What do you trade? Why?
I trade opportunity and opportunity is not limited by a class or location of stock. I trade Australia, Singapore, Hong Kong, Malaysia and China. I trade stocks, derivatives and futures.
The nature of the opportunity defines the time frame and this is defined by the market conditions. When markets become unstable, I shift to short-term trades and different trading instruments. In stable trending markets, I shift to longer-term trend trades because this is the most efficient use of capital with the lowest risk.

What were some of the mistakes you made when starting out?
The biggest mistake was not understanding the concept of stop loss and the relationship between trading capital and individual trades. I did not know how to use and apply the 2% rule. The second largest mistake is believing that I could be Warren Buffet and emulate the behavior of the funds and institutions. Their methods are simply unsuitable for private traders. The learning curve is much the same for all of us and it is continuation. You never reach mastery of the market. There are always new conditions, new products, new instruments so there is a constant challenge to develop trading skills. I talk with other traders and read books about trading. My objective is to learn how to recognise mistakes when I make them so I can quickly take the appropriate action.

What are some of your golden rules?
Humility in the market. It is not us AGAINST the market, it is us WITH the market. Mental agility, discipline and risk management are essential. A willingness to appreciate the new and discard old ways of thinking is vital. Understand that the market is our own thinking multiplied thousands of times so the market is about human behaviour and expectations – not accounting reports.

How did you become an educator?
Initially in response to requests from readers of my book and organisations like the Australian Stock Exchange. I am opposed to the idea that success is only possible through specialist, and protected, knowledge. My aim has been to show what is possible for ordinary people who are prepared to put in a bit of time and approach the market with an open mind. The market gives you an opportunity to control your financial destiny and, despite what brokers will tell you, the entry price is very low.
I read and read and read. I also write, which helps me to refine my ideas. I teach and this exposes my ideas to criticisms, and challenges. This improves my understanding, my analysis and my trading.
Many people helped me to develop success because they shared their ideas in books. It is appropriate that I also share ideas so that others can learn and develop success.

Do you think the everyday person on the street has a chance – can they become successful traders?
My philosophy is that trading is a skill that can be developed by anybody. Success in the market is not, and should not, be a secret. The market is not a closed and exclusive club. I am proud to have been involved in breaking down the doors of market exclusivity. The market is about equal opportunity and the opportunity is grasped through education. I have no time for those who pretend there are ‘secrets’ and demand they be paid high fees and commissions for these secrets. Knowledge is power and my intention is to transfer that knowledge to others so they can decide for themselves if they want to use it. It’s a foundation of my work in Australia and a primary driver of my work in China.

What do you wish you could have known when you started?
The most important understanding is that the market is not about buying a business. The market is not about predicting the future. The market is about benefiting from price behaviour so success comes from understanding price behaviour and its drivers. From this position is a short step to appreciating that risk management is most effectively defined by specific price multiples and calculations. These understandings develop over time, they do not come as a sudden realisation. There is always so much to learn from the experience of others.

What’s the number one thing traders can do to improve their performance?
Understand that success does not rely on you being first to discover an opportunity. Success comes from recognising high probability situations and trading them with tight risk management.

What were some of the mistakes you made when you started out?
I started trading futures and stubbornly overrode my stops when the market didn’t go the way I had predicted. It was an expensive exercise and reinforced the reality that the market doesn’t care what you think; it just is.
This motivated me to refine my risk management. Indeed, it is a core component of my trading system.

Do you just trade shares?
Depending on the market, I trade shares, futures and options – at present I am trading only shares.
This is because of lifestyle reasons. I enjoy living on and sailing my boat and spending time with my family. With my share-trading system, I only need to monitor the market when it’s open. My only requirements are off-the-shelf software and an internet connection.
By contrast, trading futures and options requires constant monitoring of the market. This is because with the leverage involved, only a small move in the market can make a huge difference to your profits and losses.
I also enjoy teaching my methods and hearing of my students’ successes in the market. Given the dangers of leverage, I am only comfortable teaching share trading. There is plenty of money to be made that way and I have seen too many inexperienced investors badly burnt by leveraging.

What’s core to a trader’s success?
It’s easy to buy, selling’s the thing.
Many of my students are confused about when to sell. They don’t know when to get off the tiger. They keep giving back profit. They also don’t know how to manage their risk.
You need to calculate your price targets (ie. your profit exit points) and exact initial and trailing stops, based on the individual shares chart patterns.
Next, you need to be clear about what you can afford to lose, based on the difference between your purchase price and your initial stop. This will determine how many shares of a particular company you can buy. If your stop is too far away from your purchase price, your risk is probably too great.
Don’t leverage unless you’ve been trading successfully in both bull and bear markets for at least several years. Then think again. If you do leverage, don’t answer a margin call with anything but a sell order.
Don’t get married to a particular stock. Be objective. Once out, you can always buy in again if the buy set-up reoccurs.
Have fun. If you are stressed to the eyeballs, you are taking too much risk. The aim is to make money, not have a heart attack. If you are ill, or distracted, don’t trade.
Be adaptable. Whilst having a system and sticking to it, always seek to refine and adapt it to the current market.
I have been using technical analysis for 20 years. I am constantly experimenting with new patterns and refining my risk management strategy. Different markets (ie stages of a market), produce different patterns. The trick is to identify and use them.
For example, instantaneous computer trading as used by the large investors, such as institutions and fund managers, appears to have modified traditional patterns and caused new patterns to appear.
Revisit your mistakes. If a trade goes against me, I want to know why. Rather than being emotional, I go back and study the relevant chart to understand why the stock performed in a way I didn’t expect. I have learnt more by my mistakes than my successes.
Expect to be wrong some of the time, particularly in the early and later stages of a trend. Probably 50% of my trades are losing trades. That’s to be expected. I keep my losses modest by exercising my stops and maximise my profits by letting my winners run.
Don’t be afraid to cut your losses and get out of a falling market. It is far easier to muster the confidence to get back into a rising market when you have a clean slate, than when you are burdened by losses.

Any sectors you prefer?
No. If a chart is right, being the buy set-up, with the correct balance of risk and reward, I buy the stock.
It is not unusual for me to be in shares where I have no idea of what the company actually does.
Having said that, I have noticed over the past six months that most of my trades are in the resources, energy and medical sectors.
However, one component must always be watched. That is the All Ords. It is critical to know what the overall market is doing. I always start my trading decisions by considering what the market is doing.

What’s coming up for the markets?
I believe the day of reckoning is still ahead. The problems that led to the 2007 Australian market fall and the global issues that precipitated that are still out there.
That doesn’t mean you don’t trade, rather you exercise caution, only take trades that stack up in terms of risk and reward and always act on your stops. There is still good trading to be had, as the past six months have shown.
Interestingly, during the Great Depression, the US and our market in particular, had huge gains. To me, this is further evidence that basing your trading on fundamentals and what the “economy” is doing is not the way to go.
Charting gives the tools to identify what is actually happening in the market and to follow what the money in the market is doing. With my method, the market will tell you when it is turning.
I have a lot of people ask me how I called the top of the market in 2007. It was simple. I was stopped out of trades and no new trades presented themselves.
If the market is not going in the direction I wish to trade, I am quite comfortable staying on the sidelines until the trend returns. Sometimes I am only in the market 3-4 months a year, for a return of 25% plus for the year.

Do you find writing a column is helpful in the way having a trading diary can be?
Yes. With my column I am publicly trading my personal portfolio. I don’t think there is anyone else actually doing that. It puts new meaning to having skin in the game. I’ve been doing it for 10 years and refining my ideas in the public gaze. It creates a marvelous discipline.

When I was young I was always interested in numbers, number patterns and probability. I guess it was almost inevitable I would end up in some sort of trading role.
I studied economics at university and was hired by an investment bank. As part of my trading, I worked in the trading room. This time coincided with the 1987 crash and so I learnt about a lot of products very quickly.

So what happened next?

My main love had always been equities and so I managed to get a position on the trading floor on the ASX. Those were the days when all the trading was done on the floor. You can’t help but miss it. I moved to Tokyo after that and I was in Japan between 1992 and 1994.
Trading equities in Japan during the 1990s must have been tough work. The market fell 50% over the course of their ‘lost decade’.

Yeah, it wasn’t easy. I mainly had responsibility for the Nikkei futures in addition to other responsibilities.
One time in 1994, I was trading in Tokyo and we were buying Japanese Nikkei futures. We knew Barings Back was selling heavily into the market, but we thought they were selling on the behalf of hedge funds.
But the Nikkei wasn’t really going our way and it was because Nick Leeson selling options was on the other side buying it for the infamous “five eights” fund. We were about to cut the position, but we just held on long enough for it to start to go against Leeson.

So what would you call your ‘world view’?

I don’t use fundamental analysis. I find it too subjective. That’s not to say that other people can’t be successful using fundamental analysis. I prefer systems that are more easily systemised or quantifiable.

So you use technical analysis?

Well, I look at charts, but I don’t look for the traditional chart patterns. I try and look at the numbers behind the charts and apply principles like autocorrelation.
For example, if I am looking at a market, and that traditionally has a high positive autocorrelation, and that market has been making gains for a few days, then you might reasonably expect that to continue.

What are the differences between trading for a company and trading for yourself?

You trade more conservatively when you trade your own money. The other important difference is that when you are a sole trader, it gets that much more difficult to maintain discipline.
When you’re working as a team, that discipline becomes self-regulatory. As a sole trader, you don’t have that luxury, so you have to try and impose it on yourself.

What’s trading all about?

Trading is all about making decisions when faced with uncertainty.
I tend to look at trading as a mean reversion strategy. I think that markets will often overreact to events and that is what creates the most opportunity.

What core to a trader’s success?

The most important factor is to ensure you have a well-thought methodology that provides you with an edge.
Then, once you can assume that, your profitability depends on your edge and how often you get to apply that edge.
You need to spend the time developing your methodology, and that includes working out which asset classes and instruments suit you best.

How did you get into trading?
I just fell into it. After finishing a business degree at uni, I started off in the currency options back office at ANZ. I spent seven months there and decided I wanted to move up to the dealing room.
There was a trainee foreign exchange dealer role there and I didn’t even get an interview. So I said to the guys on the forex night desk “Do you mind if I sit in and learn a little bit?” I figured that the next time there was a role at least I would get an interview!
After about three months it got to the point where they would ring me every night because they needed help with the orders.

So you just volunteered?
Yes, I just volunteered. I would work all day in the back office and then go into the night desk for three hours each night. I’d finish my usual job at 6.30 and then go up to the trading room. It gave the opportunity to learn about the markets and I would obviously help the guys with their work.

How would you describe your trading style?
I would structure my view on the markets by constantly asking: “Where to from here?” Before you start your trading session, you’d look at what’s been going on in the session beforehand and try to figure out what’s most likely to occur next.
As a forex dealer, I would look for the next move of between 70 and 100 pips, I wasn’t interested in where it would be next week, just where the next 70-100 points was going to be. Also, at the bank you have a certain budget you need to meet every day, so if you come to the conclusion it might only be a 30-pip day you would look to take a larger position size looking for less in terms of points.

How would you figure out what kind of day it is going to be?
I would look at the technicals. I look only at the technicals and I am a big fan of three timeframes. First, I would look at a one-hour chart. I always base my view on a one-hour chart.
Then I would look at four-hour and daily charts to see whether that chart causes me to negate that view. If the four-hour or daily charts produce something to make me think twice, then I would sit back and reassess the situation. This is because I always work on the assumption that the longer-term charts outweigh the shorter term.
For example, if I was really bearish on the hourly, but there was a big cracking uptrend line about to come into play on the daily, then I would respect the longer-term chart. Although the bearish pattern on the hourly may be the catalyst for the breaking of the uptrend.

So you look at short term, medium term and then long term?
No. Strangely enough, I look at the one-hour, then the daily, and then the four-hour. I use the four-hour to clear any confusion produced by the hourly and the daily charts as I find the four-hourly to be a cleaner chart. But overall, I came to a view on the hourly and if no red flags appear in the other charts, then I stick by the view I gained from the hourly chart.
When you are trading intra-day, you are looking only for the moves that an hourly chart might produce. The hourly was the smallest time frame, as five or 15-minute charts are too focused in my view. Yes, they show many signals, but they tend to give plenty of false ones also.

What markets do you think are best to trade and why?
I have a background in forex and so I try and stick to what I know. The forex market is a good market to trade in because it is so liquid and it’s less prone to see the kinds of shifts in sentiment you see in the share market if one big player decides to enter or exit a position.

What are some of the biggest hurdles you have had to overcome?
Confidence. You have to be confident to be able to take the trade when you need to. The other major hurdle a trader has to overcome is the lack of a trading plan, but that’s related to confidence. A trading plan helps you gain the confidence to pull the trigger.
At the end of the day, in trading, you are going to be right or wrong. But if your trading plan makes sense, there’s more chance you are actually going to be right. And if you are wrong, the trading plan should ensure that you don’t lose too much on the trade.

What’s the most important part of your trading plan?
Managing risk, without a doubt. Every single trade that I have done has always been derived from where the stop loss needs to be placed. This is because you sit there and look at your charts or look at your order book and you think, “Where am I wrong?” From there is where you derive your trading strategy.
Every time you take a trade, you have to think about whether you afford to run the position to where your stop needs to be. If you can’t, then the trade’s not worth doing. In that case, you will just have to be patient and hope you can get set at a better level. But that might never happen. Alternatively, you might have to take a smaller position.
It comes back to the structure of the trade. If you cannot afford to stop out at the right level, the trade is a “bad” trade in my book, even if you ended up picking the market move right. This is because you need to control your trading and make sure that you don’t enter trades you cannot afford.

Can you tell us some of the tricks of the trade you have learnt over the years?
I think people need to be aware that certain currencies suit certain traders. For instance, as part of my role at the bank, I had to look after the USD/CAD book for some time. It was a tough book to trade (especially in the Asian timezone) and I don’t think I ever made money trading it, so when I moved onto another desk, I was happy to not have to trade it anymore. It wasn’t that I was a bad trader, the USD/CAD just didn’t suit my trading style.
The USD/JPY and the GBP/USD, on the other hand, suited me down to the ground. Those pairs suit break traders, that is, they break to new lows or new highs and you just go with the move. The same with the GBP/JPY.
Another example is the AUD/USD which can go through periods when it is range bound for some time, and if you are a break trader you can get very little joy. So when the Aussie is in a range, you should just ignore it. At the end of the day, you just have to find the currency that’s right for you at the time.
One other thing to note is that when you trade forex, patterns work particularly well. Bull and bear flags along with pennants and triangles are great continuation patterns and on the hourly and daily they give break traders plenty of opportunities.

What advice would you give to traders that are starting out?
Always work on your trading plan first and be realistic about what your expectations are. Also, think about your risk to reward ratio. I believe that a risk to reward of 1:1 or 1:2 is appropriate. I have no problem with a risk to reward ratio of 1:1.
I also think it important to remember that even the best traders are only going to get it right about 65% of the time. So you have to make sure that the losses on other 35% of the time don’t wipe out what you make on the other 65%.
Also, be careful not to take your profit too early, because that throws out your risk/reward ratio. You have to be careful that your risk/reward makes sense.
Finally, I would say to all those looking at technicals to help their trading, keep it simple. At the bank, all I used was a 13-period RSI on the daily chart to look for divergences. You don’t need to have Stochastics, MACD, RSI and ATR on your charts all at the one time.  Keep it simple, otherwise you get too many conflicting indicators and you will never pull the trigger. The simpler the better works for me.