Former Floor Trader Talks Trading Strategy

This week, Tim Bourquin of TraderInterviews.com talks to Jeff Quinto. To listen to the audio interview, click on the attachment at the end of the transcript.

Transcript:

TraderInterviews.com: Hello everybody and welcome back to TraderInterviews.com. Thanks for joining me for another show this week. We're going to be speaking with Jeff Quinto. And I spoke with Jeff in the studio of the Money Show recently where we did a studio above the CBOT trading floors which was kind of neat. We talk to Jeff about a couple of different trading topics and I want to get him on the phone to get into some of those things a little bit more in depth so we're going to talk to him and find out some good tips for us traders about approaching the markets ourselves. So, Jeff, thanks for joining me on the phone today.

Jeff: Thank you for having me Tim.

TraderInterviews.com: Well, let's start out with your background because you've got pretty interesting ones, so let's let everybody know where you're coming from.

Jeff: Sure. I've been involved in trading for the last 37 years and I've got say it's been a wonderful 37 years, I've enjoyed every minute of it. Through the time, I've traded during wars and pestilence and droughts and floods and crashes and all kinds of things and as I said I've loved every minute of it. I started out in my trading sort of pretty young because at our dinner table instead of talking about football or politics, my father would talk about the stocks he was buying and selling and it was a topic of interest in conversation in nearly every meal and from that I got a pretty good interest in trading, albeit I thought it was stock trading. And then I became a stock broker and I was a stock broker for a time. I became a futures specialist and as I was handling the futures trades for my clients I thought, "You know what if I'm as good at this as I think I might be, I had to be doing this for myself and I ought to be doing it on an exchange floor." So I bought a membership on the Kansas City Board of Trade for $40,000 and the reason that I bought it on Kansas City instead of Chicago is that at that time the memberships were $160,000 in Chicago and then we're only $40,000 in Kansas City and since I didn't have any money and I knew that paying back 40,000 would be an easier thing to do than paying back 160,000. So I started out as a trader on the floor and I was completely scared by trading actually. The first trade I did, by the time I completely the trades my hands were shaking so violently that I couldn't even write down on the trading card what I had done. And that surprise me, this fear that I had of trading and I slowly overcome that doing it everyday, trying again and again and I became at the end a clearing member of the exchange in my own name. So in any event that's me up to this date.

TraderInterviews.com: Well, let me ask you back to go back to that first time on the trading floor in Kansas City, looking down at the trading pit in the CBOT just last week, these guys don't have charts in their hands, some of them have computers but it's just to fill the orders I think and to see the flow and yet they're up there buying and selling. I mean is it strictly price and volume and the feel of the markets that they're relying on?

Jeff: Yeah. People on the floor, it's interesting because people on the floor would use one of two things, generally, they didn't use the market profile or did use a point figure chart and the reason was I think that you can kind of do those afterwards figure out what the chart was, but basically people on the floor didn't use charts. They just went on a feel of the market and they traded on that basis which it made a different kind of trading. You know today, you have all this sophisticated software to do charting. At that time you really didn't have anything at all like that. If you were looking at charts, generally, you were looking at charts that you made yourself or we had charts that came out weekly, I think it was called Commodity Research Bureau charts and you would get these charts every week and they would have some room on the end of the chart on every chart so you could fill them in pencil what actually happened. So those are different times and you really didn't look at charts. You are more going by a feel of the market.

TraderInterviews.com: Yes. So are we better off today with all that junk that we have available to us. Maybe I shouldn't say junk.

Jeff: I know you're thinking but you bring up an excellent point because what happens to people is they think that if you have, let's take indicators as an example. On the floor, nobody knew what an indicator was. Nobody knew what the MACD was or the stochastics. They didn't care that wasn't part of their lexicon. But now, you have all these things available and the reality is that what people do is they're thinking, "You know what, if I have one indicator on my chart, and that's going to tell me something important. If I had two I'd probably be better off and three would be even better and it goes on to some absurd infinity of, "Well, I've seen charts that have so many lines on them that you can't tell where the price is." It's just crazy. Because the essence of trading isn't about finding perfection in the information, the essence of successful trading is being able to make decisions with imperfect information and I believe with imperfect information you don't need all these things. They're more confusing. There was a saying that I like that it is, a man with two watches never knows exactly what time it is. And that's kind of what happens to traders. They get so many different timeframes and oscillators and this and that the essence of what they're doing, they don't actually know when to make a decision, they're waiting for all these things to come together and it doesn't help you make decisions. I think you need a minimum amount of information but not more than that.

TraderInterviews.com: And making those decisions based on imperfect information and being comfortable with that after talking with hundreds of traders over this past year that's really what it comes down to. I think a newer trader is looking for the "feel great" trading, feel comfortable, know exactly what they're doing, the great traders will say that's never going to happen. You just have to be comfortable in what you do know.

Jeff: That's absolutely right. Because people think that the better you get at something the more perfect you get out of it. And that works in all kinds of things, but it doesn't work that way in trading. You know the world's greatest trader is not the most accurate. I mean he isn't the world's greatest trader whoever he is because he's so accurate. He's the world's greatest trader because he process when he's right, he exploits his opportunities and he cuts his losses. But it isn't about perfection. The people go into trading and they think, "This is like everything else. I'll become the best at it. I'll work extra hard and I'll become precise and accurate in my trades and that is not where the money is."

TraderInterviews.com: So what does make that difference and how did you then become comfortable after that first handshaking incident to get from there to comfortable in the trading and making those good decisions. What makes the difference?

Jeff: Well, I think what makes the difference is you evolve as a trader and the evolution is as we just said, it isn't about being more accurate but it's about being smarter about the way you operate. Now, one of the things that wasn't a benefit from the floor, and I should tell you this it seems absurd, but when you opened an account on the floor the time I was trading, the way you open and account is you signed your name on a piece of paper that had some sort of a legal writing but not very much and then you trade it. Now, the one thing I haven't said is about the money. You didn't put up any money. Now, you owned an exchange membership, so the exchange membership meant that the clearing firm had some asset that they could go unto if you lost money. But the fact is that it wasn't about the money in your account. So what would happen would be that you would start off a day, you'd have literally, not very much in your account and you'd make money and then on the floor the runners would come around and they would have this little pieces of paper they call them cheats and on this little cheat you would write the date, how much money you wanted and you sign your name and you would put an X if you wanted a check or if you wanted cash. And you'd hand it to these guys, so you're actually in the middle of the trading day, you made money and you're actually taking the money out. It's an incredible thing. Some of the guys took the money out and if they had a good morning, they'd take $500 in cash and go play golf or gamble or whatever they did. I never took cash, I only took checks, but what that did was it made the money real. You know the people say in trading that you shouldn't worry about the money. And there is some truth to that except I think it's better said that you shouldn't be afraid of the money, but after all successful trading is about the money when you have to. It is about making money. It is about taking the money. So you have to be aware of what you're doing. The beauty of being on the floor in this kind of environment is that you knew about the money, you knew that if you did well trading, if held in you're disciplined, if you did the things you're supposed to do, you're going to A, you're going to make money and actually you're going to be able to take that money. And in my case, I have to write a new check, and then I go pay the rent or do whatever I did with it, but it made the money real. Today, what people do is they open an account, they make money and the account gets bigger where the lose money and the account gets smaller. I think there are some smarter ways to do that actually than what I've just described. But anyway when I started the money was real and the profits and losses, you understood it and it made you very disciplined because there was one thing that I didn't tell you that if you had lost money during the day, here's the kicker, this is the other part of it. So let's say you lose money and let's say you lose money that you don't have and so your account is in deficit, you cannot come on the floor the next day. You would be blocked from coming on the floor the next day that means you're out of business. So you're not going to let that happen. You're not going to lose more than what you have because you can't let that happen. That would put you out of business, you can't let it happen. It makes people more disciplined. So you found that people and they were willing to take risks but they were also disciplined. So it had a good combination of this willingness to take risk but at the same time not willing to be run over by a truck.

TraderInterviews.com: So what can a trader do who's at home screen trader, trading on a direct access platform, and maybe even web based platform to kind of duplicate that discipline.

Jeff: Absolutely. Here's what I would do. I would several things. One is the money in my account would be a base amount. In other words, whatever the money is, I would say, "OK. This is the money in my account. And as I made money, I would take it out. And I would take it out on some basis such as I have people in my electronic trading mentoring program that I coach to take out, they take money out every time they get some amount of money so their account is up by 2,000 or 5,000, or whatever, they take the money out. So let's say, if you're account, I'm just saying this is an example, you have $50,000 account and you're going to take out money every time you're up by let's say $3,000 or at the end of the month. And so you're always starting with 50,000. You're always trading with the same amount, so this isn't about doubling down all the time in trying to build your account to infinity. What you're really trying to do is you're saying, "OK. I have a 50,000 account, I'm willing to lose X amount of money a day. My maximum daily risk should be a percentage of that, one or two percent, depending on how you do that." So you're willing to lose, let say, you have $50,000 account, you're willing to lose a thousand dollars in a day and you'll go about it in that way. And so that's a better way to do this if you're doing it from home and the beauty of the electronic markets is that you can pretty dial in your risk. In other words, you start off and say, "I've got a $50,000 account; I'm willing to lose a thousand dollars a day. I think that in a given day I should do five trades that mean each trades should have a maximal lose of $200. You're going to make some calculation like that which you can do much more exactly than you are able to do on the floor.

TraderInterviews.com: So if I want to increase my size though, and I need that extra additional fund in the account, is there a right way to go about that?

Jeff: Yes, there is. You increase your size or you change your size actually with some sort of a plan in mind. In other words, what people do, what they really do is that they're trading well and so they increase the size until they're trading poorly. And that's not a way to do it. But what you really should do is as you're being rewarded, you should have some plan for increasing your size in some major planned way. But you're doing it, having given it some thought, not just sort of will, I feel pretty strong to that make that trade twice as big, it isn't the way it should work.

TraderInterviews.com: So, it should be, if I've made this amount of money every month for three months, then I'll increase my size 30% or 50% is that a good plan?

Jeff: Yes. It's getting there. You're going to have some sort of review if you achieve certain benchmarks, then you add in a rational norm and a rationale way to the side. And also when the market is not rewarding you, you're going to want to reduce your size and that's OK too because the market is not always going to reward you. And so if what you're doing is wrong, and what you're doing is not being rewarded, the first thing you need to do is reduce the size. I used to one to be a big trader. And there are some stories, I think I told one in our interview about my trading, and I was lucky because when I was a big trader I made little money and lost little money. I didn't actually have any, I had neither any big wins or any big losses but I have some pretty good risk over the time in terms of the trading that I did. But I found that really, the money that I got, the money that I made from trading really came from consistent regular trading. It came from consistent trading and that was what I worked on. I worked on consistency and you don't have to be a big trader. On the floor, you have to be a big trader to get other traders attention. In other words, if a broker came and he had a hundred contracts to sell, he'd look for traders that we're going to take 20 contracts each. So he only has to find five traders. He wouldn't split it up on those guys with three contracts each, it's just too difficult. So the bigger traders got the good trades. And so you needed to be a bigger trader to get these good trades. But on the electronic market, it makes no difference what size you are. Nobody knows and nobody cares and the markets are so liquid that even if you're a very big trader, nobody is ever going to know who you are, and you're not going to be a blip in the market. So the beauty of electronic market is your ability to dial in your size both increasing and decreasing it in a major and planned way.

TraderInterviews.com: So what should traders be watching then Jeff for say, the E-Minis these days, that's hugely popular and lots of traders are watching that. Do you have every recommendation on timeframes and certain things whether they have indicators or not that you should be taking a look at?

Jeff: I'm not a big believer in lots of indicators. I think the price is the most important indicator. When I look at a chart taking the S&P, E-Minis, I look at a 377-tick chart, a candlestick chart, and I like putting a 21-period exponential moving average on. I also put Keltner bands, one and a half times the average to range over the same 21 periods also figured exponentially. That would be the chart I would look at. The chart I would look at wouldn't have any other indicators on it because what I'm really interested in, I'm interested in looking at this. Now, when I said a 377-tick chart, it isn't because I've done some great studying and found 377 ticks and somehow inherently better than 375 or 200 or 100, it isn't that at all. I think there is a value, however, in looking at consistently looking at sort of the same chart for the same futures because you can get a sense of what the market is doing relative to what it's done before. So I like looking at the same chart again and again, but I know that it's not because it's a perfect chart, it's more because I'm used to it and it talks to me in a way.

TraderInterviews.com: There are a lot more traders using tick charts because their charts speed up as the market speed up which you don't get in time based charts.

Jeff: Oh, absolutely. But you know I'll tell you a funny thing about it, I said a minute ago, when we're on the floor, you had to do your charts by hand and so when we started trading electronically in the late '90s and you did have a trading software that you just, everybody was trading at that time using either one-minute or five-minute charts. I think I was using a one-minute chart at that time and one of the guys that I'm trading say, "Hey, you can put any minute, any whole integer that you want. You can have any minute you want." He says, "Look what happens when you make it a three-minute." So we made a three-minute chart. I was like, "Wow, the three-minute is really cool." It seemed to be a little better than the one-minute and not quite as slow as the five-minute, and we thought we discovered something. I mean, it sounds silly doesn't it that we thought that the three-minute chart was like some great discovery. But we thought it was and we actually told ourselves that we weren't going to tell anybody that we were using these three-minute charts because we didn't want to give away the golden goose as it were. And so we traded with the three-minute chart and I use three-minute charts for years. And then I don't know, a few years ago, there was a time as I recall December probably three years ago, the market went down like a stone, in about nine minutes the market fell. And if you look at the minute chart, that is the three-minute chart, it showed you three red bars. It just fell. That's all it did. And you think, "OK, well it fell like a stone, there's nothing here." And then I thought just for fun, I would see that it looked like at the tick charts because a friend of mine had been talking about tick charts earlier in the day. And so I changed it to a 300-tick chart, just not knowing that 300 ticks is right or wrong but just to see what it was. Well, in that same nine minutes on a 300-tick chart, it didn't have three bars, it had about 20 bars. And actually during those nine minutes, the market fell and retraced and fell and retraced. It had beautiful structure. Now, the beautiful structure that it had, it was very fast, I mean you can imagine it made 20 bars in nine minutes, I mean that's pretty fast moving, so you didn't have time to sort of analyze it and look at it, you have to react. But the point is that it made a very different story of these nine minutes. And since that time I've used the tick charts and I love them. I think it's a great way to look at the market because it isn't just about time. It is an equalized time. It actually equalizes volatility or price changes.

TraderInterviews.com: Absolutely. And you probably get a better feel for if you're a faster trader, it makes a lot more sense it would seem to watch a tick chart maybe on, I don't know how many ticks is too little. I think a tick by tick chart is awful hard to follow. I think you're right that you've got to do something about widening that a little bit, but still be able to get a feel for the market moving quickly and 300 ticks in the S&P, E-Mini, yeah, that's going to print pretty quickly when things are moving fast.

Jeff: Absolutely. And I like the way it speeds up and slows down in the formation of bars because the bars are equal that is equal in the number of price changes. You'd be going along looking at it and the bars will start to build bars faster, and you're looking at the chart sort of in the same way but the amount of time that's going by is speeding up. And I think that's very healthy because that's what the market does. It runs and it rest. It gets quiet and then it rolls.

TraderInterviews.com: Now, Keltner bands I know I've heard something about that. I heard a lot of traders talking about that. Can you talk about how you use those again?

Jeff: Yeah. With Keltner bands, Keltner who has been designing the bands, he's idea was if you would have this moving average in the middle and that you would have these bands on the outside and the bands on the outside would denote sort of the range that it would go away from the mean and his idea was he would sell the outside Keltners as sort of reversing to the mean. I use them differently. And with the way I use them is they just help me define whether the market is an uptrend or a downtrend. And to me both the exponential moving average and the Keltner who really just meant to be reference point, it's not that there is a system. They're just reference points; I'm just watching the market. I believe the market moves in waves, and just like a wave, if you can think of if the market moves up and then it retraces and then it moves up and then it retraces. So this is the way the market moves, it moves in waves. And so the exponential moving average in the Keltner bands is not meant to be exact point. They're just meant to give you kind of a reference as to how this wave is moving.

TraderInterviews.com: Right. Was it the 21-period exponential moving average or 22-period?

Jeff: 21-period. And the reason, I can tell you why I use the 21-period, it's a highly scientific thing and why I use 377, you may have guessed already actually. I use Fibonacci numbers for lots of things and I did them because I made some great study of it, it's just that it forms a framework for me to do things. And I choose, if it's at all possible, I choose Fibonacci number. Well, you know what, when I go to the train station and I park, I park in either space number 55 or space number 89.

TraderInterviews.com: I know, I've got a friend who trades forex that sets his alarm clock for 6:18 every morning.

Jeff: That's it. I understand that.

TraderInterviews.com: There's definitely something to that whether or not it has a direct effect on your trading, it really doesn't matter I guess, it's the fact that you believe it works. There's something about that that affects change and successful trading I guess.

Jeff: Yeah. And it's not that. I mean, I'm not like thinking that this is some remarkable thing. But it does for me and the different things that I use the Fibonacci numbers is that the Fibonacci progressions sort of has to me a logical way that it goes, you know 1, 2, 3, 5, 8, 13, 21, 34, 55. It's just a logical way that it's adding to things. So I feel pretty good about that actually.

TraderInterviews.com: So those point and figure charts that you mentioned earlier on to. I don't hear a lot of really short term traders talking about that. I hear more of it on the, maybe long term swing and even investors talking about it. How about the point and figure for short term trading.

Jeff: Yeah. I'm not sure. I haven't used it. I haven't used it a long time. I know over the years lots of people that I've known have used them and then they've gotten away from them. The idea is that what I think it's appealing in a point and figure chart is it masks the noise or people think that it masks the noise. And in masking the noise, it gives them a kind of a better idea of what's actually happening. I'm not seeing people, and there maybe people doing wonderfully well with them. I don't know people that are, but mostly I've seen where people would do it. They'll use them because they like this noise masking part of it and then they sort of move on from it. And also I should tell you one more thing. Before you had all of the electronic advantages that we have today, it was a way to do, you could do this, you could keep a point and figure chart during the day without spending every moment which looking at it. During the day, as an example, you certainly can't make a tick chart. But it's very hard to make even like minute charts or five-minute charts because it's just too much activity. So the point and figure was a way for a guy on the floor to mark up his chart and he didn't have to be staring at it every second.

TraderInterviews.com: Now, how about the Keltner band for setting stop losses and profit targets, you talked about using them as reference points, but you use them to set levels of certain types for when you want to get out and in.

Jeff: Yeah. Just in my simple strategy, when the market has pierced an outer Keltner band that's one way to define whether it's an uptrend or a downtrend. In other words, if at most recently pierced the upper Keltner band then I say it's in an uptrend just by, it's just a way to define an uptrend or a downtrend. Once again, it's not meant to do it very crudely. It's not meant to do it as an exact thing that they know it's like meant to be system. It just meant to give you an idea how the wave is moving once again getting back to the idea that the market really moves in wave.

TraderInterviews.com: Do you trade any other futures outside, say the E-Mini, are you trading Ags or anything else that you kind of use this same tools on?

Jeff: I think you can use these tools on anything. I don't particularly. But also, anything that's going to work, by definition, anything that's robust would work across all kinds of futures that would be a test of whether it's actually really valuable and this does work over all kinds of things. I have people that use this, you trading gold; I have people use it trading agricultural product and indexes. So I think that it works, but it's meant to be a crude thing. It's not meant to be some exact system like some magical exact system. It isn't even meant to be that.

TraderInterviews.com: The traders that you've seen over the years, that you've seen had success, any trades or anything they've done that on those times when you said, "Well, let's try this as one trader if it works, we'll go to two, three..." what was one of those really successful ones that you said, "We've got to implement this across a lot of different people?"

Jeff: Oh, there are a lot of them that we've done. I think because trading is so complex and includes so many things. There are some things that we've done. One example, it's something I called a V, and the V is simply looking at the market, looking at size and the way you're trading and looking at it and saying, "OK, I'm going to start trading in the middle of the V, and the middle of the V is," let's say I'm a five-lot trader. And so at the middle of the V, I come in and I'm trading five lots. I walk in trading five lots. And then as the market rewards me on some preset method, I'm going to trade bigger. I'm going to trade bigger. I'm going to be an eight-lot trader as it goes up, and then maybe a 13-lot trader, a 10-lot trader whatever it is. If you think of it as a V, so as the market rewards you, you'll become a bigger trader, you trade the bigger size. As the market takes money away from you, by now rewarding, you become a smaller trader. So the five-lot trader becomes a three-lot trader, two-lot trader and one-lot trader even during the day. We call that the V. And I've seen it work with people. It can work to pretty amazing result.

TraderInterviews.com: All right. So I'm a little slow here. You take the shape of the V when you plot that?

Jeff: Yes. It takes the shape of a V. So, I think of it as you're holding your fingers as a V and you're going to put a line across the middle of the V and you're going to say, "That's five lots." And then as you get rewarded, you go up in the V, you trade, the V becomes wider, and as it becomes wider and it's just a way to graphically illustrate that you're going to be bigger as the market rewards you.

TraderInterviews.com: So what is your setup as the market rewards me plan to trade larger. What was it for you? Was it pure dollars?

Jeff: No. A lot of those the ticks. It's about you preset on how many ticks you're going to be up and what you're going to do with various ticks. I don't even use dollars because I think dollars then gets, we get sort of a weird thing going on because you need to talk about ticks because ticks puts money in the abstract. Dollars puts it in reality and then it makes it harder for you to make the decision that you need to make because if you're a bigger trader and the next trade you're going risk what might be half your mortgage payment or something like that then you're going to think whole differently about if you're going to give you a pause, and I don't want to. So I think when you talk about these things, all of my plans are based on tick.

TraderInterviews.com: Jeff, thanks very much for your time today. I appreciate you sharing with us some the strategies and things you look at, I think it's been really helpful. Thanks a lot.

Jeff: You're very welcome Tim.

Attachment	Size
TraderJeffQuinto.mp3	30.69 MB