Stocks & Commodities V.

25:6 (50-56): Interview: In Synch With Steven Primo by Jayanthi Gopalakrishnan

INTERVIEW

The Beginning Of The Trend

In Sync With Steven Primo

Are you trading according to your trading personality? Steven Primo can give
you a clue about that. A nearly 30-year Wall Street veteran, Primo is the
director of education for TradingMarkets. Currently, he also heads a private
investment partnership where he is general partner and head trader. Previously,
Primo was a nine-year specialist for Donaldson, Lufkin and Jenrette (DLJ),
one of the premier investment firms on Wall Street. STOCKS & COMMODITIES
Editor Jayanthi Gopalakrishnan interviewed Steven Primo on April 12, 2007,
by telephone.

teve, how did you get involved in trading?

Thats a funny story. I
dont have any background
in finance. In fact, I graduated from
Loyola University with a degree in
music. But my father was a stockbroker.
He was always trying to get me involved in the markets, but I had no
interest in the subject. The summer I
graduated from college, I was in downtown Los Angeles looking to buy a
cheap saxophone, and I saw the Pacific
Stock Exchange. I thought, My dad
always talked about this place! So I
went up to the visitors gallery and saw
the paper on the floor and all the people
screaming and making hand signals
and I was hooked. So I got a haircut and
applied for a job the next day.
When was this?
The summer of 1977. I got hired as a
runner, where you stood in front of the
specialist and literally wrote down all
the trades on a piece of paper and once
a trade occurred, you wrote down the
share size, the name of the stock and the
price, and then took it over to the teletype
operator and she put it up on the tape. I
started out doing that and seven years
later I became a specialist for Donaldson,
Lufkin and Jenrette (DLJ).
How long were you there?
I was on the floor of the PSE for a total

of 16 years, but I was a specialist for

nine, until I left in 1994. I tell this
story to my students because a lot of
them start out thinking they need a
business or financial degree to trade
or have to know all about companies
and have a business sense. You dont.
I started not knowing a thing. I was
down there for 16 years. So that is
how I got started trading. It was just
supposed to be a summer job.
What was so exciting about it?
Since I traded from 1977 to 1994,
I think the most exciting part was the
crash of 1987. I came home from Europe the day before the crash. My style
of trading I was a contrarian was
to always buy when everyone was selling, and sell short when everyone was
buying. I told all the other specialists
and the floor traders I was going to buy.
And they said, No. You havent been
here. This is worse than you think.
So what did you do?
On the day of the crash, the market
was down about 250 points and it was
falling out of bed. I started to buy. Lo
and behold the market did rally. A lot of
people dont remember, but there were
these intraday swings, and it rallied. It
was only down 100 points, and so I sold
everything I had bought, and in about an
hour I made about $100,000. I thought,
Wow! This is like free money! So
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When I was on the floor

I was just a contrarian for
contrarians sake, and
there was no plan. Then I
realized the importance of
having one.
when the markets started to sell off
again, I started to buy again and we
all know what happened.
Didnt go quite the way you thought it
would?
By the end of the day I had not only
lost the $100,000 I had made but I also
lost an extra $250,000. A lot of floor
traders lost millions, and this was in
1987.
It taught me a valuable lesson, and
this is what I teach my students. Wouldbe traders come into the markets,
whether it is to trade stocks, commodities, or futures, looking at the market as
if it is something to battle with. If you
look at it that way, that is what you are
going to get a series of battles.
After that I thought it was easier to
view the market as if it were some type
of river: something to go with, or swim

Stocks & Commodities V. 25:6 (50-56): Interview: In Synch With Steven Primo by Jayanthi Gopalakrishnan

downstream with. Not something to

swim upstream with. It is easier if you
have that philosophy rather than trying
to go against the market.
Youll hear people say, I made a
killing in the market or I got beat up
today or even I outsmarted the market. I dont look at the market like that.
I teach my students it is not something
to battle with, but something to be in
sync with.
Are you still a contrarian investor?
On the surface, my style appears to be
contrarian; its similar to the products
we have at Tradingmarkets.com. Larry
Connors extensive research has shown
that there is a tremendous edge if you
look to buy when all others are selling,
and look to sell when all others are
buying. But we buy it during pullbacks.
So we are buying when everyone is
selling on that pullback, and vice versa.
When the intermediate- to longer-term
trend is down, it is followed by a rally.
Since you are selling, it looks like
you are going against the market, but
you are selling with the longer trend.
This is one of the things that encouraged
me to work with Larry Connors because
everything we do here is on a systematic
approach. Everything comes from rules
and quantified results and it is backtested
and researched. It fit in perfectly with
my style of trading once I left the floor.
It was a style Im totally comfortable
with. I trade for my own partnership in
my own account using the same type of
methodologies.

to take my 16 years of experience and

go trade on my own and trade other
peoples money. But I immediately
started losing, and I couldnt figure out
why. I had lost touch with all of the
things I used to rely upon, like the floor
and the noise and being able to see the
orders come in. So even though I had 16
years of experience, I was right back to
the starting point. I had a tough time and
I had to decide whether I wanted to
continue trading or go back to work as a
specialist. I decided to become a student
of the market instead and I made myself
a promise.
Which was?
I said, If I get through this and I am
successful again, I am going to do everything I can to help people get through
the whole learning curve faster than I
did. It took me years, but I got to a point
where I developed a systematic approach. That is why I want to teach. I am
still trading for myself, and my partnership, but I continue to teach as well, and
give seminars.

In terms of the quantified research

and the models you used?
Yes. It is difficult to develop an inner
sense and trade based on that. We need
to have research, and backtesting, and
quantifiable results to give us the confidence to take that trade. Cesar Alvarex
is the head of our research department,
and he has analyzed and formulated
systems for us that have more than 12
years of backtesting behind them.

Without getting too proprietary, can

you give us some idea how someone
would develop a systematic approach
to trading?
The first thing I tell people is that
80% of all traders will lose money. And
that means only 15% are only going to
break even. Only 5% consistently make
money or are profitable. It doesnt mean
they are profitable enough to live on. It
just means that they are profitable. You
have to ask yourself, How does the
minority get the majority of the profit?
I teach that they have an edge. An edge
will sustain you throughout any type of
market. And the edge in trading is systematic trading. That means doing research and being able to rely on
backtested results so when you get to a
point where you cant pull the trigger or
you stay in too long, you have a set of
rules to follow. That is your edge. You
need to have some type of plan.

What made you switch to teaching?

When I was trading on the floor I was
successful. I traded through the crash. I
had done well and I thought, Im going

What is one of the biggest mistakes

traders make?
Most people try to employ someone
elses style of trading or use someone
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elses discretionary system. It has been

my experience it doesnt work, because
I could have a system that makes 100%
a year, but if it doesnt fit your trading
personality, you are not going to make
money. Thats what I think is the real
edge. It is having a system that fits you.
So when you talk about something that
fits you, what are you looking for?
I have had students come to me and
say they want to learn how to daytrade.
When we finally sit and talk, or go
through examples, and I give them different ways in which to trade, they cant
pull the trigger, or they cant follow the
rules. What may really fit their style is
possibly swing trading or long-term investing. They may like to focus on news
or earnings, which is fine, but that has to
do more with longer-term trading as
opposed to daytrading. You dont need
to have all that information for
daytrading.
I also get approached by people who
want a good, fundamental way of trading, but they get bored when there arent
enough trades. Then we see their nature
is more like that of a daytrader. People
dont realize this until we sit down and
talk. Once we have that figured out, that
is half the battle. Then we format to fit
their personality. In my mentoring I
either give them the tools and everything I have learned and constructed for
them, or we supply them with proprietary plans and methods.
I understand you trade a range of
tradables. Are there any marked
differences between trading equities
versus commodities, for example?
There are differences, but in my opinion when you come from a systematic
approach, they are pretty much the same.
You have to give and take certain things
for risk parameters, and share or contract size, but ultimately, if you backtest
and research something five or 10 years
and it seems to work well, it is just as
simple as following the rules. I trade
forex, e-mini futures on a daily and
intraday basis, and for the company, I
mainly trade stocks.
For all of the tradables you are waiting for clear, concise setups, and then

Stocks & Commodities V. 25:6 (50-56): Interview: In Synch With Steven Primo by Jayanthi Gopalakrishnan

just pulling the trigger. So it doesnt

matter which venue I am in. Thats my
style. When I was on the floor I was just
a contrarian for contrarians sake, and
there was no plan. Then I realized the
importance of having one. Since then
my approach has always been to stick
with a plan.

periods. That gives you a tremendous

edge. You see results that look like the
holy grail. It really fine-tunes your entries and exits. But this is just one of the
indicators we use. Larry Connors and
Cesar Alvarez looked at more than seven
million trades, and that is how we came
to determine this.

So the plan was developed while you

were on your own. On the floor, what
was the main mechanism that traders
used?
Order flow. We knew how to trade
off of order flow, which is great, but to
me a real trader is someone who doesnt
have an outside influence. He has to rely
on his own decisions. If you took his
order flow away or you gave him more,
it wouldnt matter. He would still succeed. That is what trading is, even without access to news. You should be able
to trade successfully if you were stuck
alone in a room in front of a computer.
With the help of your magazine and
taking seminars and reading, it took me
a couple of years, but I finally got back
on track, and I realized I had to formulate a plan.

You look at intraday charts too, dont

you?
Yeah, and the amazing thing is that
you can use the two-period RSI on a
five-minute chart, on a daily chart, on a
monthly chart, and you will see the
same results. Lets say you are interested in buying. If you buy when the
two-period RSIS bar has closed below
five, you get tremendous results. If you
buy when it is below three, you get even
better. If you buy when it is below one,
you get phenomenal results. This research just shows you how great it is
when you fine-tune the RSI to a twoperiod instead of the standard 14-period
default. That is one of the great indicators we use.

Do you use any type of technical

analysis in your trading?
Yes! All our research at Trading
Markets is based on technical analysis.
I am a true technician. I dont have
anything against fundamental analysis,
but it is, in my opinion, better suited for
the longer term. If we are trading on the
shorter to intermediate term we dont
have to rely on that.
The indicator I use the most, and
which has been extensively researched
by Larry Connors, is the relative strength
index [RSI], developed by J. Welles
Wilder. This is a great momentum oscillator and gauges overbought/oversold conditions. You can use it for anything. It transfers easily to stocks, indexes, forex, and futures. Its standard
use or default is 14 periods. But statistically, looking back 11 years, when using the 14-period RSI we found little to
no edge.
Where did you find an edge?
When we shortened the RSI to two

That is quite a reduction from the

default time period.
We dont want traders to make all of
their decisions based off the two-period
RSI, but this is one way to help you finetune this great tool. It works on foreign
exchange, it works on the e-mini futures, it works on stocks, and we incorporate it in a lot of our proprietary
methodologies.
What about moving averages. Do you
use them?
Yes, we mainly look at moving averages to define the longer-term trend.
For example, when we are trading
stocks, we apply a 200-day moving average. The first thing we ask ourselves
is, Where is price in relation to the 200day moving average? If the price is
above, then we will be a buyer. If the
price is below, then we will be a seller.
If we want to daytrade, we do the
same thing, but apply a 50-period moving average. In my mentoring classes
where I teach mainly daytraders, if the
price is above the 50-period moving
average then we will buy. If the price is
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below, then we will be shorting or staying on the sidelines. We use moving

averages to determine the trend direction and then fine-tune it with other
indicators like the RSI.
How should traders select their trades,
given the magnitude of options
available?
Since we rely on quantifiable results
it is almost like the trades pick you.
When all the quantified setups are in
place it is as easy as taking the trade. It
doesnt mean you have to make a trade
every day. It has to meet the rules. This
is the way I traded even before I started
to teach at TradingMarkets. Some days
I was daytrading, and I would not get a
trade for one or two days. But that was
okay, because when I finally did get a
trade setup I knew it was a high-probability setup. Ill take a trade if it meets
all my quantifiable rules. Ive done research into it.
Does TradingMarkets.com have a
stock-screener?
We do. With the products in the systems we promote, we scan and screen
everything. We also give you the ability
to do it yourself. You can get setups on
a nightly basis. We are trying to pick the
sweet spots out of every high-probability trade rather than trade just because
you can. That is more of a discretionary
type of approach.
What in your opinion is the single most
important factor in deciding when,
exactly, to enter that trade?
You have to be able to follow the
rules. Rules are really important in all of
my trading. Since everything is researched and backtested, you stray offtrack if you dont follow the rules. You
also dont want to make it complicated.
In fact, we have a strategy called the R2
method that I give away at my seminars.

Stocks & Commodities V. 25:6 (50-56): Interview: In Synch With Steven Primo by Jayanthi Gopalakrishnan

It is an S&P trading system and it only

has two rules but it has been correct
more than 84% of the time, going back
about 10 years. There is an entry rule
and an exit rule. It is that simple.

hat is simple!
Many people feel that for
some reason the more complicated a system or method,
the more valid it is. I have found that it
is actually the opposite the less complicated something is, the better it is. It
is the easiest thing in the world, I tell my
students, to complicate your life. The
most difficult thing is to simplify it.
That is what we are trying to do. We are
trying to simplify things and make them
clear and concise. Thats the deciding
factor. You have the rules in place,
which have been quantified by Larry
Connors and our research department,
and you just follow the rules, one by
one.
What variables do you recommend
using to help decide when to enter a
trade?
We have two great rules we give
away on our website to enter a trade,
and I could tell you those. We have a
proprietary stock ranking system called
PowerRatings. It is an algorithm that
tells you the short-term bias of the direction of a stock, so if you have a
higher rating it is rated from 1 to 10. The
higher the rating, the greater the bias is
that the stock will go up. The lower the
rating, the greater the bias the rating
will go down.
How does it work?
We applied two rules to this. Basically, you enter at a certain percentage
level once you get one of these higher
ratings. You enter, say, 3% below the
close for the next day. You exit when
the price crosses above the five-day

moving average. That is your exit rule.

By doing that your results increase,
your average gain increases from 0.99%
to 2.33% per trade, looking back 11
years. By choosing a high-rated
PowerRating stock, enter your buy limit
order 3% below the closing price, and
then exit when it closes above its fiveday moving average. But this plan only
applies to high-rated PowerRating
stocks.
That is pretty simple!
Very simple and very basic, and you
go from making maybe 1% up to like
6% or even 7% per trade. We have this
research going back roughly 11 years.
These are some of the best rules for
entering a trade. Enter a bit below and
then get out once the price closes above
the five-day moving average.
Another great exit strategy developed and researched by Larry Connors
and Cesar Alvarez is the close of the
two-period RSI above 75. Once the RSI
closes above 75, you exit on the close
or the opening the next day. We use that
in a lot of our own products. So those
are two easy exit strategies to use.
Are there any particular money
management strategies that you
recommend to your students?
We think that money management is
really about position size and shares,
and contract sizes. Another aspect we
stress is diversifying your portfolio. That
way you dont have all your eggs in one
basket. You are not trading the same
amount of shares for each stock, but if
one or two stocks arent performing
well, eight will help bring up the slack.
That is a great way to control your risk.
I am sure you have a lot of students
come by. Out of curiosity, do many of
them have the common misperception
that trading is a get-rich-quick type of
thing?

Copyright (c) Technical Analysis Inc.

They all do. Either a friend told them

or a friend of theirs made a lot of money,
or any number of things. They are usually successful people and have been
successful at another job or career, and
they want to transfer that success onto
the realm of trading. I always present
the following scenario: I love to play
basketball. What if I quit my job and
said, I am going to try out for the LA
Lakers or the Seattle Sonics tomorrow?
Youd think I was nuts, right? You can
open up an account tomorrow and trade
alongside money managers and hedge
fund managers, with your orders next to
theirs.
Everyone thinks they will be just as
successful as their previous career, but
it is not true. You need a lot of planning.
You need a trading methodology that
has been researched, quantified, and
backtested with positive results going
back a number of years. This is the most
important thing. I see most people having trouble because they are trading out
of sync with who they are. They are
trying to be a daytrader when they should
be an investor, and vice versa.
Ive also seen people who succeed.
They suddenly flourish because they
are now in sync with the way they should
be trading. It depends on what market
they want to trade. A lot of people say,
I want to trade futures. Then they
realize they really shouldnt be. Maybe
they should be trading stocks or forex.
Many people come in with mistaken
perceptions saying, I hear there is a
system that makes this much. If I trade
it Ill make that much too, right? Thats
not the case. We try to get people on
track and then get them to understand
that there is a plan or a process that can
get you successful. And thats really
about it.
Thanks, Steve.

S&C