Interview With A Swing Trader

[Leth]

Trading in the Swing of Things

By Darrell Jobman

This science teacher-turned-trader is still learning and still teaching, but these days, about the science of trading.

When he was a science teacher in Warwick, R.I., back in the mid-1970s, speculating was a spectator sport for Sam Jones. It wasn't a case of not being interested in trading but, as a schoolteacher, he did not receive the kind of salary that would enable him to participate in the exciting, nut capital-intense, world of trading. One thing Jones did have as a teacher was the knowledge of how to take notes and to study As it turned out, those were valuable skills to have.

About 20 years ago, he quit teaching and moved away from the defined-benefit pension plan he could have had. Ha became an information technology professional, finally able to apply those note-taking and studying skills to trading. In fact, he still has notes he wrote about trading back then. Today, he is fully involved in the financial markets and still lives near the ocean in Rhode Island, where he can satisfy his salt water fly fishing habit. Along the way, Jones decided his future and his retirement needed to hinge on his ability to navigate the markets and not on someone else’s investment decisions.

Getting into the swing

Jones is not a daytrader or an advocate of the buy &hold strategy that clearly has not worked since the dotcom bubble burst. “With very few exceptions, buy and hold just doesn’t cut it any more,” he contends. Instead, he is a swing trader in exchange-traded funds, ProFunds, equities and options. On average, he closes out about 20 trades a month.

He uses fundamentals to help determine the long-term trend and then relies on technical indicators and tools almost exclusively to time his trades within the larger cyclical trends, either up or down.

For example, precious metals and the energy sectors are in long-term cyclical bull trends with consolidations several times per year, " Jones observes. "These consolidations provide opportunities to maximize profit by selling before or buying during the move. I may try to reduce a position before a consolidation phase and add toward the end. Timing obviously becomes critical with this strategy. Housing and real estate may be entering a long-term consolidation, which I am shorting now, so I trade both long and short.”

An ideal trading opportunity for Jones occurs when a sector bases. He will leg into a market with a small position, then once the trend has been established, he will add to the position. If the trend does not materialize, he gets out as soon as he can. Using a number of technical indicators as well as support and resistance levels, he is able to detect trend changes more often than not.

Primary tools

“The most basic tools I use include moving averages of various time frames, money flow indicators, volume, relative price and Bollinger Bands," Jones says. "Fibonacci levels also have a place because so many other traders use them and it is helpful to understand them.” Once in a position, he evaluates his position continually and waits for notification of a potential trend change.

Being human, Jones admits to sometimes having a tendency to hang on to a losing trade too long because “I am convinced that I am right and the market is wrong.” Winning positions can be just as tricky, he warns, noting that if you’re not careful, you can get too emotional about a position.

After a 30% gain, I increase the amount of attention I give to the position and start to plan my exit," he advises. "That doesn’t mean I get out; it just means that I become more observant. It also depends on other investment opportunities as well and my cash position at the time. I do not have a clear-cut rule because of all the dependencies.” He also begins to reduce his position when indicators become less positive.

Managing his money

Jones has learned a lot about money management over the last 25 years and always keeps at least 10% cash flow for flexibility. “If I get close to that level, then I may reduce one or two of my weaker holdings,” he says, adding that capital preservation is the most important objective of trading. The amount he invests in any one sector is based on trend strength relative to other sectors.

He believes this is a great time for investors because of the "great amount if information on the Internet. But he also cautions traders about getting information overload. In addition, he has found that the more expensive information isn’t necessarily better information and encourages traders to check out free resources as viable sources of information.

“The problem is evaluating the available services that aid in turning the vast amount of data into usable information,” Jones comments.

Just as he did when he was a teacher, he studies the information and articles on these sites daily to create and modify his own trading style and to more closely follow sectors that interest him such as the basic market indexes, metals and energy. His advice to other traders? “Start small and make your mistakes early, as we all do, but never quit. Trading is a lifelong learning endeavor.”