Interview with Larry Connors

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RealTraders:

Kasanjian Research is pleased to present the following interview with Larry Connors, money manager, trader, and co-author of Street Smarts and Secrets of a Hedge Fund Manager.

The inteview, posted below in its entirety, was conducted by Ed Kasanjian using the questions that were recently forwarded to us by RealTraders members.

Please note the following:

1) Larry Connors is, like you, is RealTraders member. He will be happy to answer any follow-up questions you may have to the interview. The ground rules are: You must use "CONNORS INTERVIEW" in the subject heading so that he can easily sort out the questions that are intended for him.

2) RealTraders members can purchase Street Smarts at a 20% discount 800-797-2584.

3) RealTraders members can order a free catalog from Oceanview Financial Research.

4) For your convenience, the interview will be posted to our website, www.RealTraders.com in the next couple of days. Kindly refrain from requesting us to email the interivew directly to you if you accidently delete it.

Profitable trading,
Eddie Kwong 2/28/97

>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>

LARRY CONNORS INTERVIEW 2/28/97

RT: You usually daytrade. Do you have some techniques which work on
position trades where you can leave stop orders with a broker
for entry and exit ? If so, which ones ? I don't use realtime
data because I'm based in Hong Kong (EST + 13 hrs).

CONNORS: The 1-2-3-4 strategy I co-created with Jeff Cooper does an excellent job establishing position trades. The rules are as follows:

For Buys (Sells are reversed)

1) ADX > 30 +DI > -DI
2) The market must make a swing high and then pullback for three days. This pullback is three lower lows or two lower lows and an inside day.
3) Buy one tick above the 3rd day pullback and your initial stop should be near the 3rd day low.

This set-up allows you to enter strongly trending markets (as measured by the ADX) that are going through a brief pullback and then resuming their trend.


RT: I just submitted a question to the group at large which I'd like
to get included for the Larry Connors interview - Has he reworked the
parameters for the VIX daytrading system from the 11 and 15 values in the
Hedge Fund book?

CONNORS: Yes. Over the past two years, I have made the VIX Indicator a dynamic indicator instead of a static indicator.

Here are the rules of what we humbly entitled "The Connors VIX Reversal."

For Buys (Sells are revered)

1) Today the VIX must make a 15 trading day high.
2) Today's close on the VIX must be below the open.
3) Buy the S&P futures MOC on signal day.

Nelson Freeburg from Formula Research recently tested the results for me and found over the past four years there were 58 signals of which 69% were profitable after three trading days. More importantly, it was 76% correct on the short side in spite of an upward market.

This set-up works because:

a) By using 15 days you are looking at the indicator in the context of current market conditions and
b) By waiting for a reversal bar set-up, you are identifying an intraday change of sentiment at extreme levels.

A word of warning: As I am writing this (02/25/97), the VIX system has had three consecutive larger than average winning trades for 1997. I would expect a losing trade in the very near future, so please use caution.

If anyone would like a report on this call 1-800-209-3342 and order the February 1997 issue of my Professional Traders' Journal. It will be sent to you free of charge.

RT: I think it would be interesting to hear why Larry after being a successful trader would want to share his theories and secrets in the books and seminars he now conducts. The cynic would wonder why he doesn't just roll in the money trading.

CONNORS: Good question. A number of years back I set a goal to do two things; trade full-time and have a research company that brought original research to the public. I am fortunate enough to be doing both.



RT: Does your definition of an "Inside Day" include highs/lows that
are equal to the previous days high/low, or must they be strictly
less than/greater than?

CONNORS: An inside day can equal the previous day's high or low.


RT: For the Turtle Soup and Turtle Soup + 1 strategies, the previous
high must be 'X' days ago - does this number include the current
trading day?

CONNORS: Yes


RT: Larry I have enjoyed your book "Investment Secrets of a Hedge Fund
Manager". Since your data input for the book ended in late 1994 have you
found the many systems and trading strategies you revealed to be more or less
accurate since that time ? Which ones do you feel better about and which
would you be less inclined to use ?

CONNORS: I have furthered my research on a number of strategies from Investment Secrets, but the VIX strategy is the only one I have adjusted. The area I have devoted the most research to and will continue to devote my time to is volatility. As I mentioned in a previous question, News Reversals are certainly worth spending time on as it combines Larry Williams Oops strategy with market psychology.



RT: You very emphatically endorse strict money management and the use of stops,
yet do you use much discretion or intuition in your management beyond your
systems ? How mechanical are you in employing your systems ?

CONNORS: I use very few mechanical systems for exits but I am strictly mechanical on entry.


RT: Specifically I have tried and tested your Advance-Decline System (CHADTP)
from mid 1995 to late 1996. Your seven year test showed a great 74% accuracy
yet my more limited test had a win percentage near 50% with a smaller profit
factor. Did I do this wrong in your opinion or was this a poor period to
compare ?

CONNORS: I still use the CHADTP today. The sell signals results have dropped off a bit reflecting the bull market but I suspect it will adjust over time. The best way to use the indicator is to combine it with other signals to give you further confirmation of a top or bottom.


RT: I have heard others lately talk of your NDX-SPX indicator and how the
Nasdaq basically leads the Blue chips. It seems that over the past year there
has been little correlation with NDX-SPX at significant market turns and in
fact NDX has lagged a few times as when it bottomed late on 7-24-96 and topped
very late on 12-9-96. Is it only important to use as you show on a daily
divergence basis or do you also find the indicator valid at market inflection
points ?

CONNORS: This may be hard to believe but when we wrote the NDX-SPX chapter, very few people (outside of the pure momentum players) ever mentioned the NASDAQ 100. Even though I am still aware of the NASDAQ market everyday, I feel that one can go one step further and create your own momentum index as a benchmark to see where if the fast money is buying or selling. One way we've done this was to take the 15-20 biggest momentum names and create a basket. The basket should then be modified to reflect current situations, i.e. Iomega and Micron Technologies were hot stocks/leaders in early- to mid-1996 and now they are fairly dead. This basket will allow you to keep a pulse on things as these stocks tend to front-run the overall market.


RT: I like the simplicity of your Chapter Four on "Undeniables" for price
reversals - which triggers a signal when prices reverse a six week
extreme...basically. Do you find that this (and for that matter your "News
Reversals") work best in markets other than Stock indexes ? For instance it
seems that there were a lot of (maybe thirteen or more) Sells in 1995 and 1996
basis the SPX and one Buy and that almost all the Sells were wrong basis the
index value. Did you find this to be true and did the use of Selling option
premium that you advise with this indicator work better ?

CONNORS: I continue to use the options strategy with the Undeniables to trade stock sectors as I have found it does a good job of identifying halts in market moves. As for News Reversals, it is still one of my favorite strategies and I find it to work in all markets.

RT: On your reversal signals do you find that you must trail stops close once
you have a profit ?

CONNORS: Yes



RT: The ANTI pattern requires a 7 period %K and 10 period %D oscillator. Please define these terms sufficiently so that I can program and backtest the pattern.

CONNORS: These are Linda Raschke's strategies and I don't use them for my trading. If you have a question for her please fax them to my office at 310-317-4621 and we will forward it to her.


RT: What role does intuition play in your trading?

CONNORS: Intuition plays a big role for me in exiting trades, but interestingly it is disastrous for me when entering a trade. That's why I use mechanical entries and then trailing stops based upon my gut feeling.



RT: What techniques do you use to exit profitable trades? Do you use price objectives?

CONNORS: I always use trailing stops to lock in profits. I never use price objectives unless I am short premium in the options markets.



RT: Do you have any techniques for calculating position size? Are your positions larger for certain set-ups?

CONNORS: This is probably my weakest area. I have historically not used leverage to my advantage in my trading. Part of this probably has to do with being married and having two young daughters ages nine and four. My daughters are being raised in a nice comfortable lifestyle and I would prefer not to have to tell them we are moving into their aunt's garage because I blew out.

As far as larger position size, I am more aggressive with news strategies and most of my volatility-based strategies.



RT: Looking back at your trading career, please describe an event that caused you to make major changes in your trading strategies.

CONNORS: Like most traders, I had no consistency early in my trading career. This changed when I became more disciplined in using tight stops upon entering a position, and trailing stops when a position became profitable. This greatly reduced the drawdowns and it basically put an end to me having one trade ruin a month's work. If there is one analogy I can share with you, it is the following: Losses are like a cancer. If you stop it early enough, you will probably survive. If you let it grow, it will probably kill you. Most large cancers were once small cancers, most large losses were once small losses.

When you think about trading in those terms, it increases the seriousness you bring to abiding by the rules.

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Boggio@aol.com eddiekwong@realtraders.com
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