John Saleeby is certainly a model for trading in the digital age. Engulfed in a bank of computer screens in his downtown Chicago office, the 36-year-old trader splits his attention between the markets, the TV and a video game, manipulating all of them with his high-tech joystick.
In fact, trading is just one big electronic game to Saleeby — one he enjoys as much as any kid in an arcade.
“I don’t find trading stressful,” the energetic Saleeby exclaims. “Since the day I started, my attitude has been, ‘This is a video game, it’s not money.’ I look at it like that because my approach has been to never touch the money in my account. It’s different if you have $20,000 in your account and you need to make $2,000 rent money. I’m sure that’s stressful.”
Ironically, while Saleeby has been a successful stock trader nearly his entire adult life, he never really considered trading as a full-time career until the last few years.
“I won trading competitions in high school and college, but I never looked at it as a way to make a living,” he says. “I’ve just always traded stocks on the side. I always considered it an avocation.”
In fact, Saleeby’s original vocation was the law, and although he was making a good living, he knew he wanted out fairly early in his career. Not surprisingly, his dislike for the work helped push him closer to trading.
“I just didn’t really enjoy law to be honest with you,” he says. “I had four jobs in four-and-a-half years. I tried tax law, I tried corporate litigation, I tried assistant attorney general and I hated it all.
“I really started actively trading because I was so bored,” he continues. “I’d sit around my office and trade. The head partner even came by once and said, ‘You know, we always hear you talking about stocks.’ I told him, ‘Well, I make more money trading my stocks than I do with the law.’ With comments like that, needless to say, I wasn’t going to spend my whole life in law.”
When his stint with the bar had run its course in 1995, Saleeby started a home automation company, which proved to be a short-lived venture.
“I began trading to create cash flow to pay for the losses, which I was able to do,” he says. “And then I realized if I just closed down the damn company, I’d be making a lot of money.”
Two years later, Saleeby is still going strong. He bought a seat on the Chicago Mercantile Exchange, although he trades almost exclusively from his office, and in the last year he has added the S&P and E-Mini S&P futures to the stock trading that has been his bread and butter for years.
For his stock trading, Saleeby has always believed in blending technical and fundamental data, often combining trendline analysis with an understanding of the fundamentals of a particular stock and its industry. Not surprisingly, Saleeby collects and dissects copious amounts of market information, something he never skimps on.
“You can never pay too much for information,” he explains. “I want to know everything that actually occurs in the entire market. I’m a strong believer in a confluence of all types of information. The more information you track, and the more information that meshes, the better everything is going to work for you.”
He keeps an extensive trading diary, tracking every important development each day in a market calendar he maintains by hand, a process that helps him internalize the information.
Saleeby, who admits to being somewhat “obsessed” with the markets, spoke to us over three days, explaining various trades he had recently made and others he was making at the time.
AT: How do you combine technical and fundamental analysis?
JS: I want something that is fundamentally strong that also gives me a good chart point. In early December, for example, I was buying Advanced Micro Devices (AMD) between 26 and 28, and I loaded all the way up to 31, with a price target of 45.
I bought AMD for a number of reasons. The chip sector was red hot — the fourth quarter is the strongest one for the sector. AMD had produced a high-end chip superior to Intel’s for the first time and Intel was having execution and supply problems at the time. In terms of technicals, the stock was stuck in a trading range between 18 and 31.
Given the company, sector and market were bullish, I thought AMD would break out of its range. It was moving toward the top of the range after forming a bottom pattern. Also, the stock had just made a “fractal breakout” of the long-term pattern within the range, which means it had broken out of a smaller range within the larger range (Figure 1).
I projected a couple of different potential price targets — 51 using a doubling of the range method and 48 using a Fibonacci projection. So I placed a conservative (exit) price of 45. When AMD’s earnings came out (48 cents per share vs. a projected 1 cent per share), the stock broke out of the larger trading range and I got filled.
I’m buying for a reason — a stock has met a chart point and I believe that charts are entry points to fundamentals. That is, fundamentals have to coincide with chart points. I won’t buy on fundamentals alone. I won’t buy on chart points alone.
I use several technical techniques. I have a system to project trendlines and I also use ratios similar in concept to Fibonacci numbers.
Much of my trendline technique is based on John Murphy’s book, Technical Analysis of the Financial Markets. I modify everything I use to suit my needs, but my trendline analysis is fairly straightforward. When anyone asks me about technical analysis, I always say the same thing: Read John Murphy’s book. I basically draw trend channels of different magnitude and adjust them as the market moves.
AT: Do you have any purely technical systems — strictly price-based strategies — that don’t use any fundamental inputs for short-term trading?
JS: I have technical systems, but I always keep the fundamentals in the back of my mind. You have to understand fundamentals, but if you trade solely on them, you’re dead. You can make money trading technicals alone, but you can’t make money trading fundamentals alone.
Also, I don’t believe you can trade individual stocks, especially highly volatile ones, without having a feel for the market itself. I definitely watch the S&P futures as well as the Nasdaq futures before I execute a stock trade.
I calculate all kinds of intermarket spreads and ratios, and I also maintain an extensive historical diary and databases in which I record fundamental information — earnings, the price-to-book ratio, the dividend yield and things of that nature. I look at the markets and each trade from a fundamental standpoint and a historical standpoint as well as a technical standpoint.
AT: What kind of trading approaches would you suggest for a short-term stock trader?
JS: Tick-trading stocks is impossible, as far as I’m concerned. I’ve never met anyone who does it profitably and I’ve never been able to do it profitably.
The strategy is mathematically unsound. If you’re trying to capture a sixteenth, where’s your stop-loss? One-sixteenth on the other side of your entry? You can end up having to take three-tick losses to make one tick. That’s the wrong ratio! And the ratio of commission costs to trading profits is prohibitive.
I did some calculations for a guy and discovered you’d have to be 80 percent correct just to break even. I don’t want to trade in a way that I have to be a genius to make a little bit of money. A lot of people think technology has put them on the inside with the market makers and it really hasn’t. The market makers still have superior execution techniques, superior information and lower transaction costs.
However, I think it’s possible to swing trade very profitably.
AT: How would you suggest finding the best stocks to trade and which approaches to use for that kind of trading?
JS: That has to do with your personality. If you have a low-risk personality and you don’t like to see things move a lot, you should really work with big-cap, blue-chip stocks that have sold off. Wait until they sell off hard and buy them for a bounce — that’s a pure swing trade. SBC Communications was a perfect swing trade (when it sold off sharply starting in late December 1999 and bounced in early March).
I know a trader who doesn’t do anything but buy dips in these kinds of stocks, using a 2-to-1 profit-to-loss ratio, and he’s one of the most successful short-term traders I know. He takes no more than 5-percent heat on the downside and gets out on a 10 percent move to the upside. I look for a 3-to-1 ratio myself.
AT: But do you think that kind of approach would work in a stagnant or bear market?
JS: A downtrending market is fine as long as you trade individual stocks and not the market. I believe in the adage “It’s not a stock market, it’s a market of stocks.” Most importantly, you must have a predefined strategy for getting in and out of trades.
Here’s another simple technique: IPO lock-ups and quiet periods. A really hot IPO generally tops early on and then comes right back down. Why? Because of the four-week quiet period when the syndicate can’t tout it and the insiders can’t talk about it. You won’t hear another word about a hot IPO until four weeks have passed. At that point the syndicate and the company will begin hyping the stock again, so it’s smart to look for buying opportunities toward the end of the quiet period.
The lock-up period is the opposite situation. Generally, I don’t like to short stocks because most people are naturally buyers. But look for a selling opportunity in any stock that is up significantly — I’ve been using five times the IPO price as a benchmark recently. Check the chart pattern. It should start to go into a downtrend about two days before the end of the lock-up period. But always wait until the chart pattern turns down coinciding with the lock-up expiration.
The insiders are going to sell at least portions of their positions to take huge profits. Remember, the insiders have gotten in at pennies on the dollar, not at the IPO price. If you were an insider, what would you do when your stock comes off lock-up, cash in some of your huge profit or buy more stock? I’ve yet to meet the person who would buy more stock.
But be careful. Generally companies will announce very bullish news and analysts will tout the stock the week before lock-up ends so they can sell into the retail buying. (See “Analysis in action” below. Commerce One (CMRC) announced a deal with GM and a 3-for-1 stock split, while an analyst set a $1,000 price target, right before lock-up ended.)
AT: You mentioned that you calculate a number of market ratios and spreads. How do you use them?
JS: I’ll compare indexes like the S&P and Nasdaq, for example. That spread was very predictable until around last October, when the Nasdaq just kept going.
Spread ratios give you indications of certain market patterns. I look at the market bias implied by a spread and trade the side of the spread with the greater potential for movement — gamma, convexity or whatever else you want to call it. I rarely trade both sides — buying one and selling the other. Pure spread trading is stepping across dollars to pick up pennies.
AT: What kind of brokerage do you use?
JS: I use several brokerages and direct access firms, and I use Globex to execute my trades in the E-mini S&P. But I don’t really like direct access firms because the ECNs don’t have the liquidity to move any size.
I’d rather give the order to a market maker at a brokerage, especially with larger orders because they’ll often improve your execution because of their access to Instinet. I’ll give these guys a sixteenth — what do I care? The other day I couldn’t get an order off on an ECN — there was nothing there.
I also think it’s really important to have back-ups for all your technology — hardware, software, communication — in case something goes down.
AT: Do you make very short-term trades that rely on your information and trade execution capabilities — playing on earnings announcements or things of that nature?
JS: Yes, and since I have the fastest information and the fastest execution, I know I can beat the world into that kind of trade. This is what I always say: I’d rather be wrong fast than right slow. Because if you are right slow, you’ll miss the profit and you’ll lose anyway. But if you’re wrong fast, you’re in and out so quickly that there’s no pain to it. If you’re slow and wrong, you’re double bad.
So, if you’re right fast, you make the most money. I want to be the first person to know what’s happening, then I want to be the first person to execute and then I want the market to confirm my position. If that doesn’t happen, I’m out.
One thing to keep in mind is that you never need to chase a trade. The market has plenty of opportunities. The money runs out before the opportunities do.
AT: Is there a typical holding period on the type of trade you’re describing?
JS: Under 10 minutes. What I’m trying to do is be the first in. Then the rest of the world comes in, does 60 to 80 percent of the move in the next five to 10 minutes, and then I get the hell out.
AT: What kind of stops do you use?
JS: I like using patterns rather than percentages or arbitrary money amounts. I use support and resistance levels and my trendlines — they function as a trailing stop. But it’s equal parts art and science.
The biggest mistake people probably make, in my opinion, is to trade their account. In fact, right now I’m training a trader who doesn’t have a lot a money and I tell him, “If you trade your capital you’ll never make it, because you’re undercapitalized.” But if you’re going to take the risk, you better put it all on this and believe in it and put your stops in and hope you don’t have three losing trades in a row for a while.
AT: But wouldn’t it also be valid to say to this person, “Wait until you have more money before you try to trade?”
JS: Yes. I can’t believe it would be to your benefit to not have enough money to do things right. But some people say the best thing that happened to them is they had to start small and conservative and had to be very careful with their capital.
AT: Do you do anything like adjust your position size in an open trade to manage risk?
JS: I have another rule: If a stock doubles for me really fast, I “play with the house’s money.” I take my 50 percent off the table and I leave 50 percent of it in there so I’ve got a free stock now.
AT: What kind of advice would you give to someone starting out?
JS: Well, they couldn’t do many of the things I’m currently doing. When you start out you have to be more conservative in terms of risk because you don’t really know what risk is until you’ve experienced a big loss. If you’ve never experienced a big drawdown in your account, then you don’t understand why it would happen or how it could happen. I think you have to go through that at some point.
I was fairly successful from the start, but it took a couple of times of being wrong to appreciate how wrong I could be. And I think that is important in a trader’s maturation. As a beginner, I could not trade the way I trade now. But now I know how to recognize risk and minimize the risk of the type of loss that could really hurt me.
I think one of the reasons I was successful, quite frankly, is I never — I mean never — used margin, in stocks or futures, for over the first year I was trading. If I didn’t have the cash, I didn’t make the trade. I was never forced out of a position that I didn’t want to sell. Also, it’s easier to quantify your gains and losses — what kind of risk you’re carrying — when you’re not on margin. If it goes down five percent you know that’s five percent if you have your whole bankroll on it.
Now, I use margin. But I think the fact that I didn’t early on is why I’m still around.
AT: What about different ways a beginner can approach trading and analysis?
JS: One thing that I will say is that if you’re starting out, you need to be a pure technician. Don’t talk to me about fundamentals, because most people don’t know what fundamentals are. There are so many ways you can value a company — cash flow, price-to-earnings, price-to-book — and they can give you different numbers.
SBC Communications (SBC) valued on cash-flow analysis is 32; valued on the sum of its parts, it’s 65 — that’s double the other valuation. Which one’s right? Who knows?
Fundamental analysis is very valuable, and I use it — don’t get me wrong. But people who don’t understand finance will need years to be able to do fundamental analysis. Everyone looks at price-to-earnings (PE) ratios. Well, what about price-to-earnings-to-growth (PEG) ratios?
Look at Intel. Last year they generated $4.5 billion in free cash flow. How much would you pay for that free cash flow? Think of it this way: How much would you pay for a cash machine that gives you $4.5 per year?
At Intel’s current market valuation, you’re paying $400 for a machine that pays you $4 per year. Even factoring its growth rate, it is very overpriced by traditional methods of valuation.
You also have to think about the time frame you’re going to trade on. I say the same thing to everyone: Your technical analysis has to coincide with the time frame you’re trading. If you’re looking at a trade that will last a week, use daily and weekly charts; if you’re looking for a five-minute trade, use five-minute bars; if you’re looking at tick trades, look at tick charts or maybe one-minute or five-minute charts.
AT: What do you do when you’re not trading?
JS: I’m pretty much addicted to this. Sometimes I work as many as 100 hours a week. The whole time we’ve talked I’ve been trading. I’ve got nine screens in front of me so I can watch two channels of TV, three different market screens and play on the Internet.
As long as I’m going to sit around and watch TV, I might as well make some money while I’m doing it.
Analysis in action
Many of John Saleeby’s technical trading concepts are built on a simple base of support and resistance concepts. “This stuff is not rocket science,” he says. “Generally, the simpler the technique, the better it works.”
Two of his frequently used techniques: retracement percentages (modified Fibonacci levels) and multiple trendlines he adjusts as price action unfolds. He projects trendlines and price moves forward in time to calculate price targets and uses them also to determine likely support and stop levels.
A series of trades in Commerce One (CMRC) illustrate some of these techniques, as well as the way he integrates fundamental factors into his decision making.
“Companies tend to put out the most bullish news, including stock-split announcements, right before they go off lock-up [see main story],” Saleeby explains. “That’s what happened with CMRC. They announced a 3-for-1 stock split and an analyst came out with a $1,000 price target — two days before the lock-up ended.
“It’s a game!” he exclaims. “They give you [bogus] news right before lock-up ends so they can sell into retail buying.
“The stock then went down to 210 and I went long, expecting a short-term bounce. The stock was very oversold at that point and it just bounced off its Fibonacci retracement level of 205 (approximately .618 of the high price of 331). I exited the trade the same day when the trend on the one-minute chart lost momentum and stalled between 230 and 234.
“When it went back down I bought again at 210, which was a mistake. I did it because I was able to buy there the first time — which is a bad reason. The stock continued to drop and I bought again at 167, at the resistance implied by a trendline (in red). But it pierced that trendline and traded down to around 155, and I have to admit I was a little nervous. But fundamentally, I believed in the stock, so I was willing to take a little more heat. I got out of the entire position when it moved back up to 210.
“After that, the stock came back down and touched a longer-term trendline (in blue), forming a double bottom. So I waited and watched for another up move. I got in on a buy stop at 210 again. The stock has been in an uptrend, and I’ll get out of most of the position on a downside penetration of the most recent up trendline (in green), which functions as a trailing stop.” (The trade was, in fact, stopped out around 245 on a penetration of this trendline.)
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