily day trading stocks. And yes, we have uh traders in our chat room, some seasoned pros uh who were trading options and so.

for intraday moves liquidity is very important. Uh it's fairly difficult to day trade options. just for liquidity reasons, you're giving up a pretty big edge where the underlying stock always has a tighter bid ask spread and with four to one leverage. I personally I prefer to trade stock, even though my roots are all option based.

If I'm day trading, the liquidity, it's nice to be able to sell an ask and buy a bid, and you'll rarely be able to do that in the options markets because typically the other side of your trade is a market maker and they don't budge. But so yes, we will trade deep in the money options. Typically for day trades, you want to have a nice tight bid ask spread. There are probably only a few hundred stocks that you would have the type of liquidity that you need to day trade options.

You would want a delta of say 0.75 or higher, something that's going to move point for point with the underlying stock. And we're not at all opposed to trading weekly options because we don't plan. on holding that position for more than the day. You're in and you're out.

Mm-hmm. And what about uh twenty twenty three, especially the recent months? What is your overall take on the market? And what kind of strategies are you choosing to reflect your disposition on the market? So we've continued to do a lot of day trading and the bottoming process that we really saw through March still could have reversed. We could have had a nice downleg.

We didn't, but we could have. So the threat was still there. I still didn't feel confident swing trading and the intraday move uh moves were still very good. And the ATR though has the average true range for the S P 500 has been tanking. Over the course of the last few months. One of the reasons for that is that a lot of the uncertainty is starting to come back out of the market. So the first quarter we're still day trading. I was just on the brink of starting to do some bullish swing trades.

I like the fact that the market had put in a nice base. We had the 50-day moving average. It crossed above the 200-day moving average. That's a golden cross. That's usually a pretty good sign. But then lo and behold, about two weeks after I started to turn a little bit bullish, we got the bank.

failures from SIVB. So I've been through 2008, 2009. I thought, you know what, I want to give this a couple more months before I start aggressively swing trading. So my swing trading has been pretty minimal. Uh we've been doing a little bit this week, but not that much. And so my market opinion right now is that And we've got the Fed in recess. Washington DC is going to go into recess once the megacap tech earnings are done, which they will be after today.

Shorts will be more aggressive and some of the air will be let out of the balloon and everyone will start wondering, gee, is the Fed going to hike rates in September? And which by the way, there's it's been a quite a large bond sell-off that started before the uh credit rating uh was lowered by Fitch. And that's because the market's been expecting that the Fed was going to cut rates.

in Q4. And the Fed has said absolutely not. In fact, we might raise rates. And now push is coming to shove and we're getting closer and closer to Q4. So they're having to unwind that. Well, the Fitch news really accelerated that bond sell-off. So they're having to unwind that position. They are taking losses on that. So higher interest rates are going to weigh on the market a little bit as well as we head into the end of August. And

into September and just a seasonally weak period. And after a big run, the market's gonna start to soften up. What so what does that mean? How do how does how do I trade that? Well, it means that you keep your risk exposure fairly light. You know, everybody goes on vacation, the volume drops off, focus a little bit more on day trading and start looking for those topping signs.

And so I'll be looking for a little bit of a rebound next week. I don't think that the sellers are going to completely go away and then look for that lower high double top. And then once you have that and a nice long red bar that starts to break down and make a lower low. Now you know you've got the makings to day trade from the short side, be a little bit more aggressive there, perhaps even do some swing trading from the short side, maybe sell some out-of-the-money bearish call spread.

on stocks that are particularly weak and breaking through technical support.

Mm-hmm. Uh, how often do you not trade due to unpredictable or neutral broad market conditions? That is Such a good question. Oh, is that a good question? Um, that is something that I try and teach people. You don't always need to be engaged in the market, but the temptation is to always have something on.

And early on in my career, some of my biggest losers would come after my biggest gains because you're thinking, oh, I'm just going to keep doing what I did before and it's going to make these monster returns. So some of the tells, I know that you have an audience that largely day trades. So some of the tulls that you should look for if you have a low volume, choppy trading day with lots of mixed, overlapping candles.

It's not going to go anywhere fast. It's a low probability trading environment. If you are inside of the prior days range and inside day. It's going to be a low probability trading environment. If you're inside the first hour range, it's a low probability trading environment. So then you have to trim your size, your trade count. just sitting and watching could be the best thing that you do. Unless you find something that's super compelling, oftentimes we'll find a lot of

group or sector rotation within the market. And then we're going to find that because those stocks are going to have relative strength or relative weakness and the heavy volume that we're looking for. And so you'll be able to zero in on those pockets and make your money there. But in general, you're trimming your size. Uh if you have a monster move the previous day.

The next day, you're probably going to have an inside day when the market's not going to have back-to-back big days. So you should expect that if you have big pending news, like a jobs report, uh FOMC statement. you could lose a couple of days of trading because everybody is going to wait for that event. And so you factor that into your trading and you reduce your size and your trade count.

W one of the quotes you have on your blog is, uh, you should not buy breakouts near the high of the day. Uh why is that? Well, one of the reasons is because most people don't know how to identify the real McCoy, which If it's early in the day and it's making a high, say in the first 40 minutes or so, and you have a conducive market backdrop. for longs, then you can trade those, but you're looking for these stacked consecutive green candles on heavy volume with very, very little overlap.

The big problem that most people have is that they start seeing that pattern and everything that they want to trade. And it's just not there. There's overlap. There's not the volume. These are head fake moves. And when you buy the high of the day. from support and so when the stock does reverse It reverses very sharply and you're not sure where you should be stopping that trade out. And oh my gosh, now it's continuing to reverse that entire move. So the better method is to set alert.

And to wait for those dips. And when the stock dips. We want to evaluate that dip. And in particular, what's the nature of that dip? What does it look like? Are we seeing stacked red candles consecutively on that pullback? Is the volume heavy? If it is, that's not a dip. That could be a drop. That whole move could reverse. On the other hand, if I see Overlapping candles

lighter volume and the stock is able to retain most of the gains that it's put in so far that day. That's just a normal little round of profit taking and that dip. Especially if the stock retains its relative strength is going to stage another leg higher and you'll have that bullish flag formation. And that will provide you with a much better entry point. Plus, while you're waiting.

You're able to evaluate the market strength. What has the market been doing over the course of those 15 or 20 minutes or 30 minutes? And it also encourages discipline, which a lot of novice traders they are just they'll shoot at anything that moves and you you really need to be able to uh put FOMO aside and I've d developed an alert system.

specifically for this so that traders can set an alert and we use a number of different indicators. One is it measures relative strength and relative weakness. Well, a stock that has shot higher Is going to have lots of relative strength in the first say half an hour, 45 minutes. And that percentage gain is going to be very big relative to the SP 500. Well, eventually it's it can't keep up that pace. It just can't.

And so the stock is going to lose some of its relative strength and it'll dip below zero and then it'll regain that strength. And so we set alerts and we know that it has to go relative weak. And then relative strong, and we get the alert. And when we get that alert, we look at the stock, we see if it's got stacked red candles. or if it's been a nice tiny little pullback on light volume, then we know that's going to be a good opportunity.

And then we'll take the trade. LRSI is another indicator that we use similar premise. And that which we use, we can also use for swing trading. Same concept applies. So you get a nice big breakout on a daily chart. You don't have to buy the breakout. That stock in all likelihood is going to retrace. You would use longer time frames like maybe a M30 or a one hour. time frame for that type of setup for swing trades.

Mm-hmm. So um, but if one's looking, say, at a daily chart and they see a breakout and the size of the breakout is not obscenely large, say maybe two or three times the average true range. uh so it's not like one of these very long candles. Uh and and the volume is heavy. Um, isn't that a type of breakout that would be uh conducive, say toward near the end of the day where you you get maybe like a hammer formation?

Oh, those are really good breakouts. In fact, on every breakout, uh you make a good point. Uh You want to break that on huge volume with a long green candle closing near its high. versus poke, poke, poke, poke at that resistance level. You want to blow through it. You want to obliterate. But even then, most of the time, you're still going to get some retracement and you're still going to get some profit taking.

And you may not get as big a retracement. So if the chart looks really good and the stock is not too far out of the gate as you've mentioned. then what you'll want to do is set an alert with maybe a five minute or 15 minute uh time frame so that just even a smaller dip Is going to trigger that alert so that you can evaluate it. 90% of the stocks, they pull back. 10% of them, they won't. They'll just keep right on going. And you have to be willing to Miss

those 10% of the trades. But in doing so, what you're going to realize is that for the 90% that do pull back, they're going to be a huge percentage of them where you look at it and you go, oh my God. I'm so glad I didn't taste that breakout because that thing retraced the whole way and I avoided a very big mistake.

Mm-hmm. So let's jump to uh part three of your process, which is uh choosing the strategy, whether to go long short stock or to choose uh uh options. Those who avoid options due to perceived complexity and others who only want to to do options because of its leverage. How can options be used responsibly to expand our options? Well, again, options are the icing on the cake. And if you get the first two parts of the equation right.

Trading options is going to be very easy for you. And what we suggest to novice traders, and this is gonna dishearten a lot of listeners and there aren't a lot of people that follow this advice. But trade one share. If you're starting out, trade one share of stock. Get your win rate above 75%, do it for three months, and then start increasing what you do. Then and only then.

Should you even start thinking about options or even learning them? Because this is a double-edged sword that cuts very, very deeply. If you don't know how to trade. And you get the market wrong and the stock wrong, there's a huge probability that you're going to lose money very, very quickly. Options will simply take you out of the game much more quickly. And so when it does come to effectively trading options.

You've got your confidence up, you've got your win rate up. You're not going to get to that 75% win rate unless you've been trading for probably two or three years and put an extremely Uh just putting some extreme hours. Uh you have the knowledge that you need to identify good market conditions from bad. And now you can take your trading to the next level using options. But the

You know, there's no big mystery to options. It's the direction, duration, and magnitude of the move are what you have to quantify. And so if you look at all these black shoals and option pricing software and models, oh, this is great. You know, here's what my PL can look like. Well, you still have to know what the inputs are. What is the duration? What is the direction of the move? What is my level of confidence in that move? And so those are things that you're going to also pick up.

When you're just working with the underlying stock, I can give you specific examples of strategies that we use when we trade options. you know, uh one of the most exciting option strategies that we use, mind you, it's a very small part of what we do. So I don't want to get anyone super excited that they're gonna jump in and learn how to do this because

It is the epitome of option trading. But in the last week or the last hour of the week, Friday, we look for weekly options. We look for stocks that have extremely strong characteristics. We look for the market setup that we need. And you can buy options for a dime, 15 cents, and they can go up two, three, four X even within the course of 15 or 20 minutes.

But this is a very low probability trade, meaning most of them don't work out. So we really have to work on that component of it to make sure that we have our odds of success up. But it's also a very low risk strategy with high potential. But most people are going to look for those opportunities in the last hour of Friday every week. And they're just going to go in there bing, bing, bing, shooting around.

when the setup is just not there. So it's a small percentage of our trading that we do. It's kind of a fun way for us to spend a Friday afternoon very late and it nails Really drives home a lot of the concepts of pinpoint precision when you're trading options, buying options. If you're an option seller, then it's kind of like uh instead of being a sniper, you're throwing hand grenades. You just generally have to be right. You can sell naked out-of-the-money put.

on very strong stocks that you would like to acquire and you can generate income doing that. You still have to pick really good stocks, but that's an excellent strategy at selling out-of-the-money bullish put spread. Thank you. When you have a decent market trend is also a fantastic strategy because most of the time, about 80% of the time, The market is flat to hire, and that strategy is going to generate income for you under those conditions. And once we get through September.

I think we're going to have a market dip. And from that point forward, I really feel that we're going to have a nice environment for many years where we can sell out-of-the-money bullish put spread. It's a strategy you should learn. So you don't need to be complicated with your option strategies. You don't have to do broken wing butterflies and iron condors and ratio back spreads. Just have to know how to.

Do debit spreads, credit spreads, selling naked puts is a good strategy to know, and then just buying in the money calls or puts. Focus on the market. Focus on getting the stock right. You get those two pieces right. That's that's the key. Excuse the last interruption here. This is Tessa. We hope you're enjoying this episode so far. If you love the podcast,

Please give Chatwith Traders the best review you can on whatever platform you're listening from. This will help us to keep the episodes coming. Also, if you haven't subscribed to our email list, please hop on to chatwithraders.com and click on subscribe. so we can keep you posted of information that may be of importance. Thank you. Now back to the chat with our guests. Mm-hmm. Uh in some of your videos, um, you've highlighted some stocks that are breaking out.

And that due to your cautious nature at that time, that instead of going long the stock in a breakout that appears to be looking very good, uh busting above the trend lines. uh you have put on trades more much more conservative trades, uh bullish um credit spread trades where the stock could actually fall.

uh a number of points and you could still generate a decent income of around twenty five percent on your position. And so um what are your thoughts about, you know, sharing a little bit uh More conservative strategies because so many people have heard about the oh, if I buy this call option and it it could quadruple in the next hour and I could get rich, but A lot of traders would uh like to understand the much more conservative way to use options as a many tools in our tool chest.

Right. Well, yeah, you hit a couple of really important points. One point is I don't do the videos all the time. So for me to provide minute to minute instruction to YouTube followers. If I put the trade on and give them a level that they can lean on and it, yes, if the stock breaks below this level, it would have to move quite far. And then you would want to close this trade down.

It's kind of an automatic pilot. So time decay uh whittles away at the position it expires. And so there's no action required. Part of it also is the warm fuzzy feeling that I'd like to have my YouTube followers get when the trade works out because They see, you know, video after video that, hey, this is a really good method and it's been successful versus, you know, and it is very, very tough to publish trade ideas publicly.

because you get ridiculed, you get hammered, people on social media are are they relentless. You know, it's it's it's very difficult. So Part of it also is I just don't want to deal with the aftermath of you told me to buy calls and look they they lost money. It's like oh geez, well yeah if you'd have listened to the other 10 components of the trade, then you wouldn't have bought them. because there were some contingencies associated with the trade and I usually try and I identify as well.

Here's what I'm expecting the market to do. Here's what I'd like the market to do. If it does this and the stock does this, then I would buy the To your point, yes, selling out-of-the-money bullish puts breads for anyone that's looking to swing trade. I would highly recommend that they learn that strategy. It's a good one.

I'd like to transition to risk management. You I've seen a quote by you uh where you say position sizing is way, way down on the decision-making flowchart. Uh why is that? Because uh there's this mechanical structure that everyone wants to associate with uh trading in my opinion. It's way too regimented, it's way too constrained.

If I have support on the stock here, I'm willing to risk X number of dollars. And if it goes below that point, then I have to stop out and I always need to have twice the profit potential. as uh the amount of money where my stop is. So when it comes to position sizing and risk management. You're really looking at what is the overall market doing and what is my confidence in it. I know I keep hammering this point home, but I can give you countless examples real time of how this works.

And so when you're looking at it and you're assessing it, you can identify certain instances where I feel very confident, given what I've just seen, that the market is going to do this. I feel very confident. And let's say that a bullish trend day is forming and we have a bullish trend day within an overall bullish longer term trend. Awesome. Got two major check boxes marked. Now I have a stock that is starting to break out through major horizontal resistance on heavy volume.

Okay, got the daily chart. I've got the relative strength on a five minute basis. So now I'm starting to enter the position. markets continuing to do what I expect it to do, I'm adding to the position because I know I have the market conditions I want and the stock is performing as I would like. So I'm going to continue to build and add onto that position. versus a situation where the market is sideways, it's in a tight compression, it really hasn't been

uh having any kind of a trend, perhaps even like what we saw uh from December through February this year, chopping back and forth, up and down. I don't have a whole lot of market confidence in here. So I'm going to reduce my trade size and my trade position. So as long as the position is working for me, in many instances, especially if I have that market tailwind, I'm going to continue to add to the position, knowing that this move has legs. It's got the potential to keep going higher.

Other times, I'm not going to be adding to that position if I don't have the confidence that all of the other checkboxes are in place. Mm-hmm. What do you look for to get out of a position? And do you do it manually or do you have a preset stop? I do uh manual. Uh I have some indicators that I use. Uh the one OSI indicator uh measures relative strength. So I'm looking for price patterns. I'm also watching what the market is doing and what the SP 500 is doing.

So if I feel that the market is starting to get a little bit toppy and it's starting to hit resistance intraday, I'll speak on a micro basis since many of your listeners are day traders. And so earlier today we had a situation where the market was starting to top out. I've got a 10P indicator that helps us judge when the market is starting to get a little toppy, but we had a double top after we filled in the gap and the market was not able to advance. I told everyone, listen, if you're

Uh STX was a stock that I highlighted earlier today. If you're in this stock, You should be taking your profits here because the market has hit resistance. It cannot move through this. We've seen heavy selling pressure the last couple of days. We've got major news pending overnight. Got Amazon, Apple, and we got a jobs report tomorrow.

You don't want to be stuck in a position, kind of painted in a corner. So take your gains right now. Bullish hammers off of a relative high, bearish engulfing candles off of a relative high. Those are major signs of resistance. especially when you're making a new high of the day. So tiny compressed candles, mixed overlapping candles during the rally tell me that the rally is not that strong to start with because it has lots of retracement.

So that tells me also that I need to be fairly careful and I may need to take profits earlier. What's the volume on the way up? Is the volume charging higher? Is the volume increasing? Those are all components of learning how to read price action. Those are all factors in when I'm going to be taking profit. So I noticed that you use quite a bit of uh trend lines. Are you are you um looking at multiple trend lines and to see if the stock breaks above or below these intersecting trend lines?

to measure the quality and the importance of um going long or short that stock. Trend lines uh play an important role in uh what we do. Uh I have automated trend lines that I released. about three months ago and there are a number of different current trend lines that are visible as long as they're within a certain ATR. And so yes, we're able to see what the stock is doing around those trend lines. Institutions are also watching those trend lines. I'm fairly confident that.

They have algorithms uh that they program so they know when these trend lines are being breached. If we see that really heavy volume through that trend line with the the candle closing near its high, then we know.

that the institutions are accumulating that they're also following that trend line. And relative strength is also going to be present. So yes, we we use trend lines a lot. And and so Trend lines that are, we have different names for them, like a high minus is a downward sloping trend line that connects the highs. a breakout of a high minus is much more reliable than an ascending trend line that connects the highs and we call it call those high pluses. So those trend lines are more apt to

those breakouts are more apt to reverse. So the type of trend line is also important.

So to uh wrap up, uh what do you struggle with most in trading? Well, my trading, quite honestly, I'm I'm kind of in the twilight years of my trading right now. Uh I am winding down. Uh I have uh I've made it. Uh I don't have any real struggles. I trade when I wanna trade. I'm not uh Beating around trying to grind out uh huge winners every day. I'm really more focused. on building trading software and on educating traders. So from a trading standpoint, just to purely

Pete come in and trade and make some money. What do I struggle with? You know, I I feel like I've been there, I've seen it all, I've done it all, but I do still have uh some challenges and struggles. Uh One of them is the fact that this is a very sedentary profession. And so you're sitting for twelve hours or more a day in my case. And so I... Getting exercise is difficult. Uh, you know, my eyes have taken a uh beating, so I can't take, you know, I can't watch.

the screens as much as I continue to educate uh other traders. Uh you know, I struggle with uh patience and uh, you know, kind of rehashing the common questions that come up. Uh time and time again. I also struggle with writing. It's very difficult for me to write, although I've been diligent about it and I've got

Pretty close to a book. I'm about 70% of the way through it. So I don't know if you've been able to check out my educational content that's uh available for uh my members, but it's very detailed, very comprehensive. Some of my those are some of my struggles. They're not trading related. Uh, I feel like I can trade with the best of Oh, fantastic. Uh so what's the next chapter for you? You s you mentioned you're working on your book.

I am working on a book. I haven't decided if I'm gonna publish it or just leave it and uh have it available for my members. So completing that, I'm about 70% of the way through. It's taken me a couple years. Uh, so uh to sit down and force myself to write has been tough. Uh I love developing software and to develop new tools that

Are going to help us become better traders. So I've mentioned the automated trend lines. I've mentioned the alerts that we just released about three months ago that help us buy dips and help. People avoid FOMO. Well, one thing that I plan on doing is when you've done a trade to be able to have a back-end analysis. So we've got

custom searches and variables and we have ones that we know should be present when we do a trade. Well, once you've done the trade, you'll be able to take a look and see which check boxes were marked, which ones should have been marked, but weren't. Then you'll also be able to go back and see when I had these variables marked and they were in place, my probability of success was much higher. So it's almost a way of journaling.

And I think that a lot of traders uh struggle with journaling. It's just like they don't want to do it. It's like, oh, the trading day's done. I'm tired. I'm turning my screen off. Well, that's such an important part of trading. That's where you learn. from your mistakes and where you continue to do what is working well for you. Thanks, Pete, for your contribution over the years in uh educating traders. I remember watching a video of yours.

Going all the way back to February 2008 with the simple graphics of the early internet. I mean, it was like a flashback to earlier time. Yahoo charts. Yahoo line charts. Exactly. Uh yes, I have been doing this for a very long time. So thank you. I appreciate that. And I I've I have I've taught a lot of people. And right now that's kind of where I find my greatest joy is uh knowing that I've been able to share my passion with others and to uh to help them.

Great. How how can our listeners get in touch with you? www.doneoption.com. You can spell the word one out or you can use the number one. If you do that, you'll find all my social media. You'll find your way to our website and uh You don't have to buy a thing. Learn the system. And on the website, there's so much information on the system that I've just been describing to you and why it works. Great. Thanks again, Pete. My pleasure. Thank you so much. I really appreciate the app.

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