Trading In The Swing Of Things

SAM JONES, TEACHER TURNED TRADER

When he was a science teacher in Warwick, RI, back in the mid-1970s, speculating was a spectator sport for Sam Jones. It wasn't a case of not being interested in trading, but as a schoolteacher, he did not receive the kind of salary that would enable him to participate in the exciting, but capital-intensive, world of trading. One thing Jones did have as a teacher was the knowledge of how to take notes and to study. As it turned out, those were valuable skills to have.

About 20 years ago, he quit teaching and moved away from the defined-benefit pension plan he could have had. He became an information technology professional, finally able to apply those note-taking and study skills to trading. In fact, he still has notes he wrote about trading back then. Today, he is fully involved in the financial markets and still lives near the ocean in Rhode Island, where he can satisfy his saltwater fly fishing habit. Along the way, Jones decided his future and his retirement needed to hinge on his ability to navigate the markets and not on someone else's investment decisions.

Jones is not a daytrader or an advocate of the buy & hold strategy that clearly has not worked since the dotcom bubble burst. "With very few exceptions, buy & hold just doesn't cut it any more," he contends. Instead, he is a swing trader in exchange-traded funds, ProFunds, equities, and options. On average, he closes out about 20 trades a month. He uses fundamentals to help determine the long-term trend and then relies on technical indicators and tools almost exclusively to time his trades within the larger cyclical trends, either up or down.

"For example, precious metals and the energy sectors are in long-term cyclical bull trends with consolidations several times per year," Jones observes. "These consolidations provide opportunities to maximize profit by selling before or buying during the move. I may try to reduce a position before a consolidation phase and add toward the end. Timing obviously becomes critical with this strategy. Housing and real estate may be entering a long-term consolidation, which I am shorting now, so I trade both long and short."

An ideal trading opportunity for Jones occurs when a sector bases. He will leg into a market with a small position, then once the trend has been established, he will add to the position. If the trend does not materialize, he gets out as soon as he can. Using a number of technical indicators as well as support and resistance levels, he is able to detect trend changes more often than not.

"The most basic tools I use include moving averages of various time frames, money flow indicators, volume, relative price, and Bollinger Bands," Jones says. "Fibonacci levels also have a place because so many other traders use them and it is helpful to understand them." Once in a position, he evaluates his position continually and waits for notification of a potential trend change.

Being human, Jones admits to sometimes having a tendency to hang on to a losing trade too long because "I am convinced that I am right and the market is wrong." Winning positions can be just as tricky, he warns, noting that if you're not careful, you can get too emotional about a position.

"After a 30% gain, I increase the amount of attention I give to the position and start to plan my exit," he advises. "That doesn't mean I get out; it just means that I become more observant. It also depends on other investment opportunities as well and my cash position at the time. I do not have a clear-cut rule because of all the dependencies." He also begins to reduce his position when his indicators become less positive.

Jones has learned a lot about money management over the last 25 years and always keeps at least 10% cash flow for flexibility. "If I get close to that level, then I may reduce one or two of my weaker holdings," he says, adding that capital preservation is the most important objective of trading. The amount he invests in any one sector is based on trend strength relative to other sectors.

He said he believed this was a great time for investors because of the "great amount of information on the Internet." But he also cautions traders about getting information overload. He subscribes to several websites, including www.stockcharts.com and www.morningstar.com, and also frequents free sites such as Yahoo! Finance and www.tradingeducation.com. In addition, he has found that more expensive information isn't necessarily better information and encourages traders to check out free resources as viable sources of information.

"The problem is evaluating the available services that aid in turning the vast amount of data into usable information," Jones comments. "I enjoy [technician] John Murphy's market message and have found www.stockcharts.com, STOCKS & COMMODITIES magazine, and www.tradingeducation.com to have a wealth of knowledge and novel investment ideas."

Just as Jones did when he was a teacher, he studies the information and articles on these sites daily to create and modify his own trading style and to more closely follow sectors that interest him such as the basic market indexes, metals, and energy. His advice to other traders? "Start small and make your mistakes early, as we all do, but never quit. Trading is a lifelong learning endeavor."