Interview with Jeff Cooper

The following originally appeared in the RealTraders discussion group. Please view this file with a screen resolution of 640 x 480.

Jeff Cooper is the author of a brand new book titled "Hit and Run Trading, the Short-Term Stock Traders’s Bible". Recently there have been some questions from RealTraders regarding this book and in the interest of all RealTraders we thought it would be best to interview him and make it available to our group.

I have known Jeff for over 10 years now and during all of those years he has made his living trading stocks from his home in Bel Air Ca, one of the wealthiest communities in the country. His metamorphosis as a trader has been significant, in fact I would now classify him as being of the "Market Wizard" caliber. His evolution as a trader has been a long road of hard work with many bumps. His work-day has always been much longer than the trading hours. Even to this day he continues to spend many hours daily doing his homework.

Jeff is far from being a computer jockey. His research time is not spending hours in front of a computer tweaking oscillator parameters. Nor does he create complex trading strategies and then test for optimal profit and loss characteristics. Actually his strategies are very simple. To find them he has looked at thousands of barcharts and continues to do so on a daily basis.

You will also be surprised to know that his main tool is simply a daily barchart. Yes he is a daytrader, but he does not look at 60 minute, 30 minute or even 1 minute bars. From the analysis of his daily charts he comes into the trading day with a handful of stocks and he keeps a close eye on the trading behavior of those stocks using the information found in a conventional quote screen: bid, offer, size, volume, last trade.

In his book he describes 10 patterns he looks for in his daily charts. The patterns are clearly defined, easy to spot, and they work. His trading is all about finding stocks that are having explosive moves either up or down, and he goes for the ride during the day. He wants to be in the stock during the huge range days when it is relentlessly powering in one direction or another. His initial stops are well defined and it is up to the reader to exit a profitable trade with some sort of trailing stop.

His hit list represents about 15-25 names that he is going to focus on during the day. It is put together every Sunday and adjusted each day after the market close. He describes 4 criteria he reviews when making his list. Although the criteria are defined, different readers will likely come up with different names simply because there are dozens of stocks that would make the cut. This is one of the areas where experience comes into play. Out of the universe of all trees, let’s say that oak trees represent the large group of stocks that have one of the 10 patterns described in the book. Furthermore let’s say that we have to select the 20 best looking oak trees out of 200. How much overlap do you think we will have in our lists? This is where personal taste and experience comes to play.

None of my questions are going to deal with things like "how do you define the SLINGSHOT pattern" or "what do you think about XYZ Inc." The patterns are all well defined in the book. We need to get inside his head and find the subtle things that make Jeff a successful trader. These are the things that make THE difference, they come with experience, and are impossible to put into a book.

By the way, the publisher has offered all RealTraders a 15% discount on "Hit and Run Trading". The telephone number for ordering is 1.888.486.7861.

As mentioned above, the interview will be posted in several sections within the next 24 hours.

Ed Kasanjian

Interview

ED: Looking back at your trading career, please describe one or two significant events that caused you to make major changes in your trading strategy. What changes did you make?

JEFF: 1987, the crash that was a seismic event. I’ll tell you a story first though. I never really was an option player, but had made great profits in stocks the first half of ’87. The speculative takeover fever rampant then bit me, and I opened an option account. I had turned $10,000 into over $70,000 in a few months. I remember I was long Dayton Hudson calls on a potential buyout story when the stock was halted on news of a takeover bid! I’d thought I’d hit a home run but, there was one minor problem: the news services never quite bothered to authenticate the story or its source. To make a long story short, D.H. reopened under a cloud of confusion and I watched my options slide from 9 ¾ to 1 over the next few days. As it turned out the takeover bid was bogus and had been made by a stressed-out, flipped-out money manager.

ED: Why didn’t you just sell the calls when D.H. reopened?

JEFF: I had my sights set on a nice round $10 target. No one knew for sure what was going on. It was easier to adopt a policy of wishful thinking. I chased the option all the way down from 9 to 7 to 5. Every time I put in a limit order to sell I missed it. Any price less than $5 was unacceptable-viewed from the former paper profit. I eventually closed the account out with approximately $7000. After that, all profits started to look like expiring assets. Since then I almost always trade with market orders when exiting a position.

ED: What about the crash? How did that affect you?

JEFF: I hadn’t been concerned the week before Black Monday. My experience since I started trading in 1982 was that stocks always come roaring back. I was caught long and wrong.

ED: How bad were you hurt?

JEFF: It wasn’t pretty but I wasn’t impacted as much financially as I was intellectually and emotionally. I thought I understood the markets. Now, I knew my whole modus operandi would have to change if I was going to have a career in trading. That was a real turning point. It was baptism by fire. That was the beginning of Hit and Run.

ED: For example, what are some of the things you would say you learned or learned not to repeat?

JEFF: I had traded fast and loose with profits. My philosophy now is to lock them up or someone else will: I am only 3 cents (commissions) away from reentering the market and have the strategies to do it. I don’t depend on gurus, macro-economic views, brokerage firms or market timers to guide me as I did years ago. I make decisions myself from the footprints of buying and selling: the price action. I don’t rely on news or earnings but I do observe carefully the behavior of a stock on that news day if one of my patterns such as a "whoops" sets-up.

In sum I came away from 1987 realizing that anything can happen on Wall Street, that no one on Wall Street really knows; I was forced to confront the reality that I would need a new approach to be successful. More importantly, I knew I needed to develop a method and implement some definite strategies if I was to retain my net worth.

ED: How did you begin?

JEFF: The cornerstone of my quest was embedded in my desire for return of my capital and return on my capital. It would have to be as risk-adverse as possible in both price (tight stops) and time, short-term only: a few minutes to a few days. This approach would offer me a degree of control and comfort since I knew that the longer stocks were held the more things could go wrong. I also knew that stocks tend to have sharp moves over a period of a few days and pause. I saw that the majority of time stocks went sideways and it was impossible to make money unless I was involved in trends already in force. For instance, I noticed that often stocks would thrust, rest, and pivot, and reckoned if I could create some rules to identify certain occurrences I could capitalize by taking bites out of trends while protecting my capital at large, limiting my risk, and as a day trader for the most part, still earn interest my account in T-Bills. (The T-Bills serve as collateral for my trading activity).

ED: What is the concept behind the patterns you use?

JEFF: I set out to identify "inflection points", subtle nuances in charts that would be clues to stock explosions and continuations. But since surprises almost always happened in the direction of the trend, I decided to use criteria such as certain moving averages, reactive strength as presented in O’Neils IBD (Investor’s Business Daily), and most important ADX, to define trend for me. My pattern work exists in the context of trend. Since I’m a short term trader, I must embrace volatility; that’s another filter I use which you can pretty much eyeball by looking at average daily range and the frequency of that range to expand. Sponsorship is another criteria I discovered that would give me an edge. My father, (who was a major player in the IPO markets in the 1960’s and early 1970’s) used to tell me stocks don’t move, they *are* moved. I talk about this idea of sponsorship in my book. Basically I’m looking for the strongest go-go momentum names. If your want to make $4 or more on a trade intraday, you have to be where the action is: where fund managers are clamoring desperately to get in. Only later did I develop reversal patterns like Gilligan’s Island or Lizards that could identify where profit taking (or short squeezes) might trigger.

ED: How did you come up with some of the setup patterns you mentioned? Why do you think they work?

JEFF: Scrolling through chart after chart, covering the action with an index card and moving it across my computer screen asking myself what would I do here? What are the longs thinking and where would the shorts be likely to run for cover, etc.

Many of my patterns were created by being on the wrong side or by missing a move. I wanted to create an image and rule I could ingrain into my memory so that I could react quickly rather than analyze a lot of indicators. Analyzing a trading situation in the heat of battle is not a luxury short term traders are afforded. A professional trader must react from his setups and think about it later. It’s much more right brain than left brain for me.

ED: Why do people have such a though time trading?

JEFF: Two reasons:

Because they are in the wrong stocks.

Because they don’t know how to take losses. Either they have poor money management or have no exit strategies such as trailing stops.

In my experience, money management is more important than entry strategies.

ED: On a daily basis there are likely many more stocks than you can trade that have one of your setup patterns. How do you pick the ones to trade?

JEFF: I work 4-6 hours over the weekend preparing for the week ahead identifying strongly trending stocks (up & down) and creating my hit list of 15-25 names. I also scan a select universe of names looking for setups or multiple signals.

Each day after the market I spend 1 to 3 hours focusing on the action that occurred. Checking for setups on the hit list or any potential additions or deletions. Actually I keep two hit lists . A "Big Cap" for large volume stocks and a "Small Cap" for relatively thin stocks with average daily volume typically less than200,000 shares a day. This is where I get the candidates for my stepping in front of size strategy-a real bread and butter every day technique.

ED: What role does gut feel (or intuition) play in your trading?

JEFF: There are many potential candidates for the hit list criteria. Obviously experience plays a big role in picking which stocks to trade. I have a sense of how certain stocks trade and their personality, but the key is focus and more focus. There are thousands of stocks and hundreds of indicators. It is virtually impossible to look at it all - and unnecessary. I can’t emphasize enough the importance of narrowing your field of vision and keeping things simple and pure. Your intuition will begin to blossom as you have less stuff to focus on and simple tools to deal with. I found that I must have techniques that are so clear and defined that I would be intrinsically confident and comfortable enough to be able to compete against thousands of traders.

ED: Do you use other technical tools like volume?

JEFF: Other indicators are derived from price (and or volume). I’ve been using my pattern set-ups for years. Occasionally I will note that a price pattern has occurred with a volume spike and that may be of value.

ED: What about cycles?

JEFF: I believe they exist. I’ve just never met anyone able to make money short term trading with them.

ED: What about Gann theory or Elliot Wave analysis?

JEFF: I’ve studied both, but again don’t know anyone who’s consistently making money short term trading with either. As I said before, the least complex the technique, the easier it is to focus and function in a very tumultuous environment.

ED: What do you think are the biggest mistakes most traders make?

JEFF: Not being prepared. Also not having a small enough list of names that can be easily stalked during the day.

Another mistake I used to make and I see others make is the picking of tops and bottoms. This is very dangerous and difficult. This is not a contest and there are no prizes given out for being correct. It is much more reliable and profitable to look for persistency in a stock. Identifying a stock in a strong trend and getting on board is much easier than picking a top or bottom.

ED: Do you talk with other traders about the markets?

JEFF: Occasionally. I did more often in the past, but I found more and more it’s difficult not to pick up their bias. My business is short-term trading. Opinions aren’t relevant. Too many opinions can freeze you up. Stock market direction is fun to ponder but beyond a few days impossible to predict.

ED: In the world of traders you are clearly a minority. What do you think makes you different than the average trader?

JEFF: I’m really not sure. I’d have to say I’m obsessed with trading and enjoy it. You have to put in more time then the next guy and if you don’t enjoy what you do that’s a problem. I tend to thrive on chaos and trying to make something out of it. I must say it only began to be fun when I adopted a clear plan of attack day in and day out, which is what the Hit & Run methodology is all about.

ED: What can you tell us about discipline?

JEFF: Discipline. The holy grail . It is not a secret indicator, however. It is the will to work. For me the discipline was/is the importance of separating my ego needs from my market decisions. When I started concerning myself more with making money than being right I became a much more profitable trader.

ED: What important points can you make regarding money management?

JEFF: Learn to pat yourself on the back when you take a small loss-most large losses were originally small losses. When I learned to scratch a trade up or down an eighth or quarter I became more profitable because it left me open to stalk a fresh opportunity. Again, overall money management is more important than entry strategies. Controlled position size combined with stop loss management increase returns while decreasing risk.

ED: Many traders dream of making a nice living from their home every day. What advise can you give?

JEFF: Strive for consistency. Repeat the same plan of attack day after day, week after week. Have a one year game plan and a five year goal and walk towards it step by step.

ED: When you have a loosing streak, how do you handle it?

JEFF: I used to have loosing streaks. One of the keys to avoiding this is learning to take small losses. I found that one of the most important things is not to take a position home (overnight) if it is going against me. This allows me to come in the morning with a clear mind looking for opportunities to exploit instead of trying to salvage positions going against me. I don’t look at taking small losses as a loosing streak. It is simply part of the game and must be done. Keep the powder dry because every day brings new opportunities.

ED: Do you take into consideration general market activity?

JEFF: Yes, the market tone is important when considering how aggressive to get. No matter how strong a setup or a stock, if the overall market wave during the day is subsiding, most "boats" will be dragged down. It is during the markets reaction (or consolidation) within a trend that you can really take the temperature of a stock and judge its strength.

ED: Many times you add to a position during the day. What exactly do you see in the trading behavior that would cause you to add to a position?

JEFF: I know that many traders often add to a position as it goes against them, thinking that if they liked it at 40 then it is even better at 38 or 39. This does not work with me. I enter a setup ASAP when a pattern is triggered and from that point the momentum should continue. If the stock continues to move in my direction and does not give back much during intraday consolidations, that is a sign of strength and I will often add as the stock starts to rally again.

ED: What would you say is the key to your success?

JEFF: When I stopped trying to hit home runs. He who swings for the bleachers every time strikes out a lot. My goal became to hit a lot of singles. To see if I could be consistently profitable. My quest was to make money every day, every week and every month and to see what it added up to at he end of a year. What I found was that strings of wins create more than just profits, they create emotional capital and confidence as well. Again the key is consistency, having a methodology, a game plan for executing that methodology, and following thru. For me that methodology is Hit & Run Trading.

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