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