How I Trade (part 2): 1 minute John Gilner Interview

John Gilner was a successful business owner prior to becoming a trader but as he says, “Trading is a whole different animal.”  He's very successful now but it took him a while and he traded several different markets in order to find the one that worked well for him.  He started with options but had trouble getting consistent results.

Tim Bourquin: John, can you explain how you find good trades?

John Gilner:  Because I am primarily focused on index options, there's a good measurement for that volatility and therefore, the price of the options of course is the VIX.  And so, the basic principle there is you need to develop an ability to understand if options are priced high or priced low relative to the expected volatility of the underlying instrument.  So, during the course of trading options, what I was always trying to do is sell expensive premium and buy cheap premiums.  And so, you're generally always looking for ways to buy cheap and sell expensive.  In all of trading, you have to try to be careful not to think of it like you would think of a salary that you earn at a job because my experience at least, is that my profits are a lot more lumpy from that.  That's in a general sense. 

Now, I think when it comes to option trading, that's even more true because what you're trying to do in option trading, particularly, well, it's really true on the long and short side but particularly the short side where you're trying to sell expensive premium.  Those opportunities only come along so often.  So, your profits are very, very lumpy in that case.  Yes, you can make a living at that.  The problem that I found with it is that in a market that can open up 3% or 4% down on an index, I'm talking about now, it's real easy to get caught on the wrong side of it for reasons that are totally out of your control.  In other words, if you're a technical trader like I am, trading on the technicals during the day is one thing but having substantial overnight news risk and that type of thing is entirely another. 

And so, I think you can make a living out of it but my personality is such that I would rather be out of the market overnight when I don't have any control and then use my ability to interpret the market actions and understand, “Should I go long?  Should I go short?  Am I going to fade the morning gap?”  or, “Am I going to sell a morning gap or buy a morning gap?”  So, I think a lot of it comes down to what I've realized is playing to my own personal long suit and that is trading short term based on the technical.

Tim Bourquin:  How did you develop your trading discipline to avoid large losses and stick to your trading plan?

John Gilner:  I did have some trouble with that early on.  So, there are two answers to it.  One is the experience has taught me that you never change the rules or the assumptions underlying a given trade.  Then, the other way I handle it is I use different accounts for strict swing trades.  So, as an example, I have a day trading account where I do substantially all of my day trades and I have two other accounts that I use for swing time frame and that helps me because the swing trade, and this is very interesting as far as the psychology of it all goes.  The swing trades that I don't watch the P&L on, I have a much easier time staying in those trades because I don't look at them constantly.  I’m not looking at the P&L on whether I'm up or I'm down.  I don't see $1000 profit and I take it and I don't see a $500 loss and get scared.  So, what I do is I strictly swing trade those accounts and in the trading account where I do the intraday trades, I will also swing trade the same instrument there that I'm trading in the other account but I'll make a point of not looking at it.  I'll make a point of not watching the P&L tick by tick by tick.  And the other thing that I started to talk about is that experience have taught me that if you're in a day trade and it's going against you and you feel that temptation and we all feel it, we're all human, and this is why the market acts the way they do.  When you're feeling that compulsion to start calling it a swing trade, I have learned.  Boy.  Have I learned the hard way that you just have to, as they like to say, rip the band-aid off and move on because it's a lot easier to take a $500 than a $5,000 loss.  My experience has been that most of the time, and I don't have a percentage for you, but a vast majority of the time, probably 70, 80, 90% of the time, if my gut now is telling me that I should be out, I just need to sell it and get out because the vast majority of times, it gets a lot worse.

Tim Bourquin:  What kind of “homework” do you do to prepare for the trading day?

John Gilner:  What I do is I flip through hundreds, even thousands of charts on a regular basis and I don't have a master list, so to speak.  What I do is during the course of the day, every trading day, I watch how each sector, how each industry and how the leaders in those industries are behaving.  Are they trading up?  Are they trading down?  Are they leading or lagging that sector on the market?  And so, what I do is I develop a feel for what's moving and why.  The why behind it is important to understand.  In other words, as it relates to, “Is there news?  Is the sector responding positively to news and negatively to news?  And what does that mean?”  So, I watch the leaders, I watch the sectors and then within the leading sector, I flip through hundreds and hundreds of charts looking for the one or two or three, maybe four stocks that have the best looking individual chart within, say a strong sector.  Then, what I'll do is I'll move those over on to a watch list and each day after the close, I'll flip through this list and I'll ask myself, “OK.  In a strong market tomorrow, which of these represent the most likely long candidate?”  And I'll do the same thing on the short side so that at the end of each day, say an hour or two after the close, I've gone through hundreds and hundreds of charts and I've narrowed it down to, say 15 or 20 in total that represents my best, highest probability long and short trades and that's what I'll focus on the next day. 

The principle that I trade on - I'm a short-term technical trader and what that means is I'm looking at simply price, volume, and time and I'm looking at that across multiple time frames.  So, what I'm looking for is, as a good example would be, looking for stock that's in an uptrend.  We're talking about a long stock.  An uptrend on both the daily and the weekly chart but whose intraday chart, say a five or 10-minute time frame, shows consolidation and a convergence of support and resistance level with those longer term time frames.  So, for example, if I'm looking at a stock on the daily chart, it keeps pulling back to the ten, 25 range and I see on that ten-minute chart that it's consolidating right above that level or alternatively consolidating just below a level and hasn't quite broken through yet.  What I'll do is watch for that stock to consolidate in a nice tight range on the intraday chart and then break through on volume and that breakthrough of course typically comes from time during the day and what I'll do is, that's my entry, I will buy just as it breaks the short-term consolidation.  I always manage my stocks just below that area of consolidation.  I will watch for, on a break out like this, I'll watch for it to be confirmed by volume because volume is what tells you if there is enough energy behind it.  Is there substantial buying interest?  Or is it something that's popped up and no one showed up and then therefore is it more likely to sale.  And so, an ideal entry is a very tight consolidation on a, say a 10-minute chart, and then when it's one or two pennies above that consolidation area, if I see volume coming in, that's my entry.  

So, I really try to get them right as they're breaking out and the reason is for every little bit that you're late, and that stock moves up without you, that's additional risk that you have to take and that's additional profit that you've given up and so that risk reward ratio, which is so important in this trade setup process, changes very, very quickly.  So, it's the precision of the entries that really I believe is key.  I have the ability to find so many potentially good entries in the market but what would happen is, on any given day, I would have 15 or 20 or 25 alarms going off all at one time and I would miss all of them because you just don't know where to focus.  So, what I do now is recognize that to the extent of the market is one sided on the open.  I'm just going to miss most of them and I all have two or three stocks that I like the charts the best and I will focus exclusively on those for the first five or 10 or 15 minutes of the day and try to do two or three quality trades in the first 10, 20, 30 minutes, maybe even the first hour and then realize that those other 15 or 20 or 25 that I didn't pay attention to, if they move, I'm just going to miss them and that's trading.  That's the way it goes.