Jeff Cooper, the professional short-term stock trader who writes
TradingMarkets.com's "Momentum Stocks Insight" and "Weekend Stock
Market Outlook" commentaries, has had more than his share of market
experiences--both good and bad. Jeff’s family was devastated by
his father's stock market losses in the in the early 1960s. You
would have thought Jeff learned from those mistakes, but it wasn’t
until he nearly went broke himself years later that he began to
implement a strict money management plan.
Most traders view money management as an afterthought--something
they add to their methodology as a finishing touch. Jeff on the
other hand, doesn’t distinguish money management from his methodology--it’s
in integral part of it. In addition, he recognizes that markets
are dynamic and he constantly adjusts his money management style
to current market conditions.
Dave Landry (DL): Maybe we should fill readers in about some
of your history. In your first book, “Hit and run Trading,” you write
that your father built and sold a very successful textile business
and retired to Beverly Hills. Based on his brokers advice, he began
investing in stocks. Not only did they sell him on the buy and hold
mantra, but they also introduced him to buying stocks on margin to
increase his fortune through leverage.
Unfortunately, the first bear swing in the market wiped out your
father’s account. To add insult to injury, the brokers who originally
had convinced your father to part with his money were now liquidating
his portfolios on the day your mother was being operated on for
cancer. Now forced into bankruptcy, your family had no choice but
to move back east. If this wasn’t enough pain and suffering, the
moving van caught fire in route destroying what few possessions
that were left.
Your father, started yet another textile business from scratch
and within five years sold it for millions and retired. Instead
of enjoying the good life he decided once again to return to the
markets. This time however, it was on his terms. He began investing
in IPOs, but on a short-term basis. Not only did he make back all
of his original stake, but he made millions on top of that.
Did you automatically become a short-term and risk-averse trader
based on your family's painful experience with buy and hold?
Jeff Cooper (JC): No. I fell into the footsteps of my father’s
initial tragedy. I was nearly wiped out in the late 1980s making
the same mistakes that he made over 20 years earlier.
DL: Why is it that you didn’t learn from your father’s initial
tragedy?
JC: I suppose it’s the Cooper family nature. We’re hardheaded.
Look at my father. After being devastated in the markets, he started
another textile business from scratch and made back enough money
to retire. Instead of living the good live in retirement, he returned
to the markets. Now, with those genetics, I couldn’t help but to
go out and do it my way. I suppose as human beings it’s not
enough to experience other’s pain. You have to feel it for yourself.
The lessons that stick are ones that are learned first hand. And
those have to be learned and re-learned often. That’s just the way
most of us are built. Bernard Baruch, one of the great investor/traders,
went broke five or six times, I believe, before asking his mother
for some more of the family’s funds. At this point he was told that
this is the last of it. He was able to make that his grubstake,
and turn it to his fortune.
Bernard Baruch was humbled by the markets before he was able to
master them. And I would have to say that this is one common thread
that runs through almost every great trader that I have ever met.
They have all been humbled by the market early on in their careers.
This creates a definite respect for Mr. Market. Until one has this
respect, indelibly engraved in their makeup, the concept of money
management and discipline will never be treated seriously.
DL: So you were trading longer-term and taking excessive risk?
JC: Yes.
DL: Why?
JC: The market has a way of soft-peddling risk, making the
masses happy and comfortable. When that belief system is universal,
that is when it (the market) is to be feared the most. Hello! (referring
to the masses who are currently plunging into the market) Does
this give anyone the idea I’m more of a day trader as opposed to
a position trader?
DL: Why do you think people hold on to stocks and refuse to
sell?
JC: It's very easy to buy a story on a company you hear
about at a cocktail party. In addition, many people are paid to
promote stocks. Furthermore, people are generally hopeful and optimist--dreamers
by nature.
DL: Recently, I was approached by a friend at a cocktail party.
The guy is a brilliant organic chemist, probably the most intelligent
person I know. He took out a stack of charts and began asking me
for trading advice. On many of the charts it was the same story:
“I’ve doubled my money on this one but now it’s selling off. I’m
still up 50% but it keeps dropping.” When asked, so why not take
a 50% profit? His reply was that he can’t do that because at one
point he was up 100%. He felt like a failure. Yet, here’s guy who
had made some nice profits in the market--profits I envied.
JC: Many people think the object is to get out close to
the top. They buy Amazon at 150 and ride it up to 280 points. It
then sells off to 240 and they think they’ve made a bad decision.
They forget that the real object is to make money.
The hardest thing though, whether its investing or short-term trading
is to learn how to extricate oneself from a situation, whether it
be positive or negative.
DL: Yes. It seems like each stock had a story behind it as to
why it should go back up.
JC: It’s human nature to be optimistic. Any fool can enter,
it takes talent to exit consistently and profitably.
DL: What do you think is the secret of your success?
JC: I look to take money out of the market, to create income
and build wealth. I do this by consistently hitting singles not
home runs. I never try to capture a huge move and I never do.
DL: How do you view money management?
JC: Regardless of what we think we know and should happen
the reality is that a lot of stock action is random. Therefore,
money management is crucial if you want to be successful as a trader.
To me, it’s the cornerstone of both making a living at trading and
building wealth.
DL: What percentage of equity do you generally risk per trade?
JC: I risk very little. I don’t really think of it in terms
of percentages. I suppose if I did, I’m probably not risking more
than 1ž4 to 1ž2% per trade. In addition, I haven’t changed my trading
size in years. Nor do I intend to. Therefore, by keeping my position
sizes relatively small, my risk continues to decrease as my capital
base grows.
DL: Why not keep your risk consistent to the amount of your
equity to strive for even larger returns?
JC: I see things on a monetary basis. For instance, I think
$1,000-$2,000 is a lot of money to lose on an individual trade.
Think about it. Not many people make $1,000 an hour, yet an active
day trader can loose that in a matter of minutes.
I suppose at some point in time, I might consider managed funds.
At that point, I’d be forced to adjust risk to equity. However,
as long as its my personal account, I’m comfortable knowing that
as my equity grows, my risk continues to decrease.
DL: Would you share with us your techniques for money management
and dealing with risk?
JC: Sure. Depending on the situation, I use price stops,
time stops, pivot stops and size stops.
DL: Of the four, price stops seems obvious--is that points risked
per trade?
JC: Yes. As a rule of thumb I never permit a stock to go
more than one point against me. I’ve learned that your first loss
is the best and it only gets worse from there. Almost all big losses
start with small losses.
DL: Is your one-point rule rigid?
JC: No. Markets are constantly changing. Also, obviously
on a carry-over trade, there’s no way to prevent a gap from making
it worse. However, in those cases I reduce the risk by not taking
the entire position home.
DL: What about thinner stocks, higher-priced stocks, or those
that are more volatile?
JC: On those I’m willing to go to 1 1ž2 points or so. However,
I reduce my position size accordingly.
DL: What are pivot stops?
JC: When I see a stock break out of an intraday congestion
or consolidation as a momentum player, I’m looking for immediate
continuation. That’s the normal expectation. My many years in the
market have taught me to be cynical: Stocks don’t move, they are
moved. Often stocks don’t go up, they are put up. So typically,
I will place a stop immediately below a consolidation. If the stock
simply is stutter-stepping after the breakout, that is, if the stock
goes one to three bars (on a 5-minute chart) and then has a shallow
pullback, then, OK. However, if a stock comes in below the breakout
point, I’m usually gone. Most traders wait for a base to be violated.
I won’t wait that long. If the stock reasserts itself, then I’ll
re-enter. That’s the way I like to trade.
DL: What about time stops?
JC: As a momentum/short-term player there’s an opportunity
cost to be in a stock. Especially with today’s volatility.
DL: So by being in a stock that’s not moving you miss opportunities
in other stocks?
JC: Yes. Depending on the stock, I find it difficult to
manage five to six positions at one time, and if we are talking
about Internet stocks, managing more than two or three on an intraday
basis can be a real feat. So if I enter a stock based on momentum,
I expect continuation. If the stock just sits, I may simply scratch
the trade and look for greener pastures.
DL: And size stops?
JC: I use size stops with my Stepping In Front of Size Methodology
(SIFOS). Note: The SIFOS methodology essentially involves buying
stocks at the market when a large trader persistently bids for the
stock. You are “stepping in front of size.” With this, I’m buying
at the market and my stop goes right below the large bid. This can
often turn out to be much less than one point away.
DL: What about exiting?
JC: It all depends on the market. I recognize that markets
are constantly changing and require different approaches at different
times. Although this may should sound patently obvious on the surface,
it’s been a real to a key to my profit-making potential.
Let’s say that the overall stock market or a sector is in a solid
monolithic move. I’m pretty comfortable with a one-point stop rule.
I’m also more prone to let things ride a bit. When markets are choppy,
I’m going to be less forgiving, both with my stops and in taking
profits. I’m much more apt to take a piece off as a soon as a stock
runs up a point or so and bring my stop up to breakeven on the remaining
piece. I don’t overstay my welcome in choppy markets.
DL: Are there any times when you take larger positions or pyramid?
You can take the same two people and sit them at a blackjack table
in Las Vegas. The cards are coming out randomly but it’s the player
who bets properly and uses a disciplined approach and knows how
to recognize a streak when it occurs and go for the throat who will
live to survive and play another day.
The market is very similar. There are few times where the market
has a strong run and you want to do the same with your positions.
This may happen as often as a few times a month or as seldom as
a few times a year. The key is to recognize when this is occurring
and bend the rules and press a bit.
DL: Any closing thoughts?
JC: Yes. Many people think they want to pursue one particular
form of trading. For me, its day trading and short-term momentum
trading. This is not to say it's for everyone. It all depends on
your makeup. I admire traders like Mark Boucher who occasionally
catch much larger moves. Also, you have to be willing to change.
At some point in time, I might be willing to commit a small portion
of my capital to trading this style. However, for now, I know my
niche and stick to it.