Vadym Graifer is a professional trader for the past 9 years. He has also been a Headtrader and Managing Partner of RealityTrader.com, a training company for equity traders offering real-time scanning, trading suggestions and personal mentoring. Vadym is an author of two books, Techniques of Tape Reading (McGraw Hill, 2003) and The Master Profit Plan (Trafford, 2005).
Vadym has presented his real time trades, with ongoing interpretation and comments, in a unique video course “How To Scalp Any Market.” He is a featured speaker at International Trader's Expos, Financial Forum Conferences and private seminars. He has also published articles and interviews in industry magazines, corporate product newsletters and trading forums.
I really enjoyed my recent interview with veteran trader Vadym Graifer who brings a very refreshing perspective to the markets. This is the second part of our interview.
Optionetics: What is your most memorable trade?
Vadym: My biggest loss. ESOL, March of 1997. Overnight gap down that took away 2/3 of my trading capital in one swoop. That was the trade that forever shaped up my understanding of risk, position sizing, my choice of a time frame. It gave me the first and the strongest push into right mindset – self-responsibility, self-reliance in analysis, not taking risk that can take me out of the game.
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"?
Vadym: Answer to this question lies in general philosophy of trading. Major concept here is: a trader doesn't have to know what happens next in order to trade profitably. Trading is not about knowing what happens next. To KNOW is impossible by definition of a market being uncertain environment. You can't know everything about company, stock, intentions of different players etc. The moment of maximum certainty comes when the movement is over - and this is the biggest paradox of trading: Information risk vs. price risk.
When there is no information available, the price is the most favorable. When all the information is in, the move is over. A trader needs to understand this and this concept, in turn, leads to the following realization: In order to be profitable, one needs to form a set of recognizable situations, average outcome of which he knows to be in his favor, and simply react on them. It's a set of “if/then” scenarios; IF this happens, then I do that. Such scenarios include all possible developments and a trader has the answer to each of them. This helps to overcome major trading problem: How do you act with certainty in uncertain environment.
In fact, we all possess this skill; every day we make a gazillion decisions, not being certain of their outcome. How do we cross the street? We can't be fully sure that no car suddenly jerks ahead, right? Yet we act with certainty by simply following the recognizable situation scenario: red light to the cars, Walk sign is lighted up, cars stopped on the intersection – we know we can go ahead. And in most cases it works out alright. Same in trading – all signs are there, just put on a trade and accept the outcome. All the professional training in other fields of activity though is structured to teach us to gather all the information available before acting – and this is not what works in trading.
Optionetics: How would you characterize your technical approach to the markets?
Vadym: It's a tape reading in a classic sense of the word - distinguishing between Smart Money action vs. Crowd action. They act differently, their footprints are different. I use today's technology, I use charts instead of Times & Sales, but the principles I apply to analyze them are the same original tape readers of the beginning of 20th century applied. They had a tape with slowly moving prints, so they could use it under the conditions at the time - low by today's standard volume, few key players, slow trading action that was possible to memorize and discern by watching the tape. Now it's so fast, the volume is so much bigger and powerful players are so numerous that you need to use charts and computers to keep up - but the principles are still the same. And it can't be any different, because human psychology, which is major engine behind the price movements, is not changing much.
Optionetics: What do you think are the greatest misconceptions beginning traders have about trading the markets?
Vadym: The biggest of them is the idea that there is some secret known to winning traders; secret that they need to get access to and boom, they are making money. Secret system, strategy, trick, whatever... just how often you can hear from the beginners something like "nobody shares winning system, they show you what they do only when it stops working," etc. So they start this fruitless Holy Grail quest, trying to learn that magic system, becoming a pray of all kinds of crooks. No mentor worth his salt will teach "winning system." What he really can teach is how to build one's own trading approach, one's own system that will be matching one's personality, risk tolerance, personal objectives. However, that's not what many beginning traders are after – they want certainty, they expect a teacher to show them what setup to trade and how to trade it in order to make money. They don't realize that trading is highly individualized endeavor; every successful trader finds his own approach. Trading is a mix of science and art; science part is easy, everyone can learn it in months. It's art part that takes so much time and effort. This art part is to find what is yours, what works for you.
For a beginner what I just said doesn't make much sense – and the reason for this is, he doesn't see a market as an uncertain environment, an environment where there is no single right answer, an environment where the right way to act should be matched with trader's personality. Let me continue with art analogy to make it clearer. When two sculptors look at the shapeless stone, do they see the same future piece of art? Of course not - while the raw material so to speak is the same for both, it's their visions, their personalities that shapes up future sculptures. Now let me translate this into trading terms. Imagine some very simple and fairly common chart formation, for instance double bottom. Everyone sees double bottom sure - but does it mean everyone is going to play it in a similar manner? Let's see:
- Trader A will buy aggressively first sign of a bounce from second bottom;
- Trader B will buy bounce too, but in a more conservative manner - his entry will be a confirmation, break of the high between two bottoms;
- Trader C will ignore bounce but rather go for a short on breakdown of the support;
- Trader D will short aggressively on a first sign of a pullback from the high between bottoms;
- Traders from E to Z will add all kinds of technical indicators and their combinations to decide whether it's a bounce or further breakdown.
Now, can anyone tell who of those traders is right and who is wrong? I mean not in any particular trade outcome of which we already know, but in his manner of playing the double bottom as a chart formation? And I cited one of the simplest and broadly known setups! Hope this example helps to see what I mean when I talk about "art" part, individual approach and absence of single right way to trade. And, returning to the original question: a beginner who understands this concept, understands why there is no and can't be any secret Holy Grail that works objectively by itself for anyone who applies it, is on his way to building right approach.
One more very important misconception: beginners often look for straightforward logic in the markets and get frustrated and disappointed not finding it. Logic of the kind "good news - up, bad news - down"... Have you ever heard or thought "What the heck is going on, everything is bad yet market is going up, they manipulate it!"? Market is discounting mechanism, the more news is out the more it's build into price already. All the good news in – price has nowhere to go but down because everyone who wanted to buy has bought already. Not seeing this direct relation, a beginner starts talking about "manipulation," "Them that are out to rob him," etc. There is a logic in market's actions but it's a different kind of logic; logic of discounting, logic of human behavior.
Optionetics: Thanks, Vadym, for discussing your approach to the markets as well as sharing your experiences in the trading business to our Optionetics reading audience. Look for Part 3 of this interview to be posted next week.
To read Part I of this interview, please click here.
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