In this week’s show, I had the great pleasure of interviewing full-time professional trader Vadym Graifer.
Vad has been daytrading for 20 years, which is no small feat, and is also a teacher to traders, and author of numerous trading books including Techniques for Tape Reading (2003), The Master Profit Plan (2005), and A Taoist Trader (2015).
Vad has an amazing way of relating his wealth of knowledge and experience through anecdotes and simple maxims and I think you’ll find our conversation very interesting.
- When you have to do something where your very survival depends on it – you learn fast
- Day Trading can be one of the least risky ways to trade –
- If you can overcome the initial learning curve, there’s total control and no overnight risk because you are able to manage the trade in real time
- Chart patterns reflect things that never change – human psychology and emotions
- No trade setup is ever guaranteed to work
- setups are based on probabilities – just as in life
- The proliferation of algorithms have changed the market environment however the patterns are still there
- However algos are created by human beings – they leave the same emotional footprints
- Don’t play their games – don’t compete with the algos on their turf
- During the course of the trading day you don’t think about trading – you think about execution
- The good news and bad news with regards to emotions in trading:
- Bad news: You are never going to be able to get rid of emotions
- Good news: It is possible to separate your emotions from your actions
- The Emotional growth curve of a trader
- 1st stage – You think you are above emotions or that you are somehow different and immune from emotions
- 2nd stage – You understand that you are the same as the rest of humankind and are subject to the same emotions
- 3rd stage – You start understanding yourself better, and are capable of managing your reaction to emotions
- 4th stage – You use emotions as window into other traders actions
Time Stamped Show Notes:
- [06:30 ] – Vad’s journey from knowing no English to discovering and inventing day trading for himself and turning his small $11,000 account to $200,000 daytrading
- [13:00 ] – How daytrading is the least risky way to trade
- [16:30] – Vad’s trading philosophy and how he trades
- [25:44] – Vad’s opinion on the impact of algorithms/computerized trading on the market
- [28:55 ] – Vad’s lays out his typical trading day
- [39:40 ] – Thinking goes into designing setups but trading needs to be thoughtless – eye to finger
- [40:20] – What trading intuition really is -> experience that amounts to automatic reaction or “trading without thinking”
- [43:55] – The good and bad news about trading emotions and the emotional growth curve of most traders
- [54:00 ] – How to trade with The “Smart Money” and how “Smart Money” trades differently from the crowd
- [1:10:30] – The reality of the market -> Price and Volume
[Tweet “Trade without thinking.”]
[Tweet “The reality of the market is price and volume.”]
[03:38]Houston: Good afternoon Vad, how are you doing today?
[03:42]Vad: Hi Houston, how are you?
[03:43]Houston: I’m doing great thank you. Thank you so much for joining the show today
[03:47]Vad: Thank you for having me
[03:48]Houston: Yeah, so the folks online who may not know Vad, Vad is a career trader, he’s the author of a number of books that we will talk about in today’s call and a trader- a mentor to traders. He really has a storied background and experience with trading, so I thought it would be great to share some of his trading and his stories today on this call. So Vad lets open up and talk about your background. How did you get started with trading? How did you fall into the field of trading?
[04:28]Vad: Well, the story is when I can twenty years ago to Canada from Ukraine, I was thinking of what to do here since not any of my skills were applicable here, plus I had practically no knowledge of this economy, business practices and practically no English. So I was trying to think of some kind of job or business where I wouldn’t have to talk to people. And where I could more or less work without any knowledge of what’s going on in this economy and without understanding its fundamental principles at least until I start feeling more comfortable in this environment. And in some conversations the topic of stock market came up and I thought, little did I know but look this is exactly what I need, I don’t need to talk to people, I need to deal with my computer I need to look at the charts and to deal with them and that was it. So it looked very simple to me, this is the place where you can work – I still laugh thinking about that naiveté of mine but that’s how I started. And since then any kind of long term trading requires you understanding fundamentals and stories and news etc. so I thought if I look at very, very short term, real time movements, I can get a feel of where it goes. And as I used to say I practically invented the trading for myself at least, since that time – it was 1996, you had very, very little information because there was no Internet. And since my English was practically zero I never used unless someone had already done for me.
[07:08]Houston: What a fascinating story. So how did you get started then? You just literally picked up you found a broker and said I want to set up an account.
[07:15]Vad: I found an online broker that was basic, if someone at that time they might be nostalgic, and my memory for them was practically just a decent online broker. There was practically no direct access broker, no level two – you just filled out a form with your order on the page and you just click submit and you start to refresh the page to see if it came through or not.
[07:55]Houston: Well things have changed haven’t they? ([07:58]: No kidding) And how was your learning path then, did you find books because as you said you haven’t learned to speak the language yet, so how did you find your way about trading? How did you get-
[08:12]Vad: Well, it took two years of losses and frustration; I started trying to read everything I could get my hands on, and reading with this electronic dictionary, word by word. So it was a technical process, and frustratingly slow, but when you have to do something and your very survival depends on it you learn fast with your back to the wall.
[08:50]Houston: There’s something to be said about that – when you have no other options and really the only path is to go forward, there is a lot of conviction to that.
[09:00]Vad: That’s true, and the books – the books of course but the major teacher was the market itself. And the first two years brought had a lot of losses; I lost about 75% of my trading account in that time. And there were several large losses that came with huge lessons in them, fortunately I was lucky enough to focus on those and take my lessons from it and slowly click by click, piece by piece understanding how the market works and why I was not able to extract money from it and this understanding started coming together and by 1998 I was pretty much able to start trading stably and consistently and profitably. In the next couple years I turned whatever left of my initial account into a quite decent amount of money; took it from if I remember correctly eleven thousand to over two hundred thousand.
[10:35]Houston: Because the returns – at that time, was the approach predominantly day trading, was that how you grew that account?
[10:44]Vad: Yes, in day trading
[10:46]Houston: And the reason you choose that like you said, is because you felt that maybe you had less of an edge in those longer time periods because of those fundamentals which you weren’t aware of?
[10:58]Vad: At first in 1996 that was the idea, later on I felt day trading was the least risky way of existing in the stock market. And I know it goes against common wisdom which says day trading is the most risky, but to me it was always the other way around, because I have full and total control over what I do, you keep position overnight, you are subject to things out of your control.overnight gaps which take prices beyond your stop loss however, dealing with stock market real time and being there all the time, you’re only risk of losing control in possible health of the stock. In all other cases you see what happens and you can stop your losses, which is how ever painful it may be for many to apply stop loss but in fact it’s the greatest thing that saves the trader.
[12:12]Houston: And that’s a really good point there, and I know in your book- although you have numerous books but, one of my favorite books of yours is – The techniques of Tape Reading – and actually Vad and I were speaking before this call and I was telling Vad that I read, The Techniques of Tape Reading, about a year and a half ago so I’m actually late to the book as it was released – correct me if I’m wrong, was that released in ’99? Or was it 2004?
[12:38]Vad: It was 2002, something like that.
[12:43]Houston: So I’m a little late to the book, I discovered it in 2013; I read it about a year and a half ago and then I just read it again this week to prepare for our conversation. But I was telling Vad before the call that as I re-read it again it really just, I uncovered a lot more to that book, it just seems very timeless the material. So there are a lot of stuff in that book where it’s very applicable to both new trader in the both the content it has but if you revisit that as an experienced trader or someone who has gone a few trades under the belt then you just see more and more levels to it. As I was just telling Vad how much I appreciate his book. So going back to what you were saying there before – that was one of the lessons or one of the themes in the books – is that day trading, like you said, sounds like a risky venture but as you describe it: it’s tough to be a sculptor, but once you learn the right mind-set and the tools and techniques, that’s the best way to manage your risk.
[13:45]Vad: That’s a concept which I live by through by still, every day.
[13:53]Houston: And, so let’s talk about your approach now then, do you still predominantly trade intraday or do you mix it up with the various holding periods?
[14:02]Vad: Not really, just intraday.
[14:06]Houston: And how do you trade the markets, can you just share with the audience what is your core philosophy or strategies are around how you exploit intraday action?
[14:17]Vad: but let’s start and see where it takes us. My major approach is I trade chart patterns. Each of my trades has a certain chart patterns under it and I have several core set-ups which include chart patterns – and signs times of entering and exiting the trade. Each of my trades has a trigger which is dictated by the chart configuration, a stop level and an idea of a target. None of my trades are taken by impulse, by emotion, by the idea of what needs to happen or what has to happen or likely to happen. It’s all simply chart configurations, several of them are trend continuation and several of them are trending or so, and depending on the market thus what happens on that particular day, I apply one of them. Behind all this is several ideas, first idea is that charts are a reflection of math psychology. Whatever all the market participants think or do is reflected in the chart. These things are permanent, they are built into our psychology, that’s why they do not change they are still the same just as they were in Jesse Livermore’s times one hundred years ago. And that’s why chart patterns work; they simply reflect things that never change. Another idea behind this – no setup is ever guaranteed to work; it is simply because market is not short on environment. Environments are based on probabilities, just like life itself where whatever happens because people act in certain ways, and there is no certainty to how people are going to act in each given case. Over the long run, there is certainty, people repeat the same patterns, and each particular person at each particular moment can do some what unexpected things. And there are some examples that I frequently cite at the seminars where I am invited to be speaker – it will sound somewhat rude but there is a point I want my listeners to understand and understand distinctly, try to come to someone on the street and spit in his face – please don’t do that- it is in reality a mental exercise. Do you always know how your opponent is going to react? No – some of them will run from you, ([18:13]Houston: I like that) some will call the police so; there is a sort of uncertainty to how people act. There is pretty much certainties that they are not going to hug you or thank you. So while you understand general reactions, particularly the reaction of each given case may be different. The same thing happens with all our set ups, none of them are guaranteed to work every time; however when you continue doing the same thing provided that your setup is based on a research pattern that has good chances, or good expectation of working. You are going to make money in the long run, but to do that you need to understand that in each given case, your setup may fail and that’s where stop loss becomes absolute necessity because it needs to stop your losses which the name implies and makes sure that your profits are always larger than your losses. The larger profits plus chances are on your side, the odds being on your favor, due to positive expectancy healthier set outs. Make sure that you make money, this approach gives you exactly what we started with – risk control – because, you are there all the time you understand that any setup can fail. If it shows any signs of failing you simply get out, you don’t sit, you don’t hold. If you bought a TV set and you brought it home and turned it on and it doesn’t work, you don’t sit and wait for it to start working you take it back, to the store. It’s the same principles with setups, it doesn’t work – you get out. That’s why all my setups have trigger points where you enter and stop loss level which indicates the conditions of this setup working are no longer there.
[20:40]Houston: Yeah, they not favorable anymore. So I know in your books you talk about stop loss and having a target in place. You also talk about confidence levels, but maybe you can explain to listeners what you mean by confidence levels and how you use that in your trades?
[20:58]Vad: it’s simply levels where you get confirmation or non-confirmation of original idea still being valid, while there are not already necessary signals to exit your trade. But they might not serve you as a warning that something doesn’t really go right and you need to look carefully and maybe tighten your stop etc. for instance if your chart configuration includes volume being configured in certain ways and prices act as you want it to, but volumes start diverging from the pattern, maybe it’s a signal that you need to tighten your stop, maybe your pullback is a bit deeper than you want it, but it still doesn’t hit your stop level or your trailed stop. However it’s a bit, this can certainly maybe tighten your stop under the low of this pullback. So it’s kind of, a tool to refine your trading and your approach as things develop.
[22:35]Houston: Right, that’s kind of your trade management approach, you’re not waiting on your stops to get hit but you managing the trade and saying alright are different conditions appearing that would warrant me getting out of it early or perhaps shutting it down, shutting it out.
[22:52]Vad: Well it’s important not to overdo it, because if there is a natural sort of development in the market you don’t want to act on every little deviation; but with experience and with time you begin to understand elements of your setup and trade developments are crucial – and on those we act.
[23:18]Houston: And so what are you seeing now? With your methodology, do they have to change with the algorithms as these things get more difficult or as the environment changed? What is your opinion around that?
[23:34]Vad: Not really; I hear often this claim that algorithms, computers make trading almost impossible or more difficult but to tell you honestly, I don’t see it. Patterns are still there they still work in the same way, and those algorithms are created by the same people and based on the same logic, the same idea – whether you get killed by them is when you try to play games. If you all of a sudden tried to do speedy ([24:18]) and in split seconds try to compete directly with them on their turf, where they have absolute advantage thanks to the computers and not fingers – so that’s where you of course are going to get killed.
[24:43]Houston: Yeah, of course that’s where you are going to lose
[24:48]Vad: But why would you do that? Why would you try to compete with these algorithms to try and get ahead of someone by fraction a cent and fraction of a second? So let them do that and trade your chart, let them do that and dance the field, your setup – whatever they want.
[25:06]Houston: And so what is your sweet spot? Where do you see the best kind of environment for intraday day trading? Do you make your decisions based on a five minute pattern? Is it a fifteen minute pattern? Or is it something more micro?
[25:31]Vad: I have normally two charts open for each stock I deal with -I have one minute and daily just to have a context on the movement to have an idea where the stock is in regard to longer time frame to market overall etc; one minute to see chart configuration and it is quite possible to see them on three minutes, on five minutes but I am more comfortable with one minute but it doesn’t mean this particular timeframe has any advantage over others -it’s just where I get the best view over what’s happening.
[26:22]Houston: That’s right, so you use the one minute chart as your execution chart as well. Is that right?
[26:28]Houston: Interesting. So could you maybe share with our listeners who are fascinated with what the life of a day trader is like? Could you describe what your average trading session looks like? Do you trade every day? What does your average day look like?
[26:50]Vad: I trade every day, I wake up I save my courses
[26:58]Houston: And you’re on the West Coast so you’re getting up a little earlier than people in the East Coast
[26:59]Vad: Yes a bit, but at the same time I am done by 1pm my time and I have the entire day.
[27:09]Houston: Yes because I know you have other hobbies so…
[27:14]Vad: That’s correct
[27:16]Houston: Yeah, that’s good, that’s good
[27:19]Vad: So I come to my computer about thirty to forty minutes before trading day opens. I read my major and look at where we are. And between market opening at- [9:30] New York time, I get first two, three trading candidates, some stocks that start showing my patterns. Then as soon as volatility becomes manageable- and this is very important point, profit potential is a great thing but I put first risk control. Only beginners, amateurs and boys go pick their trade by profit potential. Professionals use risk control as criteria for picking a trade. If risk is unmanageable, if spread is too large, if movements are too hectic and I feel that I should ([28:41]) I won’t be able to keep stop of this in my parameters I simply skip that stock. So as soon as volatility becomes controllable and I see one of my setups performing I start trades and from that moment on I start trades in an hour, hour and a half, two hours depending on volatility. Things that I do are pretty much different from what many other people as far as I know one major feature of my trading is I don’t think at all.
[29:29]Houston: OK, I’d love to talk about that more.
[29:32]Vad: Say it again
[29:35]Houston: I would like to talk about that some more. Please expand.
[29:38]Vad: OK. Starting from the moment where I start getting signals from my scanner and seeing my setups it’s simple for me to figure out the reaction. So then I’m ready the moment it triggers I click the empty button whatever it takes, and from that moment I know where my stop is. If stop is hit, then I’m out, if it moves in my favor I start partially, normally one to one risk ratio. So let’s say my stop is ten cents when my stock moves to ten cents then I take first partial I put my stop under break even or I put it in numbers. Let’s say I bought something at $30 and my stop is under $29.90, then I take my first partial at $30.10 and my stop moves to $29.99; stock moves in my favor again second partial is taken at 1:2 risk reward and at 20 cents profit, and stock is trailed under 1:1, ([31:09]) .09.” After hitting points one to three, I depending on market action I either take loss partial or continue trading with each next leg until either trading stop is hit or until stock does this sharp vertical spike. Where I see we are climbing to the end of the movement and I get out. And I repeat this process as many times as well it stops coming my way. No thinking involved it is simply a reaction on what I see happening with pretty much robot- like attitude, without analyzing, without thought, without second guessing myself, practically I turn into the algorithm.
[32:11]Houston: let’s talk about this idea some more about removing some of the decision making out of trading. And also let’s finish your day, so how many trades would you typically take a day and do you trade right up to [1:30] until you get no more setup or do you say I’m done for the day?
[32:31]Vad: That pretty much depends on market activity and if market is very quiet let’s say, in July I might have five, six, seven trades per day, but when the market is very active it could be up to fifteen.
[32:57]Houston: So on a day like this or yesterday
[33:01]Vad: yesterday was probably a little too active, but it’s good. So I buy stocks that move in a manageable manner.
[33:16]Houston: Right; and just for the listeners, today is August 25, the day after the big route, after the six, seven percent drop yesterday. So yesterday was one of the quite volatile days, so I was curious to see how Vad interpreted yesterday’s price action. So going back to that agreement that fascinating idea that I was kind of running a kind of automatic maybe talk to us about your thoughts on intuition in trading, seems like there is a link there. Is there a connection between intuition and being able to kind of trade automatic?
[33:57]Vad: Indeed yes, but let’s determine what intuition is. I don’t believe in any kind of revelation coming from above, or in some mysterious undetermined, intuitively and decides what you need to do. Intuition that I do believe in is simply just experience that amounts to automatic action, automatic reaction. To illustrate what I mean let’s use an analogy; when you start as a teenager learning how to drive your car, every movement you make is something you think about. What do I do with this pedal? What do I do to switch gears etc? And every type of light is something you need to look at and think, but move forward twenty years, do you ever think about any of that? You get in your car into your house you don’t think about any of that, you think about something completely and totally irrelevant to the process of driving. And then you find yourself at your destination, it doesn’t mean that whatever you did to get there was done unconsciously, of course you noticed other cars on the road and traffic and traffic lights you did obviously everything you had to do, to navigate all that but you never think about what you had to do. Pretty much the same thing happens when you collect the experience and understand more about market and yourself then your actions become automatic.
[36:14]Houston: It’s a bit paradoxical for a lot of new traders; they think that a lot of trading requires critical thinking. But as you mention once you develop those habits, those sort of trading habits then a lot of that stuff can be like you said, run an automatic pilot and we won’t have to continuously re-evaluate every single setup and how you are actually going to manage your trade, how are you going to get out, so on and so forth.
[36:38]Vad: That’s very true and the word paradoxical immediately triggers a certain response in me since my last book “Taoist Trader” and there is a lot of understanding of paradoxes in life and market that I needed to navigate successfully, markets and trading; but yes, going back to this thought of trading without thinking. And I remember once somebody actually called me a priest of a church of non- thinking trading or something like that or thoughtless trading. Your thinking goes in the design setups during actual trading you use them. There are some tricks needed you do that after trading is over and not during trading; during trading you don’t second guess yourself, you just execute.
[37:51]Houston: And I think that’s how we live, that’s such a powerful idea and I think that we should extend to how new traders develop themselves. And maybe we can save that topic for the next few minutes but as I was talking about this I just kind of think about the sights around kind of being in the zone or being in flow, and now a lot of charts are showing us that the cortex- that’s the part of our brains responsible for critical thought actually turns off when we are in flow you know running on automatic patterns…
[38:30]Houston: …our creativity and our intuition is turning off that critical thinking which makes a lot of sense.
[38:31]Vad: And that’s why, by the way, my flag ship course is fully and totally devoted to pattern recognition; aside from the peak part of the course which explains patterns and how I trade. There are two videos where when you go through the course you are shown a screenshot of certain setups and chart configurations. And you need to identify the pattern and the way to play it. Next screen shot that you see in front of you is the same chart only with marks on it to show you what the setup is so you need to go and video and quickly identify setups and the second video is showing some different screenshots of course so you don’t just memorize them, and then the switch from non-marked chart to the marked one is much faster so you learn to recognize the pattern. And when you start recognizing the patterns your trading becomes thoughtless, because it’s simple eye to finger switch. You see the pattern you know what to do, pretty much as you crossing the street; you don’t stand at the side walk and think when the green light goes on and when those cars stop that’s when I start walking. No, because this is a pattern that you went through a million times before that, so you will know what to do when certain things happen – training your eye, training your fingers, training your brain to react the same way in certain situations. And the market is the first key to this algorithmic trading; the second key is keeping your emotions in check; and that’s probably one of the largest things newer traders have to deal with.
[41:08]Houston: Yes let’s talk about that. Let’s talk about how new traders can develop themselves, what is the best development like passport for a new trader. You know because you can see where new traders are fascinated with the setups and systems of indicators and once you get there the mind set and emotions that come along with trading are just as important or more important. So what do you recommend for new traders with regards to their development, where do they need to spend their time and how do they evolve themselves?
[41:45]Vad: Okay, I have two news – bad news and good news; let’s start with the bad one – bad news is no matter at what step or stage of your development as a trader you are never going to be able to get rid of emotions completely. That’s bad news, and it simply in our nature, people are emotional beings. Good news is; it is possible – it’s difficult, so don’t take it as something that is easy to do because it is difficult. But you are going to be able if you approach it right to separate your emotions from your actions and that’s where you need to aim to attempt to suppress your emotions and get rid of them is an approach but you are never going to succeed on that one and that’s a path to frustration. However the idea to put certain goals I would say is short on distance between your emotions and your actions, this is the right idea and development of a trader you go practically for all of us through several stages. On the first stage we are either unaware of the huge impact of the emotions on ourselves or we feel that we are somehow exception to the rule and emotions are for weaklings, for people who can’t control themselves and we are pretty much strong men we don’t care and we will be able to control ourselves. And that’s just a stage, and practically everyone goes through it, I haven’t met anyone who wouldn’t. And if you survive this stage because it is the most dangerous one. Then you come to the second one and there you start realizing you are the product of the same evolution as the rest of human kind and you are just as subject to emotions and their influence as the next guy and the impact of those emotions is enormous. And they still dictate your action in many cases and make you do exactly the wrong thing. The very nature of the market is to create certain feelings in you which make you do certain things and you lose money and the winner in the market is someone who has this influence or this impulse pushing you to do the wrong thing for instance, sell in panic or buy in euphoria, etc. And start acting against emotions and based on your understanding of how these emotions influence the crowd and on the short stage you reach exactly this part of understanding yourself better and you manage to put this step between emotions influencing your action, your reaction and this is a pretty good stage if you reached it as you are already consistent and profitable trader; and then there is the fourth stage of development, this is where you use emotional influence to your favors. It doesn’t impact you anymore, however you use it to understand other traders as they are going to be somewhat muted at this stage, they are not as sharp and strong at this stage. But you will be able to recognize them so this emotion that you feel will become a window into other trader’s actions. You can practically feel what they feel and at a cost their reactions.
[46:51]Houston: But instead of that triggering you, you use that now, inside of your trading process.
[46:56]Vad: Exactly, and there are some specific things that you can use at the stages and start to separate your actions from your emotions. One of my favorite methods for that- I described it in the book as the master profit plan as model trader where you create kind of ideal trader in your mind, you think through his pictures, his human traits, and reaction, to kind of build a model for yourself and then you leave trading to him. I know this sound somewhat strange and crazy but this is crazy business.
[47:59]Houston: I think it’s a great exercise.
[48:02]Vad: And every time when it’s time to make a decision to push buttons for entry or exit, instead of doing that you make a little pause and make this guy you invented or envisioned or thought through – his thoughts and reactions. So you just let him do that according to those traits that you built for him, and doing this to separate yourself from your emotions from ideal trader that actually does your trading. It sounds a bit artificial but this is a learning process it doesn’t mean you are going to do that through your entire trading career, I don’t do that for a long time. But at some point this kind of mind trick helped me to learn to separate myself and my action from my emotions.
[49:15]Houston: I think it’s a great exercise, I actually tried that exercise the first time I went through that book and I think it’s an interesting one because as you described it, it detaches you from your actual actions, so you get a chance to stand back and see yourself or someone else in third person – watch that individual versus having the burden on your shoulders and it’s an interesting exercise – I recommend folks to try it out because it can really shift the way you feel your emotions, so it’s a great exercise.
[49:51]Vad: And one more thing that creates huge obstacles for new traders – it’s a very large topic and I think we are about to run out of time so I’ll just touch it as briefly as possible. We come to the market with our luggage of our previous professions and activities and everything we learnt and much of that if not all of that is built on straight forward logic and we are trying to apply this logic to the market and so any major idea to come to the market is the idea that price should move up in a case of good news and down in the case of bad news; and we expect price to do that and we expect to build our trade on that. In reality, this absolutely does not work this way – this is called trap of obviousness – the market cannot move in accordance with obvious things. If that was the case, everyone understanding obvious things could simply make his living in the market; they could drop doing whatever they are doing – everyone would be getting rich from the markets and no one would be left to create things, manufacture products, grow food etc and civilization as we know would have collapsed. So, this is simply not how markets works – there is logic to market action but this is different logic – this is not logic of good news up, bad news down; this is a logic of balance of existing and potential buyers and sellers. Envision a situation where for a cost, expecting good news people started buying in at once and out of all 100% of potential buyers, 90% have already bought. Then good news comes, if you go by this straight forward logic you, as a new comer to this particular stock or sector are going to see the good news and buy. But there are just 10% of potential buyers left and there are 90% potential sellers after initial and very short lived move upward on the good news stock is going to crash.
[52:57]Houston: And they’re very late to the party right?
[52:58]Vad: Yeah, but not because good news was not valid, it was pretty much good news; however there were simply no buyers. And this understanding of stock or price acting against the obvious is very important for new trader and it’s a very good thing that the market works this way because it gives you your edge it gives you understanding that when price starts acting against obvious, you are getting very powerful trading signals, you’re getting very powerful trading signal and you are going, if you go with the signal to find yourself on smart money side and not on the crowd side. Crowd is going to try and buy and crowd is going to be late; and the crowd is going to be left as a bag holder
[54:03]Houston: Right- they always are
[54:05]Vad: To put a simple example to it – during last several years everyone and their brother knew that the US dollar was going to crash because Federal Reserve was printing so much money and putting it into the system and inflation was pretty much a given and there was nowhere the US dollar could go but down.
[54:33]Houston: It had to crash
[54:35]Vad: Yeah, what happened – we all know – about 3 or 4 years ago I don’t remember when [51:05] was arguing with some [54:48], I said that I can’t tell you when it happens but within a few years you are going to see the US dollar declining the [54:58] again. They just laughed – well, who’s laughing now? ([55:07]Houston: Yeah) and if it was a situation where it was absolutely obvious to anyone who was reading the news and trying to interpret them then we would see that yeah, it was going to go down according to information, however, price was holding – it was never showing any breakdowns or any sharp drops despite obvious bad news for the US Dollar. This is a situation I call information price divergence – it is a very powerful trait – I try in every way possible to go over this again,
[55:54]Houston: No – that was very, very valuable because I think when I read your work I can see that you’re influenced by you know Jesse Livermore’s Reminiscence of a Stock Operator and we just talked about smart money so, how does the smart money act differently from the crowd and the public?
[56:18]Vad: Smart money buys when no one still suspects anything; smart money starts accumulating when there is no information available about this particular stock or trading vehicle or sector or industry. They start accumulating very, very quietly – when you see some name laying down for years or months – there is nothing in terms of price movement but some volumes start to appear; you get your suspicions as smart money starts accumulating then you start to see next stage where price starts inching up as well and that’s where accumulation becomes a little bit more aggressive and more and more of those who understand how all this works start drawing in the new party at the very beginning. It’s still the very early stage of the movement – price is still quite low but at the next stage price starts going up about 45 degrees up and volume joins, stock hits more and more and news starts and some discussion starts and all the commentators might be on TV talking, in some chat rooms, discussion boards etc and everyone starts piling up in expectation of some great things to come. This is the stage where smart money starts slowly feeding their accumulated shares back but major holdings are still there; now they are waiting for that great development that everyone now is talking about to come about and finally it is FDA approved if it is a drug or huge contract is being granted or something etc, etc; that’s where one crop of buyers that were not aware of all these things happening discover them and jump onboard. Movements become vertical, euphoric, volume explodes and who is sailing into all that – the same guys that started accumulating when no one thought about ([59:30])Houston: were interested or cared) so they dump all their holdings for them – the cycle is complete or they might short it if that’s their modus operandi and stock is going back down into oblivion – then not at all once but…
[59:55]Houston: And this works across all the timeframes, right? That’s the beautiful part of that ([1:00:00]Vad): oh yeah) that it works from the small timeframes to the micro-frames that you were talking about.
[1:00:08]Vad: Absolutely, you can see it everywhere in the world by the same I was talking about job considerations for setups even though in my course I show most of the examples in the timeframe. Therefore, if you use the other timeframes daily, monthly – simply to demonstrate that these things work in any timeframe – they are independent of trading vehicle, of kind of market and of time frame – the human psychology remains the same.
[1:00:48]Houston: Right. So the time remaining we only have a few minutes left. Why don’t we just changes gears a bit, I’m just goanna ask you a few quick questions and you can give me some quick answers ([1:01:04]Vad: alright). So what are you top recommended books – trading or otherwise?
[1:01:09]Vad: Well, I would probably put on the top of the list – my books. I consider them good ones so why would I be writing them?
[1:01:20]Houston: Your books are definitely worth checking out so well, definitely add them there; aside from your books, are there any other books that you would recommend?
[1:01:31]Vad: Yes, yes of course. One of my favorites which I would recommend anyone to have on their shelf and now and then get to it as a useful reminder of the human psychology and how it works and as the mind changes – it’s a very interesting book written in 1840, I think, or published – Extraordinary Popular Delusions and the Madness of Crowds ([1:02:10]Houston: right) I love it – it’s just mind game
[1:02:13]Houston: Yeah – it’s a fascinating book – just to see the same patterns over and over again
[1:02:18]Vad: Over and over again in any time frame, in any trading vehicle, in any century
[1:02:23]Houston: Across countries, it doesn’t matter
[1:02:26]Vad: Of course, Renaissance of a Stock Operator- that’s pretty much a given, and one that is less known but I can see it is a very good book – The Nature of Risk by Justin Mamis – I love it. It’s a book about pretty much the same things, how understanding of this major logic of the market and crowd behavior works. He approaches it a little bit differently because for someone it’s going to be exactly the way to talk about the things that will hit home; of course, Mark Douglas’ Trading in The Zone is pretty much a classic in this regard. Speaking of [1:03:23], Alan Farley’s Technical Analysis, The Master Swing Trader is a pretty good one as far as technical analysis goes, Alan is my favorite guy.
[1:03:41]Houston: I send a link in the show notes to those folks who want to take a look at those titles. So another quick question for you, you’ve been trading now for going on close to 20 years now so, ([1:03:54]Vad: Almost 20 years) almost 20 years so you know, if you could go back and give your younger self some advice – to the person starting out back in 1996, what would you tell that person? Is there something you would tell them to make their journey easier or what, would you share?
[1:04:12]Vad: Don’t be an idiot – because idiots never understand, idiots never admit that they are idiots. They think they are smarter than everyone else, they think that things are easy; they don’t understand that trading cannot be easy – it can be simple but not easy ([1:04:39]Houston: Right) and they are confident that by default, it’s almost their birthright to understand what the market is going to do and then the market does something very different, they think that the market consists of idiots and they are smart and they figure it out and they will just wait for the market to recognize how smart they are and that’s the highest form of idiocy and I would advise myself not to be such an idiot. The market does what it does – just go with it – if you are a great winner and you are thrown into the ocean, are you going to be able to swim against any current that the ocean throws your way? If you are not an idiot, you will try to use the oceans – those currents – instead of fighting them. Idiots fight them and smart guys go with currents
[1:05:53]Houston: Idiots drown – that’s what happens to them
[1:06:01]Vad: If I ever finish a book that I have in mind – it’s working title – at least for now is going to be Idiocy in the Market and it’s going to describe the way idiots act in the market and explain how not to be one.
[1:06:22]Houston: I like that title – I think that’s good. So for the time remaining why don’t you tell people a little bit more about your work – so you mentioned earlier about doing your flagship course – The [1:06:36] Trader, why don’t you tell people more about that work there as well as where they can find out more about you because you have a lot of work and an online presence that you can share with the audience?
[1:06:49]Vad: Yes, online courses wise my flagship course is One Hundred Eleven Trades which shows respect and recognition – it teaches people how to use those [1:07:04], how to recognize them and how to play them. There is plenty of practical examples, each and every set-up is illustrated by actual trades shown right there in the course and if you take just one single thing from my website, I would recommend this course. It’s called One Hundred Eleven Trades but in fact there are more because the year after making it I added some more trades to it and, regarding books, my first one is one which we discussed [1:07:49] beginning of a thousand years. Second is the Master Profit Plan – it’s a workbook taking the trader from the very, very first thought “I’m going to become a trader and to becoming one and showing step by step what to do and how to avoid making major mistakes and how to do this all stand up challenges the traders encounter. And third one is the books that I consider the top of my work so [1:08:26] Taoist Trader – the book is in hard copy and electronic version and it would be a little bit too long to talk about so I will review to a description of the book on my website.
[1:08:48]Vad: Yeah and I consider that one something that the beginner probably will not appreciate in full but any trader that has a few years under his belt and already understands all the challenges and what to deal with – he will find answers to many, many of his questions in the book.
[1:09:14]Houston: Thank you, thank you for summarizing those titles.
[1:09:39]Houston: And lastly, where can people find you – I know you have a website – where can people find you at?
[1:09:45]Vad: It’s realitytrader.com
[1:09:49]Vad: Not realty – for some reason people tie me to realty – it’s reality
[1:10:05]Vad: It pretty much reflects my view on the market – you need to see the reality of the market – under all of the noise and the news and the talking that never ending stream of interpretations which is all just noise. The reality of the market is in price and volume and seeing how price and volume reflect – the viewpoint of the trader on the way to becoming a [1:10:35] trader.
[1:10:38]Houston: Thanks for that advice and I think that’s a perfect place to wrap it up so, Vad, thank you so much for your time – there are so many nuggets in there I think I’m gonna go back and listen to the audio a couple more times – just like your books – there are more layers there so, check out the show, I’ll send you transcripts and you’ll get a chance to read more about these thoughts and some of these explanation so Vad, thank you for your time today – I really appreciate it.
[1:11:05]Vad: You’re very welcome and thank you I enjoyed it
[1:11:11]Houston: Yeah, me too. Let’s talk again soon
[1:11:14]Vad: Ok, take care
[1:11:16]Houston: Have a great day.
- Techniques for Tape Reading (2003), The Master Profit Plan (2005), and A Taoist Trader (2015) – Vad’s Books
- 111 Trades – Vad’s trading course
- Extraordinary Popular Delusions and The Madness of Crowds – Treatise on understanding market boom and busts
- The Nature of Risk – Justin Mamis on market psychology and the risks of trading
- Trading in the Zone – Mark Douglas’ book on trading psychology and mindset
- The Master Swing Trader – Alan Farley’s popular title on swing trading and technical analysis
- Reminiscences of a Stock Operator – The biographical classic of Jesse Livermore
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