Roger Middleton is an experienced trader who focuses on the equity markets. His insights, however, are applicable to traders of all kinds.
How long have you been trading for?
How did you first get involved in trading?
I was made redundant in 1992, and was in danger of losing everything, so decided that the ability to generate a second income which no one else could take away once I was back on my feet was a priority. It was what my daughter called my ?get out of jail free? card.
Do you remember your first trades?
First trade was Tadpole Technology at 200 (down from over 400). Bought because I thought it couldn?t go any lower. Next day it went to 250 and I thought how clever I was. Eventually sold at 180 for a loss!
What were your first few months like? Were you profitable initially?
Apart from Tad, yes.
Has your trading style changed radically from when you first started?
Far more short term now. All you had to do in 1995 was buy and hold.
How did you learn to trade?
Bought ?The Zulu Principle? by Jim Slater – still one of the best books around for growth and value investors in my opinion. Then bought Indexia as my first charting package, and a P75 pc for £1600. Having spent 40% of my ?grub stake? on a pc and software I had a few sleepless nights wondering what I had done. Then lots and lots of reading.
Are you a self-taught trader, or did another trader teach you worthwhile lessons?
Initially self taught, but also learned much from other traders on bulletin boards, and am still learning from others every day.
Trading – In Practice
What markets do you trade?
UK for long term holds. UK FTSE index options and US shares for the short term active trading.
What is your basic approach in analysing and trading the markets?
Mainly TA based for the short term where sentiment is everything. But also use fundamentals for longer term investments and use TA to help time my entry.
How would you define your trading style?
Varied, according to current market. More inclined to be a swing trader than a scalper.
How often do you make a trade?
Options 3 or 4 times per month. US daytrades about 3 or 4 per day.
Do you prefer to trade long or short and why?
In the short term I have no preference. In the longer term I would prefer to trade long on the basis that in a long and damaging bear market people get dreadfully hurt through no fault of their own. I am thinking now of pensions. I miss the buy and hold, and multi-week swing trade, days of the late 1990s, but they are gone and we had better get used to it!
How do you pick your trades?
Trend following, patterns, breakouts and break downs thru support/resistance and gaps. Newsflow. Concentrate on picking longs from strong sectors in a rising market, and shorts from weak sectors in a falling market.
Is there anything you can single out as the most important element in deciding to put on a trade?
Risk/reward must be at least 2 to 1, and there should be a cluster of signals rather than a single one.
Do you use trading systems?
How much do you risk on any single trade?
Normally not more than 1% based on the stoploss selected, but have been known to increase this to 2% if the signal is exceptionally strong and there is solid support very close beneath for a long, or solid resistance just above for a short.
Do you use stop or limit orders?
All the time. I feel very nervous about a trade until the stop is ?working?.
Do you use chart patterns such as reversals and breakouts?
Yep – all the time.
Do you use Level 2 data to trade?
Not yet, but this is something that I am determined to learn.
Do you decide where you are getting out before you get in on a trade?
Always with regard to stoploss. After that I have a mental note of where I expect the move to go, but will stay in long indefinitely while an uptrend is in place. ?The trend is your friend till the bend at the end?!
What is the maximum percentage of equity you will risk on any individual trade?
The amount of capital risked will never be more than 10% of my total portfolio when the position is opened, but if the trade moves in the right direction I have no problem in that increasing.
How do you decide when to take profits?
I take profits on a short term trade if it stalls at overhead resistance or breaks its uptrend. I also take profits if it spikes up a long way above the trend, on the basis that it will most likely revert to the mean and I can always re-enter if it finds support at the trend.
Is slippage/bad fills a problem in your trading?
Not since I stopped using CMC!
Do you use the opinions of other traders in making trading decisions, or do you operate completely solo?
99% solo, but I value the opinions of others when formulating strategic decisions.
Trading ? The Theory
What are the trading rules you live by?
- Rule 1. Stoploss, stoploss, stoploss!
- Rule 2. Never forget rule 1.
- Don?t open a long position when price is a long way above an established trend line in the time frame in which I am trading.
- Don?t go long close to strong overhead resistance.
- Don?t go short just above previously strong support.
- Don?t chase a price.
- When losing sleep, reduce risk until I find my sleep level.
- Look for clusters of signals.
- Trade in the direction of the market and sector, based on the timeframe in which you are trading..
- Have I mentioned stoplosses?
Do you believe chart reading can be used for successful trading?
I don?t believe you can trade without it.
Are there any technical indicators that you have found to be particularly valuable?
I use RSI and stochastics as a supporting cast, but secondary to s/r, patterns and trends. I love the market breadth indicators in AIQ.
What are your thoughts about using fundamental analysis as an input in trading?
Becomes more important for long term holds, but not relevant to short term swings. Newsflow is important though.
Do you ever use contrary opinion as an aid to trading?
Only once. In my former life as an IFA during the tech boom I took 3 calls in one morning in March 2000 from unsophisticated clients asking whether they should buy shares in lastminute.com because they wanted a slice of the tech action.
I immediately recalled the story about Rothschild and the shoe shine boy in 1929. I had been wary of tech for a couple of months, and in that moment I decided that if these people were becoming involved, everyone who wanted tech shares now had them, and there was no one left to sell them to. At the first sign of trouble there would be a rush for the exit, and it wouldn?t be wide enough. The party appeared to be over and I decided that I would leave early. I sold 90% of my tech stock investments that day – the main mistake being that I didn?t sell 100% of them.
How important is having a sound risk/money-management philosophy?
Have I mentioned the importance of an effective stoploss strategy?
Trading ? The Tools (Brokers & Systems)
Which brokers do you use and why?
City Deal for my PEPs. No good reason apart from laziness in shifting to a cheaper brokerage. Deals not cheap, but I have always had good service and deals invariably inside the spread which makes up for the higher commissions. No good for short term trades or shorting.
ODL Securities (formerly Options Direct) for Options. Not the cheapest around, but efficient and invariably helpful.
Interactive Brokers. Fast execution and very low commissions of $0.01 per share.
What software do you use and why?
MyBroker – free Silver service through ODL if you place one option order on-line each month.
AIQ end of day for UK market. I like the data handling, reports, and market breadth indicators which have been invaluable to picking tops and bottoms.
ProphetFinance.com for r/t charting. Looking at using Sierra Charts after much positive comment on T2W, particularly as I already use MyBroker.
Do you have an opinion about trading systems sold to the public?
They make lots of money for the vendors. I wish I had one I could sell.
Do you feel a good system can compete with a good trader?
In your trading experience, is there one particular trade that stands out as the most dramatic?
Liquidating 90% of my portfolio of tech stocks in one phone call in March 2000.
Selling Telecity TCY at 2253 on 07.09.00 which is the day it reached its all time high – based on intraday reversal from extreme high above the trend. Now 3.25.
Doubling my initial stake in Flying Flowers only to see it halved after a profits warning.
What is the most prominent fallacy in the public?s perception about trading?
Easy bucks when times are good. And that the only way to trade is to buy a sexy stock at a low price and sell it for a higher price later. Under-estimating the amount of work and application required.
How much of a role does luck play in trading success?
I would rather have luck on my side than on the Market Makers’ side. But don?t rely on it!
How important is gut feel?
Not at all for entering a trade. But sometimes very useful for getting out. If it doesn?t feel right, get out and watch from the sidelines. I would rather be out and wishing I was in, than in and wishing I was out!
Success & Failure
How do you judge success in your trades?
A compromise of maximum profitability at lowest acceptable risk.
What are the most important elements to becoming a successful trader?
Perseverance, constant study and trade according to your own rules.
Can you describe one of your most successful trades?
Getting out of Tech in March 2000. It was the decision which ensured that I am still here trading today!
Is the joy of winning as intense as the pain of losing?
No. Losing large sums is gut wrenchingly horrible. Small losses are tedious.
Why do most traders lose?
Inadequate money management.
When you do hit a losing streak, how do you handle it?
If I have 4 consecutive losers I stop for the day, and the next 2 trades will be ?paper trades? to rebuild confidence.
Is the ability to accept losses a characteristic of a winning trader?
Yes – we all have them – it?s a part of a traders life. Learn to handle them
What was your worst time trading? What went wrong?
After some early success in day trading the US I had 14 consecutive losers. The losses were small in cash terms due to trading small and tight stop-losses, but the hit on self confidence was huge. What could the odds be on making a loss 14 times in a row if I picked trades at random?
Can you describe any specific trading mistakes that you learned from?
Not cutting losses soon enough.
Doing the research, narrowing the list to a small number of stocks, deciding the entry level, and then doing something completely different on a whim!
Are there any books you have read, that you would recommend to people?
The Zulu Principle – Jim Slater. Still the best book on basic fundamental analysis for the UK market.
How charts can help you in the stockmarket – William Jiler. A classic text, and a real gem! And very cheap.
Technical analysis of the Futures Markets – Murphy. A heavy tome, but excellent in most respects.
Options Plain and Simple – Lenny Jordan – my bible for options trading.
Japanese Candlestick Charting Techniques – Steve Nison
What is the most important advice you can give the average trader?
Enjoy it! And don?t forget what and who is important to you in life.
What advice do you have for the beginner trader?
- Stoploss, stoploss, stoploss.
- Trade small until you know whether you can do it.
- Read and study everything you can get hold of.
- Go long only in the strongest sectors in a rising market.
- Go short only in the weakest sectors in a falling market. (i.e. don?t try to swim against the current!)
- Stick to high liquidity stocks with narrow spreads. Some of my best trades have been in seriously boring companies.
- Have I mentioned stoplosses?
What are the traits of a successful trader?
- Loves trading for its own sake, not just the money.
The View From The Floor
Do you enjoy working from home?
Yes – I love being away from office politics.
What environment do you trade in, for example do you have a separate office, multiple monitors and CNBC on the telly?
Study set up as a trading room. 2 monitors. ISDN (ADSL not available)
What effect has trading had on your personal life?
It has improved it immeasurably. No one to ask if I want a day off.
Do you sometimes need to get away from the market for a few days?
Absolutely. My best ideas come when I?m out walking the SW Coastal path!
Is trading for a living firstly viable and secondly desirable?
I hope so or I have a problem!
If you weren?t trading what would you want to spend your time doing?
Gliding in the Italian Dolomites, South Africa or New Zealand.
Do you have any goals at this point?
Short term – to make a profit this month.
Medium term – 4 weeks in New Zealand next year
Long term – indefinite good health and happiness.
Do you still see yourself trading ten or fifteen years down the road?
When you make your first million, what will you spend the money on?
Pay off my kids’ student debt
Schempp-hirth Discus 2 glider
Early retirement for my long suffering wife.
Not necessarily in that order!
Any comments about T2W?
Great site. How about some more contributions from those who have registered but never made a posting?
Any last words?
Enjoy life. Don?t put off your dreams. On your death bed your main regrets will be about all the things you never did, and very few about what you have done.