Interview with a Trader: Inside the Mind of Tim Knight

Tim KnightInnovator and brilliant mind, Tim Knight has been charting and trading since 1987. In fact, his first stock trade was on the infamous day of October 19, 1987 – “Black Monday,” the day of the crash – which perhaps goes a long way in explaining his disposition toward bearishness. He has been involved in personal computers since late 1979 and, starting at age 16, began writing a couple dozen books about using and programming computers. His most recent writing has been focused on charting and the history of financial markets, with his newest book, Panic, Prosperity, and Progress, being published in February 2014. He has been running Slope since March 29 2005 and has, during that time, written more than 15,000 posts on the blog.

In 1992 Knight founded “Prophet,” (yes that same Prophet) which is a web-based technical analysis company that was acquired by Investools (and later, Ameritrade) in January 2005. Tim served as Senior Vice President of Technology for Investools from 2005 through 2010.

Knight directed his passion for the markets to fuel the innovation for which Prophet was known. In fact, Barron’s and Forbes consistently named Prophet the #1 Web Site for Technical Analysis. In his professional role as a hedge fund manager today, Tim relies on technical analysis as the primary basis for his investment decisions. He also hosts a daily show on theTastyTrade network, called Trading the Close.

Before starting Prophet, Tim was Vice President of Technology Products at Montgomery Securities in San Francisco, where he led the development of an institutional online-trading platform. Additionally, he has held various positions in marketing management at Technical Tools and even Apple Computers. He currently resides in Palo Alto, CA with his wife, children, eight hens, a pond full of fish, and a trio of dogs which occupy whatever free time may be available.

He took the time away from his busy schedule to answer some questions for me:




What first influenced your interest in the stock market?

“When I was in college, I happened to come across a book by Jake Bernstein called “How to Profit in Bull and Bear Markets.” The book was essentially an introduction to the basics of technical analysis. I’m an innately visual person, so I was immediately hooked. That was in the mid-80s, and I’ve been charting ever since.”

What methods/strategies have you pursued that have failed for you in the past as a trader?

“Well, perhaps I simply don’t know what I’m doing, but Elliott Wave was pretty much a wreck for me during up markets. In other words, I found it to be helpful – – almost eerily so – – during downtrends, but for uptrends, it was just a disaster. Not only that, there seem to be as many ways to interpret the market via Elliott Waves as there are Elliott Wave technicians, so I’ve pretty much dispatched it as having any predictive value.”

Who are influences/role models for you that are relevant to trading and why?

“I would say the interviews from the famous “Market Wizards” books are the biggest inspirations. In addition, there was a PBS special back in 1987 called “The Trader” about Paul Tudor Jones which I found absolutely captivating. It’s said that Jones tried to get rid of all the copies of the program, but you can always find one popping up on the Internet somewhere.”

When/what was your “ah-ha” moment? What was the breakthrough?

“One of the big “ah-ha” moments for me was analogs. What I mean by that, is that I began witnessing not just simple patterns repeating, but entire, complex, multi-faceted chunks of historical price action being played out again. Analogs can be very seductive, and God knows they don’t always work, but to me the fact that even some of them work is strong evidence of the persistent, unchanging nature of the collective human mind.”

How would you best describe your trading style?

“I guess I would use the words “chart-focused” and, to be frank, “perma-bearish.” I don’t pretend to be an evenly-balanced trader, although I wish I were. I vastly prefer the short side to the long side for reasons that a team of psychologists would probably be required to untangle. I tend to keep a very large quantity of very small positions going in order to spread out my risk, even though there is obviously going to be some pretty strong correlation since broad market direction is going to have a huge influence on just about any financial instrument.”

What key rules do you apply to your own trading?

“Rules for my own trading would include:

  • Stops – a stop price must be in place at all times for all positions, and stops should be set generously enough so as not to exit a position prematurely.
  • Opening Bell – with the sole exception of updating stops, no actions should be taken in the first 30 minutes of any trading session.
  • Freshness – stop prices should be regularly refreshed, particularly when the market has moved in your direction a meaningful amount so that you can lock in some profits with tighter stops.
  • Emotional Awareness – use emotional awareness to your advantage. Understanding fear often accompanies reversals in your favor and hubris often accompanies reversals against your positions. Analyze reliable technical cycles (such as the McClellan Oscillator) to augment your emotional awareness of market extremes.
  • Exits – the only acceptable exit is either being stopped out of a position or reaching a target price which has a clear technical rationale, and even in cases of the latter, partial exits are preferable to outright closes. Remember, a decision to enter a trade should be based on what may be; a decision to exit should be based only on what is. There’s a big difference in mindset.”

What do you look for in the stocks that you trade?

“Since I focus on short-selling, I look for a few things: (a) plenty of liquidity (b) a demonstration by the stock that, in the past, has the capacity to fall dramatically (c) a clean, clear pattern that strongly suggests the probability of a major diminishment in price.”

What do you feel sets the great traders apart from the rest?

“I feel that great traders tend to be born, not made.

With that being said, I do not consider myself a great trader. I don’t even consider myself a good trader. I consider myself a very skilled chartist, and a good writer, who is able to articulate an argument about the direction of a financial instrument. But the traders who have made great fortunes – – -I think they were born with an ability to ride the waves of a market which normal human emotions are typically absolutely destructive to success. In other words, there is something about their interpretation of the markets and, more importantly, their willingness to place large bets in a way that very few others would be willing to do – – which sets them apart.”

What can you tell readers about your risk management approach?

“Certainly: it’s all very percentage-based. As I mentioned elsewhere, I tend to keep a large number of positions (as of this writing, I literally have 123 different ones), and they tend to be about 0.5% to maybe 2% of my overall portfolio.

For each one of them, I have a stop-loss which is normally about 3% or so away from its current price. If a chart is very attractive but has a wide stop (let’s say as much as 10%), I’ll have a correspondingly smaller position. In other words, my dollar risk tends to be extremely similar whether it’s a tiny position or a large one.”

What trading moments make you the most proud?

“Well, it’s ancient history now, but the entire mid-2007 to early-2009 period was an exceptional period for me. Indeed, I think my style of trading was absolutely made for that kind of market. There were times I felt like I was simply printing money, and it felt so easy, I should have known it wouldn’t last forever. Looking back, there were incredible highs and lows, but when all the dust settles, I made an absolutely dynamite profit.”

The most upset?

“I’ll embarrass myself a little here and just say about the entire period from 2009-2015!

Simply stated, I had no earthly idea to what lengths the central bankers of the world would be willing to go to artificially prop up asset prices. Even now, I am appalled. Almost everyone on the planet has gone on record to say “this will end badly someday”, but no one knows when that “someday” will be, and I’ve felt that “someday” was around the corner for years now. It never seems to happen, but at the deepest level of my being, I know that you cannot print yourself to prosperity, and you cannot commit a global financial fraud without consequence. This will indeed end badly someday, and far, far worse than even I can imagine. I think it’s going to be ugly for everyone, even us permabears.”

What books, websites, or other resources would you recommend to those wanting to broaden their trading knowledge?

“I am often asked what reading I would suggest to traders that want to learn more. Well, in addition to my own Chart Your Way to Profits and Panic Prosperity and Progress, here are a few others I really like……

  • The Great Deformation – Simply stated, this is the best business book I’ve ever read. It addresses the political and corporate dealings which have, over the past several decdes, put us in the mess we’re in. I cannot recommend it highly enough.
  • Currency Wars – excellent and easy-to-read volume about fiat devaluation and how countries use it for both positive and negative motives. This is far and away the best book I’ve ever read about currencies, and the way he weaves history into the text makes it fascinating.
  • The Big Short – an absolutely superb account of the mortgage bond meltdown of 2007-2008. Michael Lewis has written another can’t-put-it-down bestseller.
  • Art of the Trade – Unlike anything I’ve ever read; very philosophical, very subtle – – almost sublime – – it helps you get inside the mind of a winning trader.
  • Fooled by Randomness – Nassim Taleb’s superb book about statistics, causality, probabilities, and the market. This is one of the best books related to trading I’ve ever encountered.
  • Trading in the Zone – a terrific guide to trading discipline……almost zen-like.
  • Technical Analysis of Stock Trends – the Bible of technical analysis. A must-read. Its advanced age its evident from its old-timey charts, but every technician must read this book.
  • Encyclopedia of Chart Patterns – a rigorous, statistical analysis of chart patterns and their effectiveness. Brilliant.
  • Education of a Speculator – fascinating amalgam of personality and trading style (even though his fund went belly-up shortly after publication!)
  • Market Wizards – a can’t-put-down collection of interviews with traders. Essential reading and full of fascinating profiles. I used to work for one of these “wizards”, but that’s a story in itself.”

What inspired you to create “Slope of Hope?”

“That’s simple – my wife! Back in 2005, I had just sold Prophet, and blogs were just starting to get popular. I had never done one before, but my wife kept hounding me to start one to talk about my trading. I finally did – here’s a link to my first post – http://tradertim.blogspot.com/2005_03_01_archive.html – and I haven’t missed a day for eleven years now (I’ve lost track, but something like 15,000 posts or more).”

What advice can you offer readers regarding position sizing?

“I described above how I do my own position sizing, but frankly I doubt it’s relevant for many people, since my style of trading (having a zillion tiny positions) is a bit lunatic.”

A lot of traders plateau and have trouble evolving beyond this level. What advice can you give to them?

“I guess two things spring to mind: (1) Read! There are so many fantastic trading books (and sites like this one) that are out there. (2) Hang out! In other words, go find an online community of traders and hang out there. Discuss, share, question, debate. I’m naturally partial to my own discussion group at www.slopeofhope.com – – there are a dynamite group of folks in there, and it’s value-priced at $0.00 forever.”

Now that you have developed into a successful and profitable trader, what are you doing to better your skill?

“I’m trying to following my own advice that I just gave to the prior question – reading and hanging out with traders better than me. I never stop learning.”

Any habits or methods that you use that others might think is unorthodox?

“I don’t think is going to help another soul out there, but I could be wrong. My answer is: Bob Ross. Yep, the painter. I have him playing in the background throughout the trading day. I guess his soothing voice helps calm down my nerves during these crazy markets. If nothing else, that is unorthodox!”

For those who are just beginning to get their feet wet, what advice would you give or direction would you point them?

“At the risk of repeating myself, I’d say jump right into the comments section at slopeofhope.com and say hello to the traders there. I’m always amazed at how generous traders are with other kindred spirits and how much they want to help others learn and grow. It’s truly inspirational.”

Any advice for those traders who are already successful?

“I guess “stay humble”, because there are certainly examples of traders who have had astonishing, amazing, world-famous success (John Paulson leaps to mind) who, shall we say, had a much less impressive second act.”

What would you like your “legacy” as a trader to be?

“If I was able to make charting more popular and easier to understand, I’ll consider that a success. I have a deep belief in the power and purity of charting, and I do not think it should be complicated. Jake Bernstein had a permanent, positive influence on my life through his book. I hope I can do the same for many others by way of my books and my blog.”

 

I want to personally thank Tim for taking the time to share his thoughts on the above subjects with us. I’m sure his words will inspire many.

Follow on Twitter @slopeofhope

Tim’s blog and website: Slopeofhope.com

If you would like to recommend a well respected and credible trader for TraderMentality to contact regarding an interview, email TM@Tradermentality.com or DM via twitter@tradermentality.

Tim Knight

Leave a Reply

Your email address will not be published. Required fields are marked *