Interview with a Trader: Inside the Mind of @RobInTheBlack
Robert Smith, better known to most as “@RobInTheBlack” or simply “Rob,” began his adventures in the Stock Market at the young age of 15, where he was a runner on the Chicago Board Stock Exchange (CBOE). He started in 1980, working for Merrill Lynch Institutional holding butterfly spreads in the Houston Oil/Texas Instrument pit (back then, Texas Instruments made calculators!)
Rob later began full time on the Chicago Stock Exchange (CHX) in 1989. He was a member of the exchange for 16 years as an Independent Trader. He was also a Technical Research Analyst for several firms, as well as both a listed and OTC specialist.
In 2008, he began writing the “In The Black Newsletter,” which later became the In The Black VTF @ www.T3Live.com. Rob also has a YouTube channel where he shares extensive insight and charts on very regular basis. Make sure you check it out.
Rob’s generosity with his time toward helping tradings develop and sharing his knowledge with the trading community around him is what drew me to interview Rob. He took some time to share his thoughts with me on some topics:
What first influenced your interest in the stock market?
“My Father was a trader from the 1950’s through the early 1990’s, so I worked on the floor with him.
Often times we would have lunch with two of the older traders on the floor. I loved to hear their stories. Those two gentleman were on the trading floor during the crash of 1929!“
What methods/strategies have you pursued that have failed for you in the past as a trader?
“The allure of trying to catch reversals off tops or bottoms. My strategy defines how to do that now, but fighting trends looking for reversals led to my largest losses.”
Who are influences/role models for you that are relevant to trading and why?
“Welles Wilder, a true pioneer in attempts to quantify statistical data, had a big influence on me.
Outside of that, I learned everything I know through pouring through 2,500+ charts a night to discover things for myself. Although I respect anyone that can make a consistent living trading, I personally could give a rat’s ass what anyone else thinks about the market (with all due respect, of course)!”
When/what was your “ah-ha” moment? What was the breakthrough?
“My biggest breakthrough came on a fed day in 2009. As on most Fed Days, the market was flat coming into an interest rate announcement. When the rate cut was announced, the market spiked up, reversed lower, and then screamed to new highs.
Although I had seen this action many times, I finally was able to figure out why that would happen. Basically, good news causes new longs to rush in as tight stopped shorts cover. Within an instant, the trade becomes crowded long… which creates an order ‘vacuum’ to the downside, as the first wave of profit taking has no bids to hit, causing the price to reverse lower than when the announcement came out. As longs scramble to get out, they are joined by a new wave of short sellers believing they have witnessed a false breakout. Once again, the trade becomes instantaneously crowded, and the order ‘vacuum’ to the upside has now expanded it’s range. This in turn causes the reversal back in the original direction with more force, as the news was actually positive.
At that point, I believed I was looking at a broadening formation, although every book I owned at the time claimed that was an extremely rare pattern. I began to draw inverted triangles on every chart and was stunned to discover that this was the true nature of price action. I discovered that without question, price discovery occurs in a continuous pattern of broadening formations on all time frames.”
How would you best describe your trading style?
“My Trading style is quantitative, based on three universal truths of price action:
1. Inside bars are price equilibriums, as the price failed to make a higher high or a lower low, which no one can dispute.
2. Time Frame Continuity, meaning that anything trading above it’s opening price on the monthly, weekly, daily, and 60 minute basis is presently moving higher, which no one can dispute. If the price is going to go lower, it would have to go lower on the shortest time frame first.
3. Price discovery works in a continuous series of broadening formations because it HAS to. Breakouts succeed or they fail. Much like the scenario I described above about Fed Day, this price action occurs on all time frames and can be followed across several time frames. The importance of this knowledge is that it shows us where and why we are at risk of a reversal, as the trade may become crowded.
These three principles are the foundation of my strategy, as they answer the basic questions every trader should ask themselves. These questions are:
What direction should I be trading in? Time frame continuity.
Why would the price begin to move or continue in one direction? Inside bar equilibrium breaks as well as other actionable signals.
Where am I at risk of a reversal and why? Any higher high or lower low with a change in short term time frame continuity because any higher higher or lower low runs the risk of the trade being crowded as the wrong side no longer has any reference points to go off of.”
What key rules do you apply to your own trading?
“I adhere strictly to the rules of the 3 universal truths of price action stated above.”
It’s well known that you review every stock from the S&P 500 on a nightly basis. What can you tell traders about your reasoning behind this? What benefits or edges have you created for yourself by doing so?
“My belief was that through complete immersion of viewing the charts, that an epiphany would occur. I would study the dollar and percentage gainers and losers every night as well, to see if anything was universal to those moves. This also gave me an advantage of knowing exactly where to be in any sector at any given time. Knowing what was strong and what was weak at all times was key before developing a bonafide strategy.”
What trading communities are you involved in? What benefits do you see from them that you can share with readers?
“Most Importantly, my Church. As it relates to trading, I became a baptized Christian and within 6 months discovered the universal truths of price action and developed the strategy. As I know my gift was divine, I didn’t want to keep it for myself, and chose to show as many people that would listen to me the importance of these discoveries.
I went to T3 Live, as they are the largest Prop firm and set up with a chat room with a large community. Since then, I have trained hundreds of people worldwide, and continue to do so every day. It is my firm belief that trading is a two person job. As anyone that trades knows, individuals make mistakes, break rules, and miss things as they attempt to do analysis and execution at the same time. That said, I train people and direct the trading on a headset 7 hours a day.
My personal trading is mostly geared to option credit spreads with a heavy focus on the decaying VIX products, mainly $VXX. This allows me the freedom to direct the rest of the trading. I take my job very seriously, as I know I am responsible for 100’s of people and their families.
After being on the headset for 7 hours a day, I make a short video each night highlighting actionable signals we will be watching the following day. On the weekends, I make a more comprehensive video of the overall market conditions as we know per the strategy broken down from broader averages, sectors, sub-sectors, to individual stocks. We have an excel spread sheet of all actionable signals on the various times frames, as well as customized software to track during the day. I also do a night session for two hours once a week to make sure everyone has a full understanding of the strategy.”
What do you look for in the stocks that you trade?
“Simply put… time frame continuity, the amount of actionable signals in force, and the position the price is in given the broadening formation series across several time frames.”
What do you feel sets the greatest traders apart from the rest?
“Consistency. Most hucksters boast about huge profits they made during volatile conditions. To me, a great trader is consistent over time in all market conditions.”
What can you tell readers about your risk management approach?
“Plain and simple: I get rid of losers almost immediately and look to press winners.
All too often I see traders trimming out of winners while holding on to losers. You’ll hear the axiom “No one ever went broke taking a profit”, to which I always reply, “No one ever got rich by selling to soon either!” Ditch the losers, press the winners. It is very important to remember that for the same reason that losers tend to get worse, winners will also tend to get better.”
What trading moments make you the most proud?
“I take the most pride in watching my traders develop and succeed. I have over a 60 year span in the ages of people that I’ve trained. I’m very proud that I have been able to teach any one form, any age or walk of life, how to succeed by recognizing the true nature of price action.
I also take special pride from the ‘In The Black Newsletter’ I wrote on May 3rd, 2010. Although still in the infancy of understanding the universality of the broadening formations, I combined the charts of the Dow, VIX, and $VXX to describe a potentially catastrophic set up for the markets. In no way would I ever claim to have called it, I simply described that the set up was there should things combine to play out. The Flash Crash occurred 3 days later.”In-The-Black-May-3-2010-1
What moments make you the most upset?
“What frustrates me the most is that I have made these discoveries, explain them over and over, and yet still have to listen to the fallacies of what is called classic technical analysis. Pattern recognition is not a Rorschach Test. All price action can be quantified.”
What books, websites, or other resources would you recommend to those wanting to broaden their trading knowledge?
“I haven’t read a book about trading in over 20 years. Hold on, scratch that. I recently read an old book of my father’s called The Technique of Short Selling by Mark Weaver. Very insightful stuff for being written in the 1940’s.
Other than that, I will continue to pound the table for people to explore the universal truths I have discovered. However, for those that continue to want to read and explore other sources I would suggest you constantly question what you are being told. Whatever you hear or read ask yourself, is this quantifiable or is it subjective?
It is very important to know that when you are reading charts, you are looking at a visual representation of statistical data, what you see is irrelevant without that knowledge. How many times will you hear someone say a chart “Looks Good” or “Looks Bad”? That is complete subjectivity and usually is said because the last sale is near recent highs or lows. To which I always reply, ‘You know why it looks good? Because it’s on the highs. Do you know what else looks good on the highs? Everything!’ But I digress. I urge everyone to explore my work and if you can disprove any part of it, you’ll be doing me a great favor.”
What advice can you offer readers regarding position sizing?
“I can’t speak for everyone’s risk parameters, but what I can reiterate is the importance of pressing winners and cutting losers. To be fair, this is easier said then done with swing and longer term holdings as you are continually exposed to overnight, over week, over month, over quarterly with earnings risk. However, with day trading, these two simple principles are imperative for success.”
A lot of traders plateau and have trouble evolving beyond this level. What advice can you give to them?
“I would say that would be more psychological than actually true. Although it may seem like a plateau has been reached, it’s more likely that market conditions have changed. More often than not, traders fail to realize that their strategy will still work over time, so long as they stick to already proven successful rules. Often times frustration sets in during periods of consolidation, leaving many too exhausted to continue executing until a real move occurs. Many successful trades occur on the 3rd or 4th attempt, thus is the nature of price discovery through broadening formations.”
Now that you have developed into a successful and profitable trader, what are you doing to better your skill?
“Outside of helping others to profit from my discoveries, now it’s down to programming and data mining results to identifying and automating the highest probability set ups.”
Any habits or methods that you use that others might think is unorthodox?
“The domination of the broadening series continues to meet the most opposition. People have it so ingrained from years of classic technical analysis being pounded into their heads that it’s hard for them to comprehend. Simply stated, when people tell me something is a head and shoulders for instance, I say, ‘Then it would trade lower 100% of the time?’ Logic would state that if that’s indeed what I’m looking at, the price would trade lower every time. The response is usually The same. “Nothing works 100% of the time.”
The stone cold fact is that price only has three possible directions, up, down, and sideways. Therefore, any so called pattern is irrelevant. The price will either break higher or lower and continue or reverse, period. Or, the price goes nowhere and forms an inside bar on a longer term time frame, thus an equilibrium. Price action does not have a choice in this matter, it must resolve based on those scenarios.”
For those who are just beginning to get their feet wet, what advice would you give or direction would you point them?
“I highly suggest they come see me @ www.T3Live.com. One of the things I’m most proud of is that everything I say makes sense, to anyone with common sense. Understanding how and why price action works helps to comfort any trader. This is a business of statistics and psychology. Until fully automated, it is my firm belief that trading is at least a two person job. Once trading criteria is agreed upon, one person watches price action and the other executes. This reduces the chances of mental errors, rule breaking, etc.”
Any advice for those traders who are already successful?
“Most importantly, I would say to quantify your trading. There are many a successful intuitive traders out there, but their style of trading will die with them. To have an educated “gut” style of trading (if you will), takes far too long to master and simply isn’t necessary with the technology readily available. Define what works for you with specific criteria, then automate it.”
What would you like your “legacy” as a trader to be?
“First, to God be all the Glory, as I’m a humble messenger and servant.
I would like to see our business completely revolutionized by the discoveries I’ve made to the point where classic technical analysis is seen for what it really is, rudimentary at best and in many cases, outright false. You don’t have to look far to see that I am right… I mean, have you ever seen any industry with as much information on how to be successful with a worse track record doing it? This alone shows you the rampant fallacies.
When I began my career, people would say “Technical Analysis is an art form.” From day one I set out to prove that price action can be statistically quantified and the rise of the machines has proven me correct. I would like to be remembered for the sacrifice of time I made to reach these discoveries, as my family, friends, and even my personal health took a back seat to my work. Most importantly, that I am using this knowledge to help others as opposed to succumbing to the rampant greed in our industry to keep it for myself.”
I want to personally thank Rob for taking the time to share his thoughts on the above subjects with us.
Follow on Twitter @RobInTheBlack