PM: = Paul Mullen (Interviewer)
AR: = Alan Rich (Stock Trader, Coach & Mentor)
You can listen or download this interview by clicking this link:
Alan Rich Interview mp3
PM: Hello to everyone from Trade2Win, this is Paul Mullen. I've today got Alan Rich with me and we're going to be talking about trading, probably NASDAQ stocks more than anything else. Alan is a coach and a mentor and has been trading a long time. He has his own website and you can contact him there, at www.alanrichtrading.com. We'll be talking today about what's going on. A warm welcome to Alan. I'm glad that you've agreed to do this and I'd just probably like to ask you the first question, and that is why is it you trade NASDAQ stocks?
AR: I think I've been trading for a living for 10 years and I realized back in the end of the '90s that if you trade for a living, you've got to go and find things that move. That's where you make the money, and American stocks are not just on the NASDAQ but on all the markets, are moved more the most so it makes it easier for the trader to daytrade, which is what I really enjoy. I swing trade on the U.K. market, as well.
PM: So swing trading are trades that you hold open for longer than a day?
AR: The swing trading, I hold open from anything from a couple of days to a couple of weeks to a couple of months. The reason that I swing trade is because the U.K. market, so often, follows the U.S. and if I'm daytrading the U.S., I get a feel and I can understand where the American market is going and I know that the U.K. is going to follow afterwards. I can take my positions before many swing traders in the U.K., based on the knowledge I've got on the U.S.
PM: So you say you've been trading 10 years. How did you get started in trading?
AR: I was trading part time and I was running a business and I thought everybody gets paid, the staff, the rent, everything like all the expenses, and I come last. I thought if I traded the markets for a living, I'd get rid of all that and it would just be me, and I would have a ready made market in which to sell or buy, any time I liked. I was very lucky that I knew a couple of good traders in the city and I was introduced to an American company that was opening up there, and joined that company.
PM: So presumably, you're talking about the London city here; you're not talking about America when you say that?
AR: No, this was in the city of London. An American trading company came over and they were looking for traders, and one of the traders I knew gave me an introduction into the company, and very nicely of them; they accepted me in there.
PM: Where these people trading specifically NASDAQ and American stocks or were they trading U.K. stocks?
AR: No, they traded American stocks, and it was the time of the tech boom and all the real moves for instance, I got fed up, really, paying 5% spreads on tech stocks when I knew that if I traded the American market I could trade those tech stocks without paying a spread, at all.
PM: For example, a spread for people who are listening here is a difference between the price you buy and sell at, in both circumstances, whether you short sell and then buy. What we're talking about here is you could actually end up not paying anything at all; you could actually end up buying and selling at exactly the same price, if you needed to. Is that correct?
AR: That's right. Typically, in the U.S. there is no stamp duty. You pay $8 to trade 1,000 shares, which is the same as £10 a point. The great thing is that I trade direct access into the U.S. market. I can trade before the market opens. I can trade after the market shuts. Typically, I can capture the spreads, so if the spread is large I can buy on the bid and I can flip it and sell on the ask, and make a profit. My American brokers give me the tools to allow me to do that.
PM: Direct market access is different to spread betting. A lot of the people who listen to this will be interested in spread betting, in that you are not taking a trade with the spread betting company, which is what people would do. You're actually trading right in the heart of the very market itself. Would that be correct?
AR: I'm trading on the same screens as the big players in the U.S., Goldman Sachs, Merrill Lynch, and things like that. Typically, spread betting is where a lot of people enter the market. It's an easy way to enter the market and to trade the market. I believe a trader needs to evolve and get better and better. Many people come from spread betting and then when they get a bit used to the markets, they move on to direct access.
PM: One of your well known activities within the trading of NASDAQ stocks is the use of "level 2." Would you like to talk a little bit about that?
AR: When your American broker gives you your direct access platform, it actually shows you the level 2 orders, so you can see the depth of the market there, and you can transact into that level 2 screen. It's actually level 2 direct access.
PM: Level 2, again for people who listen to this, means that you can see the different prices and different levels at which people are wanting to transact in the market, on both the buy and the sell side.
AR: That's right. What we have to remember is we have level 2, where all the orders are, and then once a transaction goes ahead, that transaction will appear on the time and sales, by the side of it. When that transaction is completed, you will see that transaction appear on your chart.
I'm a trader and I want to have an edge over other people in the market, so if I can see what orders are in the market, and where the market could go, I know that shortly the chart will follow where these orders are leading the market to. It's just given me an edge over other daytraders.
PM: I think you've become particularly well known for this style of trading, level 2 in particular. I know you and I met probably six or seven years ago, and we met on a few occasions. You actually explained, in detail, the fact that that's your favored way of daytrading, to use the level 2 screens. In particular, I think you've developed a skill with regards to certain U.S. stocks, where there are key players who can actually move that stock. Do you want to talk a little bit about that, Alan?
AR: What happened was when I first started trading the American market; I was trained as a direct access trader, using level 2. I soon realized a bit later on, that it could benefit me if I used the charts with level 2. I could look at the charts, understand where the next move could go, and I could use my timing on the level 2 screen.
PM: I know in the early days, there was a reference to what they call the "Ax" and this is somebody who would be particularly influential in a stock, on the level 2 screen. Are they still influential?
AR: What actually happens is you'll get a market maker who, on a particular day, is very strong in that stock. He keeps holding levels. For instance, a level just doesn't appear on the chart, it will be a market maker or group of market makers that hold that level. What I look for is the lead market maker, who is sometimes called the Ax, holding that level. I know that at key turning points, like a breakout or a pullback, I can see him holding that level before it appears on the chart. I just feel that gives me an edge.
When we go for a breakout, I know that when the Ax gets out of the way, we're more than likely to go for that breakout in about a minute. I can take the trade, using direct access, before it actually appears on the chart.
PM: I don't know how recent it is, but you actually set yourself a challenge, where you traded live for a week, and you actually demonstrated that you could make profits on every single day. Do you want to talk a little bit about that, at all?
AR: It was actually in 2005. A company asked me to and I teach all my traders to make 100 points a day. That's no big deal if you're trading the American stocks because if they move $1, that's 100 points. Believe you me; a stock will move $5, $10, $15, $20 in a day, so just getting a $1 run, which is 100, is fairly easy.
The company said, "Could you trade for a month, live, do every trade live, and show people how to make 100 points a day?" That's what I did for a month and I did it every single day for a month, except for one where I broke even. The end result was I made 150 spread bet points a day.
PM: Very impressive, actually, that record. Just to link into that, Alan, when you take a trade and you said there that stocks can move 100 points, what kind of level of risk would you be putting for that? If the trade went against you, how many points would you lose in a typical situation there, if it was to go against you of course?
AR: You have to remember that I can see the order books, so I can see the depth of the market. All I'm going to do is trade very liquid stocks. Of course, some of the American stocks are some of the most liquid stocks in the world. Consequently, the risk that you take, if I look on the bid and I see an awful lot of people that are holding it in $.05 range, and that depth is really large, then I can take the trade with a $.05 stop and I can make my risk reward really work for me. The key thing is; looking at the bid, understanding how many people are there, understanding that you've got a low risk trade and you can get out, looking at the potential reward, and making the risk reward work in your favor.
PM: This would be for buying a stock, not actually selling in that case; you'd be observing the bid in case you needed to get out quickly, is that correct?
AR: That's right. You have to realize that when you want to sell, the people on the bid are your buyers. What you hope to do is to offer out and capture the spread.
PM: To me, from what you're saying, it sounds like you're getting somewhere in the region or possibly more than it, of a 20 to 1 reward to risk ratio, if you've got a $.05 kind of potential loss there, but $1 run, then that's a 20 to 1 return.
AR: What actually happens is a trader may want to buy over the whole number, so he might be buying at $63.15 and looking at $63.10 stop, but when he offers out he'll probably be looking to offer out just underneath the next whole number. Ideally, he's probably going to be getting $.75 to $.80 out of that move and his risk is going to be seen in the $.05 $.07 region. It's going to be more like 10 to 1, so on a good trade, it will be 10 to 1.
PM: That's still highly impressive, isn't it? The other question to ask you is I know that obviously, you're highly experienced as a trader, but what percentage of successful trades would you say that you had?
AR: Going back years ago, it was probably 50/50, but as you get older and more experienced, when you daytrade, you daytrade less and you sit there and you wait, and wait for the best trades to come along. I did a seminar recently where I showed my account and it was 5 hours into the trading day and I'd just done 4 trades. When you look at it, it was running about 70% were right. The reason it was 70% right was because I sat it out and didn't take the ones that I didn't consider to be any good. I just sat back and only picked the very best trades.
PM: That's a very important point you're making there because I think that one of the issues that many daytraders in particular have is they find they have to have to take a trade. They can't sit for hours on end, waiting for the right sort of opportunities to come to them. What you've actually demonstrated there is that you can just sit back, let the circumstances be absolutely perfect for you to take that trade, and then take it. You can get a hit rate of nearly 70% and you're only risking $.07 on that trade, for a potential 10 to 16 times the actual return.
I know many daytraders suffer from this and it's something that even very experienced people suffer from. It's a very interesting point you're making there, Alan, that you do that. On a typical day how many trades would you take?
AR: Last week for instance, I took a trade and I posted it on Trade2Win when I was taking it and when I was entering my swing trades at the same time. I posted the trade on my website, and it was one trade, on the market, and I made 130 points. It was just one trade all day, that was it.
PM: Again, some people have this view that daytraders are constantly in and out of their market, but it sounds to me that over time, you've picked the ideal setup; take it, if you're happy with it and it makes a profit that's it for the day. It can literally just be down to one trade a day.
AR: The thing with daytrading is there are lots of different styles of daytrading. What I've just told you there is one particular trade. Another time, I might be doing lots of small trades in the market, and adding up. I know exactly what I'm doing; I'm trading a different style of trading and all I'm doing is adding small moves to my accounts and I keep building the accounts up that particular way. On that particular day I'm obviously going to do a lot more, probably typically do 20 in a style like that.
PM: So if you're going to do 20, what kind of move would you expect to make before closing the trade? How many points would you be aiming for?
AR: It just depends on the stock. Last year for instance, the SKF was trading at a range between about 172 to 179. All I did was a number of those moves, I forget how many it was, it was about 9 trades and I took 1,300 points. That's what it was trading at, at that time, so obviously, my stop was a lot bigger because of what I was trying to do. If I had a stock that was $20, then my stop would be a lot less. It really depends on the price of the stock you're trading.
PM: I understand. I see your point there. But 20 trades a day is quite a lot. Will you be scalping in that circumstance, or are you going for longer term ones? Or do some turn into long term trades?
AR: I used to trade 300 times a day. I was trading with a guy that was considered the world record holder and doing 20 is not a lot but realistically, I like trading and not doing very many daytrades. I really like a day where I just do about 5 or 6 daytrades, and I sit and pick the real good trades. I pass by all the ones that are not worth it and really go for the good ones.
If I'm just scalping, then it will be 20, but I want to keep the commissions reasonably low and get the profits up high. I do enjoy scalping, and if I get into the mood I will go back and really knock it out just for the fun of it.
PM: So it's really down to how you feel on any particular day. Can I just ask, we've obviously talked a lot about daytrading at the moment, but you've also said that you have quite a lot of swing positions. Can you say a bit about what kind of setups you look for in doing that?
AR: I remember a couple of traders came to me many years ago, and they were very good swing traders. They wanted to learn how to daytrade off me because they felt that if they could understand the type of things that daytraders were looking for, the setups, and the charts, then they could get an early entry into their swing trades.
Consequently, I do that in the U.K. and I look for daytrading setups that are occurring in a chart, and I will typically take at least a day before any swing trader is going to take them. Another thing I try to do is to read the American markets and understand where the American markets are going to be in 24 hours, and I can time my swing trades before the U.K. market shuts because I know where they're going to be the next time.
PM: So the swing trades that you're taking, I know that you're taking an intra day entry to that. Obviously, this optimizes your risk that you're going to be taking. Are you looking at longer time frame charts to make that decision, or are you using something else to decide "This is a swing trade I want to take."
AR: Absolutely, I'm looking at the daily charts like any other swing trader, and what it really is, is looking at the daily charts, using everything everybody else does, but when I zoom on the daily charts, I know what I should be looking for in those days. I might look at 5 days of intra day charts makeup, 5 days of trading, and I'll be able to pick out where I want to enter the stock.
PM: So it's a form of multi timeframe analysis that you're actually doing here. You're identifying something in a longer time frame, and then zoom right down to the lowest time frame possible, and that's where you decide to pick your entry.
AR: That's absolutely correct and by doing that, it means my risk is very small and the fact that I'm going to run it days and maybe weeks, my risk reward is really in my favor.
PM: Can I just ask you; you obviously have a broker. Are you able to say which broker you currently use?
AR: I've got quite a few brokers. Some I think are better than others so I think I probably best keep that to myself.
PM: That's a fair point. I just thought I'd ask you because I'm sure people would be quite curious about that. I've never met someone who's got quite the level of enthusiasm that you have, certainly for the level 2, and the sort of U.S. stock style of trading. We've seen quite a lot of change recently with legislation coming out from the Securities and Exchange Commission in the United States, and the U.S. Government, with regards to the collapse in the market we saw a couple of years ago. Has that had any impact on your ability to trade, or do you think it may have an impact on your ability to trade?
AR: It hasn't had an impact on the way I trade, at all. I just carry on doing the things that I know work and have worked for me over 10 years that I've made better and better. If the market is changed, for whatever reason at all, then I'll just change my style of trading to fit any new rules.
PM: Do you trade any other instruments, apart from U.S. stocks? Do you trade any futures, or Forex or any of those?
AR: I trade Forex, I swing trade U.K. stocks, and I trade Forex. I like trading Forex; I find it a bit slow, but as a daytrader, trading something that's faster like the U.S. market, daytrading FX is nice and gentle and it means that you can just run positions, have a cup of tea, and it just gently moves its way and you can take your profits.
PM: Do you actually coach Forex trading, or do you specifically stick to the NASDAQ stocks?
AR: What I do for traders is teach them one to one. They come to me and tell me what they want. I teach daytrading, so if it's on Forex, if it's on the American market I'll do it on the American market. If they want it on the U.K. market, then I'll do it on the U.K. market. I trade all of these, so it's really up to the individual.
PM: How long have you been coaching people?
AR: I'll tell you what actually happened. I found the best guy at the company I was working at and he was in Las Vegas. I went there and traded with him. When I came back and was on the trading floor, I kept helping people by the side of me and the company found out I'd been working with this guy. They approached me and said, "You've been with the best guy in our company. You understand more about this now than any of us, so if we get any new people in there, do you think you can teach them before they come on the floor so they've got a good understanding of what's going on?" It was the company that asked me, and that's how I started.
PM: So you started from the company asking you, and you obviously do it on an individual basis now, as an independent person. You seem to have been doing it for 6 years that I know, because I've known you for 6 years and I've seen you do some presentations as well as live demonstrations of trading, which I have to say has been very impressive. One of the questions I'd like to ask you is if a beginner was to start trading and they wanted to become consistently successful, in your view, how long would they take to do it? The reason I ask this is because some people are saying it takes 10 years before you can become successful as a trader or whatever. What's your view on that?
AR: I have seen people come into the markets I think it's all down to each individual's personality. Some of the young guys that come into the market, I've seen them I think the first 3 months is quite tough, but I've seen a chap that I trained on the floor in the city, and he just did phenomenally well in the first 3 months, just exceptional. What he did was exactly as he was told.
PM: That's a curious thing there, isn't it, because one of the things you constantly see discussed is that you need discipline to be a successful trader, and one of the biggest enemies for a lot of people, from so many conversations I've had, is that they set rules for themselves and then they break them. As you said, doing as your told really is an element of discipline to actually be able to come in and do that. Would you agree with that?
AR: What happened was that the lad was on my trading floor and I needed to know, at any time, exactly what he was doing. He did. He told me, all the time, exactly what he was doing and he followed it religiously, and I didn't know how much he was making until I was told. I was very pleased and happy for him.
PM: I guess you get quite a lot of satisfaction from seeing people who you've coached become successful in their own right.
AR: That's right. It's always nice. I did a seminar for one of the spread betting companies in the city. I was very pleased to see one of my ex students, who was on Trade2Win, sitting in the audience. I know he daytrades for a living now, and I also know that he's an exceptional daytrader. It was nice to see him there.
PM: That sounds very good. If you were starting out, again for the people who are listening here who probably are unsure about what they should do, what advice would you give to somebody who wants to get involved in trading?
AR: The first one is try and find a trader that actually does it, and go and see him, and talk to him. Nowadays in the market, there is so much information out there, and so much I consider is not how the market operates at this particular time. You don't want to end up trading like the crowd. If you go and see a trader, he's doing it every day; he knows the things that are working at the moment. He's been doing it for years, so my advice is pick the market that you want to trade, and then go and find a trader that actually does it.
PM: Your own personal setup; do you have just a single computer with 1 screen, or 3 screens? What kind of setup is it?
AR: I try and keep it simple. I've got 2 screens for the American market and daytrading, and FX and I've got 2 screens on another computer for the U.K. market. I just have a spare computer in case I have to switch; if one goes down, I just have to switch over.
PM: You've obviously got broadband, but do you have backup facilities? I'm not talking about just computers here, but let's say your data feed went down. Have you got the ability to close trades if you need to at very short notice?
AR: No, the only thing I can really do is get on the phone to the broker. I've got the broker's telephone numbers taped in my telephone. I just phone them up and ask them to close the trades out.
PM: I think we've covered quite a bit in this conversation we've had. Is there anything else that you'd like to say, personally, with regards to trading that would be useful for people who are interested in trading U.S. stocks, or Forex, or whatever it is they may be interested in doing?
AR: One of the things I would say is that there is a lot of software that is proprietary software that is available out there. Traders might be interested in looking at some of that proprietary software and adapting it for their own use. For instance, I remember at one time there was something I really quite liked and traders were using it, but in a different way. I thought it would be good to use it in a particular way that I did, and it worked very nicely.
One of the things that I've developed over the years are various indicators that help the trader and can get the daytrader to get more out of a run than they could possibly get themselves. It's always interesting to look and see what kind of tools are out there.
PM: What kind of proprietary trading software are you talking about? Can you give me an example?
AR: For instance, I've got some software which is called the Color Charts. It's an add on that goes into TradeStation or eSignal. What it does is I felt a lot of traders got analysis paralysis. They weren't sure of exactly when to take the trade, and they weren't sure exactly where to get out. Sometimes traders are bombarded with so much information that they get this paralysis and don't know what to do next. What this does is it clears away all that paralysis and the chart actually changes color at the optimum time to take the trade, and then it changes color again at the optimum time to get out. I was amazed when I started using it and got the final version; at times, I could actually double my profits by following what that did, rather than what I did. That's the kind of thing that I've got at the moment.
PM: Presumably then, you use TradeStation and eSignal as your two key data provider set and charting package. Would that be correct?
AR: Yes, I use a number of them, and TradeStation and eSignal are 2 that I use.
PM: Is there anything else you wanted to add to the interview we're doing today?
AR: I would like to say that the enthusiasm I've got for the markets really stems from the American markets. There are so many opportunities in the market nowadays. Last year, we were just going down in a big way and daytraders were doing really well. Unfortunately, daytraders take advantage of the ups and downs in the market so when we have volatility either way, that's when they do very well. Right at this moment in time, we're rising all the time, and daytraders are doing very much on the other side of the market. The great thing about daytrading is you never have to worry about the market. You just need it to move.
PM: So it's volatility. I know that you and Richard Joyson are two key pioneers, with regards to trading U.S. stocks. I know you've done a lot of things together as well as separately, on Trade2Win. It still comes across to me, Alan, from your enthusiasm for trading is that you like the volatile markets. You like them to move. I find it quite curious that you find Forex a slow moving facility in comparison. Actually now you've said it, and having traded now U.S. NASDAQ stocks myself, I know exactly what you mean. I think a lot of other people probably would be quite surprised by that statement but it certainly is the case; they do move exceptionally quickly and in a very short time scale. That's been good.
AR: I think what actually happens is if you get good at trading the American markets, then if you trade other things, it becomes a lot easier. When I look at Forex, for me it's just like a slow move on a stock and it's easy to trade. The great thing is the color charts that I've got work on the American markets, but they also work extremely well on Forex. I didn't realize this until I'd got lots of Forex traders coming to me and wanting them to trade Forex. This is how I trade Forex. I look to the way they were used in my color charts, and traded Forex with them. It's really nice and gentle. It signals when to get in and it signals when to get out. It's nice and gentle.
PM: Presumably, that was an education for you, that people came to you and said they wanted to use something you'd developed for the U.S. markets to be used on Forex.
AR: That's right. This is going back a few years now, and I was talking on the stage with a very big U.S. FX trader and author, and I jokingly said to the guys, "You can forget all that. All you've got to do is use my color charts on FX and you could clean up. I could do it. As a matter of fact, I will do it." When I came off, he said to me, "Do you think I could have those color charts of yours?" I started laughing, but that got me starting in trading FX with the color charts. It's just like trading slow moving stocks on the American market.
PM: It's interesting; I find trading fascinating actually, and I always don't think I know it all. I'm always learning things as things progress and I find speaking to different people that they have such a different way of doing things, as you hinted at earlier. It's been very good. I think you've covered a lot there, Alan. Presumably, these people can contact you at your website, which is www.alanrichtrading.com, where they could actually go for coaching sessions if they wanted to, or they could discuss proprietary software and indicators. Is that correct?
AR: That's right but first of all they're very welcome to visit my website and drop me an email, and just have a chat about their trading.
PM: I think you said you do specifically adapt the trading that people what to learn about, to suit their individual needs. It's not a fixed agenda, is it?
AR: No, although there are fixed courses on the website. The great thing is it's one to one tuition so I fit the day around you and what the trader as an individual wants. Every day is almost different, compared with a standard course.
PM: I've certainly enjoyed talking with you again. We've not spoken for a while, but I always find your enthusiasm incredible. Unless there is anything else you wanted to add, I'll say thanks very much for joining us, Alan, and look forward to speaking with you and seeing you again at some point in the future.
AR: Okay that's great. Thank you very much, Paul.
You can listen or download this interview by clicking this link:
Alan Rich Interview mp3
AR: = Alan Rich (Stock Trader, Coach & Mentor)
You can listen or download this interview by clicking this link:
Alan Rich Interview mp3
PM: Hello to everyone from Trade2Win, this is Paul Mullen. I've today got Alan Rich with me and we're going to be talking about trading, probably NASDAQ stocks more than anything else. Alan is a coach and a mentor and has been trading a long time. He has his own website and you can contact him there, at www.alanrichtrading.com. We'll be talking today about what's going on. A warm welcome to Alan. I'm glad that you've agreed to do this and I'd just probably like to ask you the first question, and that is why is it you trade NASDAQ stocks?
AR: I think I've been trading for a living for 10 years and I realized back in the end of the '90s that if you trade for a living, you've got to go and find things that move. That's where you make the money, and American stocks are not just on the NASDAQ but on all the markets, are moved more the most so it makes it easier for the trader to daytrade, which is what I really enjoy. I swing trade on the U.K. market, as well.
PM: So swing trading are trades that you hold open for longer than a day?
AR: The swing trading, I hold open from anything from a couple of days to a couple of weeks to a couple of months. The reason that I swing trade is because the U.K. market, so often, follows the U.S. and if I'm daytrading the U.S., I get a feel and I can understand where the American market is going and I know that the U.K. is going to follow afterwards. I can take my positions before many swing traders in the U.K., based on the knowledge I've got on the U.S.
PM: So you say you've been trading 10 years. How did you get started in trading?
AR: I was trading part time and I was running a business and I thought everybody gets paid, the staff, the rent, everything like all the expenses, and I come last. I thought if I traded the markets for a living, I'd get rid of all that and it would just be me, and I would have a ready made market in which to sell or buy, any time I liked. I was very lucky that I knew a couple of good traders in the city and I was introduced to an American company that was opening up there, and joined that company.
PM: So presumably, you're talking about the London city here; you're not talking about America when you say that?
AR: No, this was in the city of London. An American trading company came over and they were looking for traders, and one of the traders I knew gave me an introduction into the company, and very nicely of them; they accepted me in there.
PM: Where these people trading specifically NASDAQ and American stocks or were they trading U.K. stocks?
AR: No, they traded American stocks, and it was the time of the tech boom and all the real moves for instance, I got fed up, really, paying 5% spreads on tech stocks when I knew that if I traded the American market I could trade those tech stocks without paying a spread, at all.
PM: For example, a spread for people who are listening here is a difference between the price you buy and sell at, in both circumstances, whether you short sell and then buy. What we're talking about here is you could actually end up not paying anything at all; you could actually end up buying and selling at exactly the same price, if you needed to. Is that correct?
AR: That's right. Typically, in the U.S. there is no stamp duty. You pay $8 to trade 1,000 shares, which is the same as £10 a point. The great thing is that I trade direct access into the U.S. market. I can trade before the market opens. I can trade after the market shuts. Typically, I can capture the spreads, so if the spread is large I can buy on the bid and I can flip it and sell on the ask, and make a profit. My American brokers give me the tools to allow me to do that.
PM: Direct market access is different to spread betting. A lot of the people who listen to this will be interested in spread betting, in that you are not taking a trade with the spread betting company, which is what people would do. You're actually trading right in the heart of the very market itself. Would that be correct?
AR: I'm trading on the same screens as the big players in the U.S., Goldman Sachs, Merrill Lynch, and things like that. Typically, spread betting is where a lot of people enter the market. It's an easy way to enter the market and to trade the market. I believe a trader needs to evolve and get better and better. Many people come from spread betting and then when they get a bit used to the markets, they move on to direct access.
PM: One of your well known activities within the trading of NASDAQ stocks is the use of "level 2." Would you like to talk a little bit about that?
AR: When your American broker gives you your direct access platform, it actually shows you the level 2 orders, so you can see the depth of the market there, and you can transact into that level 2 screen. It's actually level 2 direct access.
PM: Level 2, again for people who listen to this, means that you can see the different prices and different levels at which people are wanting to transact in the market, on both the buy and the sell side.
AR: That's right. What we have to remember is we have level 2, where all the orders are, and then once a transaction goes ahead, that transaction will appear on the time and sales, by the side of it. When that transaction is completed, you will see that transaction appear on your chart.
I'm a trader and I want to have an edge over other people in the market, so if I can see what orders are in the market, and where the market could go, I know that shortly the chart will follow where these orders are leading the market to. It's just given me an edge over other daytraders.
PM: I think you've become particularly well known for this style of trading, level 2 in particular. I know you and I met probably six or seven years ago, and we met on a few occasions. You actually explained, in detail, the fact that that's your favored way of daytrading, to use the level 2 screens. In particular, I think you've developed a skill with regards to certain U.S. stocks, where there are key players who can actually move that stock. Do you want to talk a little bit about that, Alan?
AR: What happened was when I first started trading the American market; I was trained as a direct access trader, using level 2. I soon realized a bit later on, that it could benefit me if I used the charts with level 2. I could look at the charts, understand where the next move could go, and I could use my timing on the level 2 screen.
PM: I know in the early days, there was a reference to what they call the "Ax" and this is somebody who would be particularly influential in a stock, on the level 2 screen. Are they still influential?
AR: What actually happens is you'll get a market maker who, on a particular day, is very strong in that stock. He keeps holding levels. For instance, a level just doesn't appear on the chart, it will be a market maker or group of market makers that hold that level. What I look for is the lead market maker, who is sometimes called the Ax, holding that level. I know that at key turning points, like a breakout or a pullback, I can see him holding that level before it appears on the chart. I just feel that gives me an edge.
When we go for a breakout, I know that when the Ax gets out of the way, we're more than likely to go for that breakout in about a minute. I can take the trade, using direct access, before it actually appears on the chart.
PM: I don't know how recent it is, but you actually set yourself a challenge, where you traded live for a week, and you actually demonstrated that you could make profits on every single day. Do you want to talk a little bit about that, at all?
AR: It was actually in 2005. A company asked me to and I teach all my traders to make 100 points a day. That's no big deal if you're trading the American stocks because if they move $1, that's 100 points. Believe you me; a stock will move $5, $10, $15, $20 in a day, so just getting a $1 run, which is 100, is fairly easy.
The company said, "Could you trade for a month, live, do every trade live, and show people how to make 100 points a day?" That's what I did for a month and I did it every single day for a month, except for one where I broke even. The end result was I made 150 spread bet points a day.
PM: Very impressive, actually, that record. Just to link into that, Alan, when you take a trade and you said there that stocks can move 100 points, what kind of level of risk would you be putting for that? If the trade went against you, how many points would you lose in a typical situation there, if it was to go against you of course?
AR: You have to remember that I can see the order books, so I can see the depth of the market. All I'm going to do is trade very liquid stocks. Of course, some of the American stocks are some of the most liquid stocks in the world. Consequently, the risk that you take, if I look on the bid and I see an awful lot of people that are holding it in $.05 range, and that depth is really large, then I can take the trade with a $.05 stop and I can make my risk reward really work for me. The key thing is; looking at the bid, understanding how many people are there, understanding that you've got a low risk trade and you can get out, looking at the potential reward, and making the risk reward work in your favor.
PM: This would be for buying a stock, not actually selling in that case; you'd be observing the bid in case you needed to get out quickly, is that correct?
AR: That's right. You have to realize that when you want to sell, the people on the bid are your buyers. What you hope to do is to offer out and capture the spread.
PM: To me, from what you're saying, it sounds like you're getting somewhere in the region or possibly more than it, of a 20 to 1 reward to risk ratio, if you've got a $.05 kind of potential loss there, but $1 run, then that's a 20 to 1 return.
AR: What actually happens is a trader may want to buy over the whole number, so he might be buying at $63.15 and looking at $63.10 stop, but when he offers out he'll probably be looking to offer out just underneath the next whole number. Ideally, he's probably going to be getting $.75 to $.80 out of that move and his risk is going to be seen in the $.05 $.07 region. It's going to be more like 10 to 1, so on a good trade, it will be 10 to 1.
PM: That's still highly impressive, isn't it? The other question to ask you is I know that obviously, you're highly experienced as a trader, but what percentage of successful trades would you say that you had?
AR: Going back years ago, it was probably 50/50, but as you get older and more experienced, when you daytrade, you daytrade less and you sit there and you wait, and wait for the best trades to come along. I did a seminar recently where I showed my account and it was 5 hours into the trading day and I'd just done 4 trades. When you look at it, it was running about 70% were right. The reason it was 70% right was because I sat it out and didn't take the ones that I didn't consider to be any good. I just sat back and only picked the very best trades.
PM: That's a very important point you're making there because I think that one of the issues that many daytraders in particular have is they find they have to have to take a trade. They can't sit for hours on end, waiting for the right sort of opportunities to come to them. What you've actually demonstrated there is that you can just sit back, let the circumstances be absolutely perfect for you to take that trade, and then take it. You can get a hit rate of nearly 70% and you're only risking $.07 on that trade, for a potential 10 to 16 times the actual return.
I know many daytraders suffer from this and it's something that even very experienced people suffer from. It's a very interesting point you're making there, Alan, that you do that. On a typical day how many trades would you take?
AR: Last week for instance, I took a trade and I posted it on Trade2Win when I was taking it and when I was entering my swing trades at the same time. I posted the trade on my website, and it was one trade, on the market, and I made 130 points. It was just one trade all day, that was it.
PM: Again, some people have this view that daytraders are constantly in and out of their market, but it sounds to me that over time, you've picked the ideal setup; take it, if you're happy with it and it makes a profit that's it for the day. It can literally just be down to one trade a day.
AR: The thing with daytrading is there are lots of different styles of daytrading. What I've just told you there is one particular trade. Another time, I might be doing lots of small trades in the market, and adding up. I know exactly what I'm doing; I'm trading a different style of trading and all I'm doing is adding small moves to my accounts and I keep building the accounts up that particular way. On that particular day I'm obviously going to do a lot more, probably typically do 20 in a style like that.
PM: So if you're going to do 20, what kind of move would you expect to make before closing the trade? How many points would you be aiming for?
AR: It just depends on the stock. Last year for instance, the SKF was trading at a range between about 172 to 179. All I did was a number of those moves, I forget how many it was, it was about 9 trades and I took 1,300 points. That's what it was trading at, at that time, so obviously, my stop was a lot bigger because of what I was trying to do. If I had a stock that was $20, then my stop would be a lot less. It really depends on the price of the stock you're trading.
PM: I understand. I see your point there. But 20 trades a day is quite a lot. Will you be scalping in that circumstance, or are you going for longer term ones? Or do some turn into long term trades?
AR: I used to trade 300 times a day. I was trading with a guy that was considered the world record holder and doing 20 is not a lot but realistically, I like trading and not doing very many daytrades. I really like a day where I just do about 5 or 6 daytrades, and I sit and pick the real good trades. I pass by all the ones that are not worth it and really go for the good ones.
If I'm just scalping, then it will be 20, but I want to keep the commissions reasonably low and get the profits up high. I do enjoy scalping, and if I get into the mood I will go back and really knock it out just for the fun of it.
PM: So it's really down to how you feel on any particular day. Can I just ask, we've obviously talked a lot about daytrading at the moment, but you've also said that you have quite a lot of swing positions. Can you say a bit about what kind of setups you look for in doing that?
AR: I remember a couple of traders came to me many years ago, and they were very good swing traders. They wanted to learn how to daytrade off me because they felt that if they could understand the type of things that daytraders were looking for, the setups, and the charts, then they could get an early entry into their swing trades.
Consequently, I do that in the U.K. and I look for daytrading setups that are occurring in a chart, and I will typically take at least a day before any swing trader is going to take them. Another thing I try to do is to read the American markets and understand where the American markets are going to be in 24 hours, and I can time my swing trades before the U.K. market shuts because I know where they're going to be the next time.
PM: So the swing trades that you're taking, I know that you're taking an intra day entry to that. Obviously, this optimizes your risk that you're going to be taking. Are you looking at longer time frame charts to make that decision, or are you using something else to decide "This is a swing trade I want to take."
AR: Absolutely, I'm looking at the daily charts like any other swing trader, and what it really is, is looking at the daily charts, using everything everybody else does, but when I zoom on the daily charts, I know what I should be looking for in those days. I might look at 5 days of intra day charts makeup, 5 days of trading, and I'll be able to pick out where I want to enter the stock.
PM: So it's a form of multi timeframe analysis that you're actually doing here. You're identifying something in a longer time frame, and then zoom right down to the lowest time frame possible, and that's where you decide to pick your entry.
AR: That's absolutely correct and by doing that, it means my risk is very small and the fact that I'm going to run it days and maybe weeks, my risk reward is really in my favor.
PM: Can I just ask you; you obviously have a broker. Are you able to say which broker you currently use?
AR: I've got quite a few brokers. Some I think are better than others so I think I probably best keep that to myself.
PM: That's a fair point. I just thought I'd ask you because I'm sure people would be quite curious about that. I've never met someone who's got quite the level of enthusiasm that you have, certainly for the level 2, and the sort of U.S. stock style of trading. We've seen quite a lot of change recently with legislation coming out from the Securities and Exchange Commission in the United States, and the U.S. Government, with regards to the collapse in the market we saw a couple of years ago. Has that had any impact on your ability to trade, or do you think it may have an impact on your ability to trade?
AR: It hasn't had an impact on the way I trade, at all. I just carry on doing the things that I know work and have worked for me over 10 years that I've made better and better. If the market is changed, for whatever reason at all, then I'll just change my style of trading to fit any new rules.
PM: Do you trade any other instruments, apart from U.S. stocks? Do you trade any futures, or Forex or any of those?
AR: I trade Forex, I swing trade U.K. stocks, and I trade Forex. I like trading Forex; I find it a bit slow, but as a daytrader, trading something that's faster like the U.S. market, daytrading FX is nice and gentle and it means that you can just run positions, have a cup of tea, and it just gently moves its way and you can take your profits.
PM: Do you actually coach Forex trading, or do you specifically stick to the NASDAQ stocks?
AR: What I do for traders is teach them one to one. They come to me and tell me what they want. I teach daytrading, so if it's on Forex, if it's on the American market I'll do it on the American market. If they want it on the U.K. market, then I'll do it on the U.K. market. I trade all of these, so it's really up to the individual.
PM: How long have you been coaching people?
AR: I'll tell you what actually happened. I found the best guy at the company I was working at and he was in Las Vegas. I went there and traded with him. When I came back and was on the trading floor, I kept helping people by the side of me and the company found out I'd been working with this guy. They approached me and said, "You've been with the best guy in our company. You understand more about this now than any of us, so if we get any new people in there, do you think you can teach them before they come on the floor so they've got a good understanding of what's going on?" It was the company that asked me, and that's how I started.
PM: So you started from the company asking you, and you obviously do it on an individual basis now, as an independent person. You seem to have been doing it for 6 years that I know, because I've known you for 6 years and I've seen you do some presentations as well as live demonstrations of trading, which I have to say has been very impressive. One of the questions I'd like to ask you is if a beginner was to start trading and they wanted to become consistently successful, in your view, how long would they take to do it? The reason I ask this is because some people are saying it takes 10 years before you can become successful as a trader or whatever. What's your view on that?
AR: I have seen people come into the markets I think it's all down to each individual's personality. Some of the young guys that come into the market, I've seen them I think the first 3 months is quite tough, but I've seen a chap that I trained on the floor in the city, and he just did phenomenally well in the first 3 months, just exceptional. What he did was exactly as he was told.
PM: That's a curious thing there, isn't it, because one of the things you constantly see discussed is that you need discipline to be a successful trader, and one of the biggest enemies for a lot of people, from so many conversations I've had, is that they set rules for themselves and then they break them. As you said, doing as your told really is an element of discipline to actually be able to come in and do that. Would you agree with that?
AR: What happened was that the lad was on my trading floor and I needed to know, at any time, exactly what he was doing. He did. He told me, all the time, exactly what he was doing and he followed it religiously, and I didn't know how much he was making until I was told. I was very pleased and happy for him.
PM: I guess you get quite a lot of satisfaction from seeing people who you've coached become successful in their own right.
AR: That's right. It's always nice. I did a seminar for one of the spread betting companies in the city. I was very pleased to see one of my ex students, who was on Trade2Win, sitting in the audience. I know he daytrades for a living now, and I also know that he's an exceptional daytrader. It was nice to see him there.
PM: That sounds very good. If you were starting out, again for the people who are listening here who probably are unsure about what they should do, what advice would you give to somebody who wants to get involved in trading?
AR: The first one is try and find a trader that actually does it, and go and see him, and talk to him. Nowadays in the market, there is so much information out there, and so much I consider is not how the market operates at this particular time. You don't want to end up trading like the crowd. If you go and see a trader, he's doing it every day; he knows the things that are working at the moment. He's been doing it for years, so my advice is pick the market that you want to trade, and then go and find a trader that actually does it.
PM: Your own personal setup; do you have just a single computer with 1 screen, or 3 screens? What kind of setup is it?
AR: I try and keep it simple. I've got 2 screens for the American market and daytrading, and FX and I've got 2 screens on another computer for the U.K. market. I just have a spare computer in case I have to switch; if one goes down, I just have to switch over.
PM: You've obviously got broadband, but do you have backup facilities? I'm not talking about just computers here, but let's say your data feed went down. Have you got the ability to close trades if you need to at very short notice?
AR: No, the only thing I can really do is get on the phone to the broker. I've got the broker's telephone numbers taped in my telephone. I just phone them up and ask them to close the trades out.
PM: I think we've covered quite a bit in this conversation we've had. Is there anything else that you'd like to say, personally, with regards to trading that would be useful for people who are interested in trading U.S. stocks, or Forex, or whatever it is they may be interested in doing?
AR: One of the things I would say is that there is a lot of software that is proprietary software that is available out there. Traders might be interested in looking at some of that proprietary software and adapting it for their own use. For instance, I remember at one time there was something I really quite liked and traders were using it, but in a different way. I thought it would be good to use it in a particular way that I did, and it worked very nicely.
One of the things that I've developed over the years are various indicators that help the trader and can get the daytrader to get more out of a run than they could possibly get themselves. It's always interesting to look and see what kind of tools are out there.
PM: What kind of proprietary trading software are you talking about? Can you give me an example?
AR: For instance, I've got some software which is called the Color Charts. It's an add on that goes into TradeStation or eSignal. What it does is I felt a lot of traders got analysis paralysis. They weren't sure of exactly when to take the trade, and they weren't sure exactly where to get out. Sometimes traders are bombarded with so much information that they get this paralysis and don't know what to do next. What this does is it clears away all that paralysis and the chart actually changes color at the optimum time to take the trade, and then it changes color again at the optimum time to get out. I was amazed when I started using it and got the final version; at times, I could actually double my profits by following what that did, rather than what I did. That's the kind of thing that I've got at the moment.
PM: Presumably then, you use TradeStation and eSignal as your two key data provider set and charting package. Would that be correct?
AR: Yes, I use a number of them, and TradeStation and eSignal are 2 that I use.
PM: Is there anything else you wanted to add to the interview we're doing today?
AR: I would like to say that the enthusiasm I've got for the markets really stems from the American markets. There are so many opportunities in the market nowadays. Last year, we were just going down in a big way and daytraders were doing really well. Unfortunately, daytraders take advantage of the ups and downs in the market so when we have volatility either way, that's when they do very well. Right at this moment in time, we're rising all the time, and daytraders are doing very much on the other side of the market. The great thing about daytrading is you never have to worry about the market. You just need it to move.
PM: So it's volatility. I know that you and Richard Joyson are two key pioneers, with regards to trading U.S. stocks. I know you've done a lot of things together as well as separately, on Trade2Win. It still comes across to me, Alan, from your enthusiasm for trading is that you like the volatile markets. You like them to move. I find it quite curious that you find Forex a slow moving facility in comparison. Actually now you've said it, and having traded now U.S. NASDAQ stocks myself, I know exactly what you mean. I think a lot of other people probably would be quite surprised by that statement but it certainly is the case; they do move exceptionally quickly and in a very short time scale. That's been good.
AR: I think what actually happens is if you get good at trading the American markets, then if you trade other things, it becomes a lot easier. When I look at Forex, for me it's just like a slow move on a stock and it's easy to trade. The great thing is the color charts that I've got work on the American markets, but they also work extremely well on Forex. I didn't realize this until I'd got lots of Forex traders coming to me and wanting them to trade Forex. This is how I trade Forex. I look to the way they were used in my color charts, and traded Forex with them. It's really nice and gentle. It signals when to get in and it signals when to get out. It's nice and gentle.
PM: Presumably, that was an education for you, that people came to you and said they wanted to use something you'd developed for the U.S. markets to be used on Forex.
AR: That's right. This is going back a few years now, and I was talking on the stage with a very big U.S. FX trader and author, and I jokingly said to the guys, "You can forget all that. All you've got to do is use my color charts on FX and you could clean up. I could do it. As a matter of fact, I will do it." When I came off, he said to me, "Do you think I could have those color charts of yours?" I started laughing, but that got me starting in trading FX with the color charts. It's just like trading slow moving stocks on the American market.
PM: It's interesting; I find trading fascinating actually, and I always don't think I know it all. I'm always learning things as things progress and I find speaking to different people that they have such a different way of doing things, as you hinted at earlier. It's been very good. I think you've covered a lot there, Alan. Presumably, these people can contact you at your website, which is www.alanrichtrading.com, where they could actually go for coaching sessions if they wanted to, or they could discuss proprietary software and indicators. Is that correct?
AR: That's right but first of all they're very welcome to visit my website and drop me an email, and just have a chat about their trading.
PM: I think you said you do specifically adapt the trading that people what to learn about, to suit their individual needs. It's not a fixed agenda, is it?
AR: No, although there are fixed courses on the website. The great thing is it's one to one tuition so I fit the day around you and what the trader as an individual wants. Every day is almost different, compared with a standard course.
PM: I've certainly enjoyed talking with you again. We've not spoken for a while, but I always find your enthusiasm incredible. Unless there is anything else you wanted to add, I'll say thanks very much for joining us, Alan, and look forward to speaking with you and seeing you again at some point in the future.
AR: Okay that's great. Thank you very much, Paul.
You can listen or download this interview by clicking this link:
Alan Rich Interview mp3
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