I’m pleased to be able to provide you my interview with Adam Oliensis – professional trader and developer of the Dynamic Trading System. Adam Oliensis’ system is helping traders rake in profits – and this interview will give you insight to how he does it.
I trust you’ll enjoy it.
Regards,
Jay DeVincentis
JD: How did you first become interested in trading the markets?
AO: When I was 9 years old I bought one share of Automatic Data Processing. We had family in the business and I wanted to support them. The company and the stock have been a real American success story. I held that one share until it was 32 shares…and it was at the same price point that I bought it at $44. So, I’ve always been aware of the stock market and of the power of compounding.
Then ’80s I got a hot tip on a stock. I averaged in at about $6, and it ran to $60. I remember standing on a street corner when the stock was at $60 and calling my broker from pay phone on 42nd Street and Madison Avenue. I said, “I want to sell half.” He said, “Adam, I’ve seen stocks like this go to $90.” I acquiesced and held the whole position. That was on October 2, 1987. On October 19 the stock dropped to under $30. I ended up selling the stock for 1 5/8 sometime in 1989.
It wasn’t until about 4 years later that it dawned on me that it would be a good idea to invest in computers. Then about a year after that I got married and started having kids. That’s when I became seriously interested in investing. In 1995, I educated myself on fundamentals for about a year and then I began exploring technical analysis in 1996. I read everything about TA that I could find and started playing with charting software. I began trading more actively and in 1997 I started trading options pretty seriously. By 1998 I was in it full-time and started developing a loose following of people to whom I would e-mail charts.
I really sort of backed into the whole thing and it took a number of years before it turned into a primary occupation.
JD: Which do you prefer, short-term trading or longer-term trading?
I prefer short-term swing trading and day trading. I’ve found some technical keys that make the statistical risk/reward scenarios over a period of days (and occasionally weeks) pretty advantageous and clear. As with the weather, I find it’s easier to forecast over shorter time frames than out a number of months or years.
JD: What are the things you like best about being a trader?
AO: I love the fact that every day unfolds as a mystery. It’s a puzzle. We try to set up what we think are statistically likely scenarios, but we never know where we’ll be at the end of the day until we see it unfolding.
JD: How do you treat losses and account drawdown?
AO: I treat losses and drawdowns in 3 ways.
Intellectually, I try to understand them within the probabilistic context of my Dynamic Trading System. They’re inevitable and necessary. No trading system in the real world wins all the time. And I make every effort to keep that in perspective.
Spiritually/psychologically I try to look at each loss as a golden opportunity. It’s an opportunity to utilize discipline, to stick with the strict parameters that are laid out when each trade is opened. It’s an opportunity to make certain that I haven’t become complacent, arrogant, or immune to what “risk” really means. And it’s an opportunity to humble myself as well as to make sure that I react correctly (with discipline and without hubris) when I am “wrong.”
JD: What are some of the key rules that you feel are most important for a trader to keep in mind when evaluating any potential trading opportunity?
AO: First and foremost, define the maximum risk that you are willing to take, set your loss-cut, and stick to it. “Survival” is the most important thing in trading. And here’s the most important understanding to have before trading, I think:
TRADING CAPITAL IS SCARCE. OPPORTUNITIES TO TRADE ARE PLENTIFUL. BE STINGY WITH WHAT’S SCARCE AND BE WASTEFUL WITH WHAT’S PLENTIFUL. IT’S BETTER TO MISS AN OPPORTUNITY THAN TO LOSE CAPITAL.
It’s fine to be stopped out of a position and take a small loss. It’s frustrating, but it’s fine. The most important thing is to avoid big losses and to live to fight another day.
As a corollary to that rule:
ZERO AND INFINITY (WINNING AND LOSING) ARE NOT SYMMETRICAL. ZERO IS A LIMIT THAT IS OFTEN REACHED. INFINITY IS UNATTAINABLE.
If your account goes to zero, you’re out of the game.
Look, if I lose 50% I have to make 100% to get back to breakeven. And if I gain 50% and then lose 50%, I’m at 75% of where I started, not at breakeven. Losing is much easier than winning. And money management along with risk control are the cardinal rules of trading–more important than chart reading, more important than understanding the economy, more important than deriving valuation models or growth projections, and more important than optimizing gains.
And finally: find a trading methodology that gives you a good idea of your statistical probabilities in trading, then use the method, stick to it, and keep a probabilistic perspective about it.
JD: What are your favorite markets that you like to trade and do you ever use options?
AO: At this point my favorite markets are in S&P 500 and NASDAQ 100 instruments. I trade in the SPY and QQQQ Exchange Traded Funds, the leveraged Rydex funds in these markets, in the E-Mini Futures markets for these indices, and in the SPY and QQQQ options markets.
JD: What is your most memorable trade?
AO: My most memorable trade was one of the single stupidest things I ever did. It was late 1999. I was very, very long Qualcomm (QCOM) stock. And I had much less experience than profit with the tech bubble at maximum expansion and on the verge of popping (which, of course I didn’t know). I had taken all sorts of profits from trading in the options markets, piled them into Qualcomm stock, and the stock was rocketing up skyward on the strength of some freakish liquidity factors that were probably resultant from the Fed’s fear of the putatively impending Y2K crisis (remember that one?).
If I remember correctly, Qualcomm was in the mid-400s, and I sold short calls something like a hundred points out of the money against my long position in the stock. I figured, hell, if the stock goes up a hundred points I’ll be overjoyed to be called out.
Well, the stock went up 100 points and then some. And I ended up buying back to cover the short calls at a huge loss on the calls, which effectively raised my cost basis on the stock…all this just as the NASDAQ and tech stocks were priming themselves to enter the worst cyclical bear market in 70 years.
I had become so intoxicated by the upside that I had become insensitive to risk and stupidly violated my own trading plan. It’s the single worst trade I ever made both in terms of the size of the losses I ultimately incurred and in terms of the whimsical impulsiveness I exhibited in violating my plan.
JD: With all the different technical analysis tools out there how does a new technician avoid information overload or “analysis paralysis?”
AO: Test your indicators. Don’t trust what other people say about MACD or stochastics or moving averages or RSI or directional move indicators. Look at your charts. Observe them carefully. And then find a charting program that allows you to TEST your indicators. See if they do what they’re “supposed” to do and what you think they will do. And in your tests determine where your stops should be. Otherwise you’ll be guessing, you’ll lose confidence in real time, you’ll impulsively violate your plan…and your losses will effectively become very expensive tuition.
JD: What kind of technical analysis and fundamental analysis tools do you employ?
AO: After years of “wandering in the Sinai,” I have cut way back on the indicators I use. I look at a lot of indicators but I use my Dynamic Trading Oscillators explicitly. I look at Bollinger Bands and MACD. And I look at the VIX, the VXN, the Put/Call Ratios, the New Highs, New Lows, historical Volatility. I could go on and on…but I use the oscillators I derived myself.
Fundamentally, I look at a host of factors each week in my Weekly Wrap-Up. I look at the market’s PE, earnings growth, which sectors are displaying upward revisions and which sectors are suffering downward revisions, interest rates, the yield curve, Equity Risk Premium, and finally my Risk Adjusted Fair Value calculation, which is a variation on the Fair Value calculation that the Federal Reserve employs.
JD: What mistakes do most people make in the markets?
AO: The worst mistake people make is to either not have a trading plan or to have a plan and not stick to it.
JD: How important is money management in your overall approach to trading?
AO: Money management is probably the first, second, and third most important thing in trading.
JD: How would you characterize your approach to the markets?
AO: My Dynamic Trading System (DTS) swing trades signals, both long and short, derived from a set of proprietary algorithms applied to the DTS Oscillators. The DTS was developed via extensive testing in over the past 7 years’ data (in bull, bear, and flat markets), and applied through seasonal and cyclical filters. The System has enjoyed a very profitable statistical edge in the past and we continue to tweak the System to learn from the markets in real time.
Our approach is probabilistic. The System places trades that, based on historical testing, have an optimal probability of profitability. We try not to get too involved in any one particular trade, but look to measure the System’s results over months and years of data.
JD: What do you think are the greatest misconceptions people have about trading and investing?
AO: That there could be somebody who knows everything. And that it could be “me.” In real time, we never know what the market will do next. Trading is not about being right. It’s about maintaining a probabilistic approach to what is likely to be profitable. It’s about being disciplined, and it’s about recognizing an optimal time to acknowledge when a trade is not working…and then maintaining discipline and exiting.
JD: What would you say are the most reliable chart patterns and indicators for a trader to watch out for and monitor?
AO: That’s a really tough question. I think it depends on the market, the time frame, and a variety of underlying conditions. Right now I’m enamored of slight violations of support or resistance. that FAIL. For instance, the SPX has just broken out to a new 4-year high. Should it FAIL to hold above 1300, then there could be a lot of new longs in the market who are buying the breakouts…longs who will turn into sellers should 1300 fail. So, I guess in terms of formations right now I’m enamored of fake-out breakouts and shakeout breakdowns. I really enjoy the reversals that follow these.
In terms of indicators, the most reliable ones I know of are my Dynamic Trading Oscillators. I do not know of any other indicators that have been as rigorously and successfully tested.
JD: Adam – thank you for your time.
We have done our best to record the calls for you, but remember that the shows are fast moving, and sometimes Cramer bangs on the sell! sell! sell!, bull roar, train wreck, suicide jump, hallelujah chorus, backing up truck, creepy house of pain voice, machine gun, fanfare, toilet flush, all aboard, applause, cash register, bear growl, bowling pins, and submarine diving alarm buttons all at once, while he is screaming. 
