Active Versus Passive Trading Strategies
The MONEYSHOW’s Tim Bourquin Interview with John Bougearel
Tim Bourquin: Hello everybody and welcome back. Thank you very much for joining me for another show this week as we speak with another trader. We’re going to speak with John Bougearel and he’s going to talk to us about his approach to the markets and basically his overall philosophy about trading. So John, thank you very much for joining me on the show today.
John Bougearel: Tim, thank you so much for having me on. It’s a pleasure to be here.
Tim Bourquin: Well, the question I usually start with all of my traders is what kind of trader are you? What’s your kind of overall philosophy of the markets?
John Bougearel: What kind of trader am I? Overall, I am a very short-term oriented trader, always with the idea that I can take a short-term trade and turn it into a swing trade that might last hopefully for more than a couple of days, maybe a couple of weeks, maybe even a couple of months. And my last really big swing trade was going long the stock market on March 6, 2009 into May 7, 2009. I was able to ride that puppy up on the stock market for two solid months before I got off the bandwagon.
Tim Bourquin: Wow, so interesting. So is there anything that you were seeing then that you’re seeing now in terms of the top? We have so many people saying the top is in here or it might be. They’re all calling for it, it seems.
John Bougearel: Well, I’m only calling for a rotation. And you’re asking me how do I see the markets? One of the things, Tim, if we back up just to a couple of seconds, it’d be helpful to just give you a little background of how I got into this business.
Tim Bourquin: Sure.
John Bougearel: In 1994, I walked down on the trading floors of Chicago Mercantile Exchange. Within a year, I got picked up by a couple of trading groups in the S&P 500 and the bond trading pit, the 30-year bond trading pit, which was over at the Chicago Board of Trade. I was hired to do the research for them and by 1999 I was providing research to a startup hedge fund. And one of the things that I do is be forward looking as possible in one’s trading strategy in approaching the markets. When you asked me just a moment ago if you know a lot of people are looking at the pricing action over the last series of days as being a little bit toppy? Yes, we can all see that. A window of opportunity to play the short side possibly into, with the way I’m looking at it right now, the easiest window is to continue to work the short side until some time during Wednesday. One of the forward looking things I’m looking at right now that we have to consider were the window of opportunity for the earning season right? So, this week it’s going to be the financials. So they’re going to be putting out their earnings. And on Tuesday and Wednesday, we get Citigroup, Wells Fargo, Bank of America. Those are the big ones. On Thursday, it’s going to be Google and Goldman Sachs. On Friday, it’s going to be GE. But the following week, because the stock market is a discounting mechanism Tim, it’s going to be looking at the FOMC meeting and the FOMC statement on the 27th and the GDP announcement for the 29th, the Q4 ADB-GDP. And as a discounting mechanism, I think if we’re flushing in on those earnings announcements for the bad banks on Tuesday and Wednesday, that’s probably the easiest one that we’re going to get, so I’m not looking necessarily at that window of opportunity to stay short may close up. And I think you may see the low for the month being set this week on Tuesday or Wednesday.
Tim Bourquin: The low for the month, OK. All right. So fundamentally then I guess everything outside of that even though you see this is kind of a rotational top, you see this continuing higher. This is just a little blip in the trend then, overall?
John Bougearel: Yes. My big red X for 2010 is roughly 11,750 to 12,000 in the Dow Jones. There seems to be a little bit of a magnet. I’ve got a couple of models that I use and it looks like that magnet will be reached probably as we enter the second half of 2010. So that’s maybe another 10%-12% upside for the Dow Jones and the S&P 500. I haven’t quite marked off my turf too well, but it’s probably 1,250 to 1,300.
Tim Bourquin: You talked about something called retrospective versus prospective trading. Are those thoughts that you just relayed to us in doing part from what that is and what is it? John Bougearel: Well, one of the things, and it’s been a concern of mine because I’ve got a couple of retail clients, Tim, that have been focusing on the trades that they just made and then if they would’ve, could’ve, should’ve, stock it out for another 20 minutes or half an hour or hour later or until the next morning they could have broke even or they could have made X dollars more on their trades. And I’m like, “Brad, please just stop thinking. Don’t look back at what you could’ve or what you should’ve made.” I mean you’re tweaking the stuff out on a micro basis. And I’m like, “We got to be, as traders, we’ve got to be prospective.” At all times, I’m always forward looking in my thinking. I always tell my clients to be as forward looking as possible in their approach to trading. Look at all the opportunities that are going to be coming up on both the short side and the long side. Now, I just talked a little bit about possibly having a short-term window of opportunity to work on the short side with this market here at 11.45, 46, 47, 48 in the S&P 500, it’s a round trip the year right now between now and Wednesday, which it will be 11.13 in the S&P 500. If we could get that done by Wednesday, I’d be happy with that as a trading objective for the short-term trade on the short side. But at the same time, and you’ve got to be prospective, at the same time I’m looking to do a buy cover down there on Wednesday. I can’t say if it’s going to stop at 11.13. My preference is to take out the stuff below 10.96. I can’t guarantee the market will reach those targeted objectives, so what I want to do is look at the short opportunities up here in 11.40 with an idea of doing a buy cover possibly getting long. Doing the buy cover hopefully around 11.13 or 10.95-ish and possibly looking for long entry trades, and that’s being prospective. The idea is that it might take two or three times to get yourself situated on the buy cover and long for a rally into the FOMC meeting and the GDP announcement on Wednesday and Friday of the following week. But that’s the prospective attitude I’m taking. I can’t look at the last set of trades I made anymore. If I keep looking back, I’m going to be missing on what I need to be focusing in on. And as I told you, the markets take a great deal of time, energy, and focus, Tim. And the last time we spent looking back at what could’ve or should’ve, the more time you’re going to be able to focus in on what are the opportunities that I had.
Tim Bourquin: Let me ask you about that though because a lot of traders say, “Look, I want to go back and look at why some trades didn’t go well and figure out why so I can avoid those mistakes in the future.” What about that?
John Bougearel: I’m glad you brought that up because that’s a good distinction. Now, as you remember, I was talking about the would or could or should aspect. I think it’s great to review what you did, what you could have done, what did you do that wasn’t quite right or something, but you can’t over analyze this stuff. If you keep spending too much time going in the back then you’re just going to miss it. There’s a lot of information that we have to process as traders and be quick about it. If you made a mistake, recognize it, jot it down, and put it into your journal and then move on. And then at the end of the month or at the end of the week, look at the journal of trades that you made, what was the quick note that you did right or wrong. Do that over the weekend and then just kind of try to reduce those mistakes as you go forward.
Tim Bourquin: Now, you also talked about something called active versus passive trading. What is that?
John Bougearel: This is something that I’m beginning to delineate, because as I meet with my peers, at the Market Technician’s Association peers, and those that have got their certified market technician designation, they talk to me and a lot of them choose to go into passive trades. They wait for a pattern to set itself up before they enter a long or short that is if they take a bearish head and shoulder pattern. They’ll wait for a break below a trend line on increased volume before selling short. And I come from the trading pits, Tim. We come from that with the trading pit mentality. We’re saying to ourselves, “You know what, if we’re anticipating the market to top out…” like right now we saw the stock market vis-a-vis using the S&P 500 as a proxy, we figured out that we had anticipated the stock market would exhaust itself a day after the non-farm payroll on Monday, January 11th. And the reason we anticipated that was because it had done so about five times in the last 10 years, 1998, 1999, 2003, 2006, and I think it was 2002 as well. So, there have been several instances when the market rallied into the non-farm payroll report and then rotated lower the following day. And we got that kind of pricing behavior, so we’ve been looking at the short setup since then. If you take an active approach, you’re looking to get short on that model and not waiting for the market to give you a signal or a candlestick pattern that says, “Oh, look, there’s an outside down there.” or “Look, there’s inside day. The market is stalling out up here.” Or there’s a Doji signal saying that there’s an uncertainty about going higher. What I try to do is anticipate that the day on January 11th is going to set up and possibly give us that look ahead of time. And what I’m trying to do is focus in on what kind of candle light do I expect tomorrow. Tomorrow, I would expect a very strong downside day and if I don’t get it, that’s fine. But I’m trying to get positioned and I’m willing to take three to five trades in the morning or even overnight, Tim, to get short ahead of the earning reports that are coming out with Citigroup, Bank of America, Wells Fargo. I’m trying to be short from up here above 11.40 and trying to stay short. And if the market chases me out and I’m wrong about my scripting, that’s OK. I’m OK to be wrong.
Tim Bourquin: How do you protect yourself though? Is it a stop-loss or what do you do?
John Bougearel: This is another aspect that I think is very, very important. When you’re an active trader and you’re playing aggressive defense, Tim, you’re looking for your signals on a two to five-minute time frame and you’re saying, “OK. I’m expecting the day to finish like X. I expect to finish down.” So, I’m going to look for a bearish bar reversal signals on a two to five-minute time frame. When we come from the trading pits, we recognize that when the market was making a significant trend change during the day, the volume in the pit would get louder and louder and louder. And it would reach into a crescendo and that crescendo would take roughly about two to five minutes, the markets would quiet down and you would see that. And so if you look at your bar reversal signals on two to five-minute time frame, in that two to five-minute time frame, you’re going to be able to pick up the bars that are signaling the markets are reaching a crescendo and then the market should pause and possibly reverse trends there.
Tim Bourquin: What does that look like in the candles that something is reaching a crescendo?
John Bougearel: One of the things I like to look for best would be outside down bars, outside up bars, two-bar reversal signals, which would be like tweezer tops or tweezer bottoms where you double bottom or double top on those. That’s a significant line of resistance; they can’t go any higher than the previous bar and then it closes lower or closes higher, and it suggests that the market is changing trend. And that’s all you need to know. And so when I say as far as stop-loss goes, if you’re playing aggressive defense, Tim, the best thing you can do is to nurse your position right away and stay in the ring and fight it out for the next 20 minutes, half hour, couple of hours. Make sure that the position starts going your way. If you’re wrong, you’re going to see it and you’re going to say, “You know what, my position is under attack. I better adjust.” And oftentimes what I’ll do is just scratch my group at a small profit or break even and try not to let any positions really go against me.
Tim Bourquin: Are you trading like the futures ES or E-minis or what are you doing to make these trades?
John Bougearel: When I look at the equity futures, I’m looking at the ES contract and the Dow Mini contract.
Tim Bourquin: And how long did it take you to develop your strategy? Do you have kind of one single strategy, the one you just explained or are there a variety of tools that you use?
John Bougearel: It’s a really a multifaceted approach. I take a little bit of knowledge from the books that you read. You take a little bit of knowledge from your experience on the trading floors, not to say that I was actually on the trading floors doing the trading. When I was doing research for trading groups, I was not doing trading. That only came years later and that materialized after the hedge fund startup. I walked away from the hedge fund startup in 2000. So, it’s a multifaceted approach and I’ve continued to learn. One of the things I cannot stress highly enough that most people that are trying to trade from off the floor is that they have a passive style of investing or trading where they identify a pattern that they want to get long or short against and then they put their stop above or below where they know that they’re going to be wrong. If you’re going to be wrong about your scenarios and your scripting, if the markets tell you you’re wrong, then you’re going to wait for the signal to stop you out at a loss, and I think that’s just plain wrong. One of my biggest gripes is that you could dive a thousand cuts in this market, so if you have a gazillion small losses, you will still lose capital and your ability to play this game for the long haul. So I think the best way to play this game is to play it aggressively and play aggressive defense and be willing to sit there in the boxing ring, take punches and step back, and dodge those punches, don’t let them hit you in the face. You can’t take too many hits in the face before you fall down. And then you get bumped out and then you’re not in the trade.
Tim Bourquin: What about the folks who say, “Look, I can be right 30% of the time. I cut my losses quickly and then I ride the trends for as long as I can and I make up the difference on those.” You wouldn’t consider that a good strategy?
John Bougearel: I think it’s a great strategy. But I think when they cut their losses fast; I think they could probably do even better, if they got even more aggressive with cutting their losses short. But again, it’s how much time and energy do people want to put in on these? Are they doing this on their daily bar setups? Are they going up to work? Do they have a daytime job? But if they’re doing this full time, then they have the ability to be even more aggressive with their defense. The more aggressive you are with your defense, you’re going to be able to take less losses. But the only drawback is that you have a little bit of higher commission cost. And what the benefit of it is, even if you’re able to scratch most of your trades, your commission cost roundtrip is even less. You’re usually able to take half a tick or a tick out on the trade, so you’re able to make a trade, take a small profit off that would pays you your cost commission. And the next thing you know is that you’re able to re-adjust, take your same script, you’re script didn’t really change. I tend to be a little bit early in myself, Tim, so I’m willing to take two or three steps at it because half the time I don’t want to miss the trades. So, I’m willing to jump in and look at the scenarios and say, “I might be early, I might be 20 minutes early or might be an hour early, so I know full well that I might have to do the same trade setup three or four times before I get a run just right.” And then I let it run. As the market moves in the direction of your trade then you can let your profits run; you move your stop in front of your entry instead of behind it where you’re guaranteed when you go to bed at night, if the market is following your script, you’re going to be fine. If it’s not following your script, you’re still going to be fine because you put the stop in front of your order before. Actually, I’ve got my stop system on my computer system down the hall from my bedroom and a lot of times I can hear myself getting stopped out in the middle of the night. I can wake up, walk over there, see what’s going on in the European and Asian markets, and quickly within 10 minutes put another order in at a better price, and I’m re-adjusting myself in the middle of the night and going back to bed not worrying about it.
Tim Bourquin: All right. So let me ask you this, I know you talked about, “OK. If I’m not right at the exact right time, I’ll take the stop, put in the order again, take the stop.” At what point do you say, “I’m wrong about this trade. I’m not going to try it again?”
John Bougearel: You’ll see that. The market is going to talk to you. It will be talking to you all day long. On strong moves, if I’m early on a strong move and I’m not seeing or understanding something right, and a lot of times you’ll see that and you’ll say, “I’m just going to be wrong here.” So stop what you’re doing because it’s going to be several hours before the momentum gives you another chance to get yourself positioned. So, what I’ll do, if I see I’m wrong about my scenario scripting, I’m going to say to myself, “Well, looks like the bull has got the day today.” So rather than try to fight the trend for the next three to six hours, why not just try to be a short-term buyer until the end of the day, wait for the momentum to roll over and maybe reconsider maybe my strategy thereafter if I’m going to be adopting a bias towards the short side.
Tim Bourquin: Speaking of biases, you talked about cognitive biases and not being a victim of your own mind of sorts. What do you mean by that?
John Bougearel: We all have a bias. And my own particular bias, I tend to have a long side bias. I find it easier to buy the market because the market is biased to go off until the market really, really wants to take a big, big dump. And for me to shift to get my bear cap on really big time, I look at the market as having a series of power loss to it. And right now, there’s a lot of power driving this market higher and there’s not enough instability in it for me to really wear a bearish cap until like maybe the second half of 2010. So for me, I’m going to continue to have a bull bias and for me I think the easiest money will continue to be made on the long side, but I’m trying to be a buyer of 4%-5% dips, not up here on new move highs. So for myself, short-term like I said earlier in the interview, for this next week or two, I’m looking to be a buyer down at 11.13 and under 10.95 and under 11.13. I don’t know whether or not I’m going to be able to get those objectives but that is where I would like to be a buyer.
Tim Bourquin: Now, you talked about the candle patterns you recognize to see turns, what about pivot points? Do you use pivot points? How do you kind of calculate those?
John Bougearel: The pivot points are really easy. And for me you’re either looking at the top of a bar. If you have a series of bars moving higher, I always look to the bottom of a bar. Or if you’re looking for supports, I always look to the bottom of the bars for support whether it would be on a 60-minute time frame, a daily time frame or even shorter term time frames. I’m always looking for the top of the bars. And if you’re looking for resistance, it’s going to be looking at the top of the bar. If you’re looking for supports, it’s going to be the bottom of the bars. Again, if you’re looking at gaps, you should be looking at the windows where the market gaps up or gaps down. You should be looking at the windows as acting as support or resistance and whether or not that’s on a daily time frame or an intraday time frame. Those tend to act as supports and resistance. I used to do pivot. One of the things I did as a researcher was I used to write for JS Services in the mid ’90s and I used to do pivot points for up to 15 markets or a lot of euro markets, grain markets, the whole currency. So I’ve done a lot of pivot study, and I tell you what as a rule it’s just easier to follow your bar analysis and not worry about the pivots because you can see where the market has been making intraday swing highs and swing lows and you can save yourself a lot of effort without having to go to commodity boot camp and figuring out the high and low close and dividing by three and generating a bunch of pivots doing that stuff. So for myself, pivot points, they’re great, Tim, but I don’t get hung up on them. I don’t spend time doing the analysis doing them and I rely more on my bar analysis, tops and bottoms of bars as supports, and I also rely on my bar reversal signals. If I’m looking for an area to be a support or resistance, the one thing I try to do as a trader is to wait for the market to confirm that that pivot point is going to act as support or resistance. And so I don’t want to be early on my trades and so I like to use those two-minute time frames and make sure that I’m getting the bar reversal signals where I’m at, and make sure that the market is behaving as I expect it to. If it’s misbehaving around a pivot point that I see then I don’t take action.
Tim Bourquin: All right. So it sounds like you use daily charts pretty frequently, but then to go to find the short-term entry points for reversals you’re looking at the two-minute chart?
John Bougearel: I love the two-minute chart for that because from my trading floor experience, I just say to myself, “You know what, it takes two to five minutes for the pit to figure out that volume going up into a crescendo and then it makes its mind up within two to five minutes.” Now that might just be a short-term high or a short-term low, but for a while it’s going to stick. It’s going to take a little bit of time for the market to back and fill and to jeopardize your position.
Tim Bourquin: A lot of traders we’ve talked to recently have talked about how high frequency training has affected their methodology. Has that have had any effect or how do you adjust based on that?
John Bougearel: Ten years ago, we use to see much greater intraday swings, Tim. And we used to enjoy 50% to 62% or 78% retracements intraday. The high frequency trading system has made it almost impossible to anticipate that you’re going to have big intraday swings off of economic announcements. So one thing we’ve all had to adapt to is the fact that if you’ve got a strong announcement that has got the market trending strongly to the upside or to the downside each day, you’re probably going to have to continue to work that. And I find that even if you go down on a strong trending day, it’s really hard to get the market. Like the E-mini, it’s really hard to get it to take out a two-bar or a three-bar low on a strongly upside day on the two-minute time frames. You watch and pull back, they pull back to maybe the low of the previous two-minute bar or two bars back, low to those bars and then those bitters come right back in the market. So you could actually use that for short-term entry trading in the direction of the trend day.
Tim Bourquin: All right. Since we’ve talked about several specific markets here we might as well continue on with that too. What about gold? What are your thoughts here?
John Bougearel: My bigger picture thought on gold is that there’s some ruffles in the dollar trade and I’m having a hard time seeing the first half of 2010 as being bullish gold. One of the things I’m hoping to see between now and maybe March is for gold to challenge 1,200 one more time. Gold market tends to favor putting in seasonal highs in February and April, May, so I would think in the first half of this year. If you’re seeing the gold market moving up towards 1,200 in February or April, May, you might look at that as a possible double top. The resistance we saw up there at 1,200 was 12.25. The actual high was 12.27. It reached the upper channel line and reversed strongly there. We got a 12% correction off of that. When the market gets back up there, there will be sellers at the top of that trading range up there. And if that’s happening in February or April, March then we’ve got cross currents would be with Greece possibly having some fiscal difficulties, other countries like Portugal having difficulty fiscally. And there just might be a flight to the world’s reserve currency which is still the US dollar and with the U.S. economy. A lot of my models right now suggest to me that the first half of 2010, the fiscal stimulus in the U.S. is going to be very, very strong at it’s strongest in the first half of 2010. And that’s going to be working its way through the numbers in the economic calendar each month until about June. And right now a strong U.S. economic number is translating into a strong U.S. dollar. And for that reason I think, as far as the U.S. traders are concerned, that gold is in a sideway’s trading range. If you are looking at if from a euro prospective, I might be inclined to say I’d like to be long gold, short euro, but not long gold, short dollar right now. In the first half of 2010, I think that’s going to be difficult to do. That looks like a pretty good high there for the next six months up there at 12.25, 12.27.
Tim Bourquin: All right. And then finally the currency, since you mentioned on that one, we’ll talk about that. What are your thoughts, first of all do you trade spot or futures or what do you trade with currency?
John Bougearel: With currency, I just try to stick with the U.S. dollar because I’m still pairing. It’s just another way to trade the gold market. So I will take signals on the dollar and the gold market.
Tim Bourquin: In the future’s market or spot market or what?
John Bougearel: The futures market. I don’t do spots because I’ve been on the trading floors with the exchange that are products of the CME and the Board of Trade. I stick with the futures market.
To listen and play the mp3 audio stream click on the link below
http://www.moneyshow.com/trading/forex_audio_lessons.asp?aid=fxbiwkly08-18739&iid=FXbiwkly08&page=1
