Episode 70 ... Jeff Davis (76:31)

Grew up in farm country two hours north of New York
[Sounds like a two pack a day smoker]
Didn't go to college
Worked for US postal service, in processing center, night shift
Voracious reader of magazines and newspapers at work
30 years old then [late 1990s?], married, had baby and mortgage
Wanted to be his own boss, attracted to day trading
$25,000 minimum to join an LLC trading firm
1999, Harbor Securities, firm blown up by one trader [not him]
Didn't matter since he'd pretty much lost all his money anyway
Saved more money, went to Bright Trading next
Passed series 7, sat on a desk in the city, surrounded by traders
Worked night shift at USPS, day traded during day, slept on train [wow]
Was breakeven at Bright
March 2000 he went full time [how about that timing?]
Learned how not to lose while at Bright
Learned how to short
At Bright, you picked one stock and specialized in it
Trade with the specialist, not against him
Most of his problems were mainly him
Made money in the morning, gave it back in the afternoon
Sep. 11, 2001 last day of trading at office at Bright (next to Towers)
Afterwards traded from home, lonely and hard but also good
Guys who focused made money, people who didn't adapt were gone
Got Lyme Disease, got sick, couldn't trade ... inspired him to automate
You can't fiddle along with trading, bad things happen in life so you have to seize opportunities
Exchanged his mentoring with a programmer who coded up a "tape reading tool"
In 2005, Russell re-balance provided a lot of opportunities, he saw this
His brother also a computer programmer, wrote a program to take advantage of index rebalancing
Found programmers who also traded, they understood what he wanted
Should have learned Fortran and Cobol in high school but didn't
In his early 50s now, wouldn't even think about learning how to program now
If you're in your 20s, definitely learn how to program, or find someone who can program for you
Avoid the rabbit holes
If you're searching for edge, you're definitely going to go down some rabbit holes (curve fitting, etc.)
Nobody has ever run a bad backtest
Trend following hard to do when you have a 30-40% win rate, people give up
Nothing out of the can is going to work for everybody [or anybody]
You have to work hardest on you .. your psychology
Your strategy has to fit your personality
He has now achieved "mature simplicity" ... it's not what you add, it's what you take away, less is more
Find something where you can get size on, where you're confident
You're in a risk business, you don't want to make a salaryman's wage
His algorithm is now trading the S&P futures
Mean reversion strategy -- most days are range days
Range prediction algorithm -- knows probability of daily range, will fade spikes
Yesterday's high or low is hit 88% of the time
VWAP is the target on most of his trades
When price gets away from VWAP, that's where he gets interested
Range is a well-kept secret (Cooper, Crabel, Raschke have done lots of work on it)
Be aware of "market regime" even though you're day trading
Everything he does is based on Average True Range
For example, a 22 handle move will revert at least 5 handles 70% of the time
People can't stick with their systems
Automated systems with tight stops don't work -- then you fiddle with the stops
Old traders just do the same thing in the same way every day
When you're trading right, it's boring, it's just execution
Throw away what the crowd is doing
So much trading wisdom from the past ("the trend is your friend") not relevant for day traders
Don't be a hamster on a wheel
You have to stick with your system, only possible if it fits your personality
"Averaging is groping for the top or bottom"
He doesn't scale, he just goes all in [scales out in two pieces however]
He never chases
If nothing sets up, don't push the button
Picture a pool filled with sharks, that's what you're jumping into to make money
Overtrading is the downfall of most failing traders
Many are operating on tilt, jumping from strategy from strategy
Always knows what he's risking, structured identically, dollar loss pre-determined
No slippage on his stops in SP futures
Traders always rode in last train car in case of derailment [always thinking about risk]
Good traders are not jacks of all trades, they specialize
Your strategy has to be about getting size on, otherwise there's no point
"Single digit midgets"
You get confidence from specializing
Two regimes: expansion and contraction
Tracks range of one minute SP to make sure his stop is "outside of the noise"
He went from having tight stops to having wide stops -- to protect him from himself
He knows the percentage of the time his wide stop will get hit -- he never fiddles with it
With tight stops, he'd be liable to fiddle with them
You need to be able to trade your system without feeling the urge to fiddle with it
Once comfortable with strategy, with your stops, your dollar losses, then you can build up your size
Exits in two pieces: first piece getting him 2.5 points on average, gets instant gratification, lets second piece take its time (averaging 7 points)
Two to one win rate on his mean reversion trades [1R losers, 4.75R winners]
He's out there to help people, esp. persistent guys who don't lose money but don't make big money
Day trading is not a hobby, not an action junkie thing, it's a business, take it seriously
Says some kind things to Aaron in parting
Twitter: @Shaq48_Trading