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Timothy Sykes is the author of the book An American Hedge Fund: How I Made $2 Million as a Stock Operator & Created a Hedge Fund, and was the one of the top ranked short bias hedge fund managers thru 2003 to 2006 (Barclays).

It was fun to get to talk to Tim about how he identifies trading opportunities. This is the second part of that interview.

Optionetics: Are your trading systems geared more toward long-term strategies or short-term strategies?

Tim: Totally short-term, but since my strategy is based on an ideological framework of hype/manipulation, I'm sure long-term position taking is possible. I've just never had the patience to try.

Optionetics: What are some of the key rules or factors that you consider before selecting any potential trading opportunity?

Tim: I want to make sure the stock I'm trading is "in play" because I want many fickle traders involved as their involvement opens the door to wild price action from which I can profit. That means I'm looking for liquidity and message board hype-as message boards are a great indicator as to how many traders are involved with a given stock.

I know it sounds a bit strange, but I really try to view each trade as my last; that way I wait until the very last second, the point at which I can't help but get involved in a stock because the setup is so perfect, before making another trade. There are so many fake outs with low priced stocks--both longs and shorts--patience and discipline are key.

Optionetics: What are your favorite markets to trade and track with your analysis tools?

Tim: I only trade low-priced stocks, primarily on the Nasdaq, but sometimes AMEX, NYSE and OTCBB. I believe there's a distinct advantage for smaller-sized traders "down here in the gutter" and I won't stop until every single poor person understands they have better odds and can use their small size to their advantage trading $2 and $3 stocks instead of the ever so popular $300+ GOOG and $50+ RIMM.

Optionetics: What is your most memorable trade?

Tim: ISCO, now the ticker is ISO-I went long 75% of my net worth on it over the weekend back during the mania in early 2000 because they announced they'd be featured on CNN over the weekend. The CNN report was wildly positive and the stock gapped from $17ish at the market close on Friday to $29 at the market open on Monday. I sold for a $123,000 gain and took my entire freshman dorm out to dinner that night. The bill was cheap because none of us were of legal drinking age (the story is actually an entire chapter in my book An American Hedge Fund.)

Optionetics: With all the different technical as well as fundamental analysis tools out there how does a new trader avoid information overload or "analysis paralysis"?

Tim: There really is so much noise out there, it's amazing. I think the key is to block nearly everyone and everything out by remembering that the vast majority of traders and finance people are losers, personally and professionally.

Study after study concludes 90-95% of day traders lose, the most common saying referring to brokers is "where are the customer's yachts?", analysts are right at best 30% of the time, more than 70% of mutual fund managers fail to beat the S&P 500-I mean this is an entire industry trying to hide their failure and underperformance.

So you really can't listen to anybody out there, which leaves technical and fundamentals research-which can be even worse, especially in low-priced stocks. Press releases and earnings statements lie, mislead and exaggerate all in the name of cheerleading, keeping their stock high to keep shareholders happy and increase chances of fundraising.

Optionetics: Thanks, Tim, for speaking about your trading approach with our Optionetics reading audience.

To read previous installments of this interview, please click here.

Jeff Neal
Senior Writer, Options Strategist & Profit Strategies Radio Show Market Correspondent
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