Trading Strategies: From SOES Bandits to 2013

Originally published on MoneyShow, December 20, 2012.

John O'Donnell is the chief knowledge officer of Online Trading Academy and has seen traders and their successes and failures from before the dot-com boom through today. In this interview, we talk with John about the characteristics successful traders share and those that fail. We discuss how trading strategies have changed since the days of wide bid/ask margins and how traders are making money in today's markets. We also discuss the education of traders and his thoughts on the best way to learn how to trade from scratch.

Tim Bourquin: Hello everybody and thanks for joining me for another interview today. My guest today is John O’Donnell. He is the chief knowledge officer of Online Trading Academy. John and I go way back. He was one of the very first members of our day trading group in Orange County back in 1997, I think it was John. I don’t know how much time has passed since then. I don’t know how that could be. It seems like it was just yesterday.

John O’Donnell: I remember us meeting with the likes of Tony Oz at Hof’s Hut, and of course, you went on to build that into the Trading Expo industry, and Online Trading Academy, if I recall, was one of the first sponsors of that particular event for you and your partners.

Tim Bourquin: Yes, right!

John O’Donnell: And you know, so, yeah, that brings back a lot of memories. As a matter of fact, occasionally I drive over to that area and they’ve torn down Hof’s Hut.

Tim Bourquin: Oh, no.

John O’Donnell: Our landmark is no longer there.

Tim Bourquin: It’s even part of my introduction video on another site, Trader Interviews. I talk about the sausage at Hof’s Hut, and that’s the reason I had the first meetings there.

John O’Donnell: I think when I first showed up, there might have been maybe seven or eight people sitting around, you know, telling lies to one another and it was a great place to start.

Tim Bourquin: Right. I mean I think back then it was a lot of those traders still, you know, people were doing scalping in and out every day like crazy. It’s changed quite a bit since then. Did you see it changing or did you have any idea where we’d end up today?

John O’Donnell: Well you know, Eyal Shahar founded Online Trading Academy in July, actually we found it as Block Trading in July of ’97. I joined him in January of ’98 and we were day trading “SOES bandits” firm here across the street from UC Irvine, which eventually grew into 150 traders executing about $500M a day of trades. An offshoot of all that, of course, was Online Trading Academy was created literally on the floor of that firm.

Our conversations originally (Eyal, the founder and mine) is that day trading and SOES trading the ability to step in front of the market makers and narrow spreads would grow, that it was a better mouse trap. What we didn’t envision there would be cheap, affordable bandwidth would come to the home so fast. You know, you had to come to a trading floor like that. Remember those were the days of 56K modems had just been released.

But our vision of the future in those days was that the world eventually—markets would eventually trade 24/7. We didn’t know at the time that the school was going to become of the dominance of our business model. We thought we were going to build a better mousetrap and let the public come in and have a flatter, fair playing field against Wall Street professionals. The school was designed to keep the floor full of traders and, of course, we closed the floors, sold it two weeks before 9/11 and converted our model to what it’s become today and we’re the largest trading school in the world today with 35 centers spread across seven countries.

Tim Bourquin: Now when I first came into that office, I think at some point you invited me to come down and take a look and every computer screen was full. There must have been 100 of them there and people were trading on these huge CRT monitors back then. I can probably, you know, count on one hand how many of those people are still around and in the industry. Were people learning back then, do you think that it was just too easy and so there wasn’t a way I mean to duplicate that in today’s—you know, the strategy is completely different to make money now. I mean are there still people making money the exact same way they were back then?

John O’Donnell: Well, there’s a handful that are left over, many of them in those days. You know, there was such big spreads that there was also a latency in data for the people who were trading at home. Those were the early days for Schwab and E*Trade and Ameritrade and Scottrade. You know, they were just really getting their systems put into the homes. In those days, the really early days, I mean TradeStation wasn’t even a broker/dealer in those days, they were still, you know, just a software vendor. So the market has changed a lot and, of course, the markets have become more efficient. The days of day trading where we would technically buy on the bid and immediately offer it out on the ask and garner a teeny spread of 6- or 16-cent spread, I mean we had guys on that floor that was would execute 2,000 trades a day.

Of course, commission transactions were much more expensive in those days. Competition shrunk, the revenue from a commission. Competition, when we went from fractions to decimals, really killed the market maker model. You know, a lot of specialists on the floor of the New York Stock Exchange had to totally revamp their business models as well. I mean today, you can buy a $50 stock and at $50 bid and $50 and a penny offer, there’s just not a lot of margin left in that business. So the whole industry has changed dramatically.

Tim Bourquin: And were the classes that you first taught about entirely just about manipulating that spread? No, manipulate is probably not the right word, but taking advantage of that spread, exploiting the spread?

John O’Donnell: Well, we were teaching technical analysis. We were teaching risk management. We didn’t have a bias as to how long you held the trade. We wanted you to be a profitable trader so that you would stay in your seat and we would have longevity of commission cash flow. We were also making money off tuition to learn to trade but it wasn’t that it was a day trading class. There was a lot of—remember this was the early days of the dot com boom from ’97 until the market really crashed in first quarter of 2000. Those were the solid days of the sock puppet and Yahoo and, what was it, Netscape going public and there was just tremendous price volatility.

So it wasn’t that you wanted to day trade Dell or Schwab or some of these other data issues, it’s just that there was an opportunity there. So we weren’t specifically preaching day trading although when people would migrate out to the floor, they would watch what their peers were doing and emulate their success. What we did that was smart was we took some of our best traders off that floor who were really demonstrating success and we made them our first instructors. People like Mike McMahon and Merlin Rothfeld and Roger Best, Brandon Wendell all emerged from that floor to go on to become to the genesis of our faculty. Today, we have over 65 professional traders on our faculty that literally travel the world in our model and serve our graduates in these global centers that we operate.

Tim Bourquin: And in that first quarter of 2000, I remember that, of course, vividly because The New York Traders Expo, the first one in New York was in February and it was huge, enormous, just buzzing with the excitement of the market at that time and then in March it started to really take a dive when it all fell apart. Did you see traders blowing up on a daily basis when that started to happen?

John O’Donnell: Well, we had two traders, we had those that were successful and those that were successful were wildly successful and then we had those that failed. I think the common denominator regardless of whether the market was going up or whether the market was going down, the common denominator of those that succeeded were that they were disciplined, they were focused, they had a trading plan and they followed it with discipline and you could take the total opposite of those that failed. So whether the market was going up, down or sideways, we have always found in all market conditions that there’s some essential; I call it five essential ingredients you need to dramatically enhance your probability of success.

Even today, I mean the industry is experiencing two groups. There’s the group that gets it and become successful and then there’s the group that seems to never get it and continues to struggle and eventually if the pain is big enough, they stop.

Tim Bourquin: Yeah. What’s the difference? We always hear, well, engineers don’t make great traders because they’re used to preciseness and the market is not precise. So, I mean, you’ve had thousands of traders come that through there so what does make the difference? Is it just a willingness to take, do whatever you’re told? I mean, what is it that makes the difference?

John O’Donnell: Well, let me tell you what I’ve observed. This is January, we’ll start my 16th year with the company and you’re right, I’ve seen a lot of people come through our portals. I’ve seen a lot of them succeed, I’ve seen a lot of them fail, like anything in life. But let me tell you the five essential things I’ve boiled it down to that are common denominators to improve dramatically your probability of success. It doesn’t mean it guarantees it, but it really tilts the odds in the novice’s, newbie’s favor.

1) Get in touch with your buy and hold bias. The biggest obstacle we have when people come to an Online Trading Academy learning event for the first time is that they have been conditioned through culture and media influence to be a buy-and-hold investor, and they have a very difficult time. You know, belief systems are very powerful and if you believe dollar cost averaging works because it worked for you one time, although you won’t admit it failed for you five other times, that people have a very difficult time getting in touch with their buy-and-hold bias.

Dollar cost averaging is part of that buy-and-hold bias, and we believe, we have a psychologist on our team that believes that this buy-and-hold bias is just and dollar cost averaging strategies are simply a part of the denial process. You’re on the wrong side of the trade. You don’t have a plan of when to get out. You haven’t predefined your risk and that’s why you do these crazy buy-and-hold bias. Of course, Wall Street and traditional media really reinforces the whole buy-and-hold bias because they want to be the custodian of your mutual fund.

2) The vast majority of people never short sell. I think the SEC studies indicate as much as 90% of the homes that have exposure to the stock market don’t understand short selling. It’s not part of their day-to-day experience or engagement in the market. Another area on number two, maybe call this 2B, we teach through Sam Seiden’s influence. Sam, as you know, ran an institutional order flow desk on the floor of the Chicago Mercantile Exchange for over a decade and really brought to Online Trading Academy six years ago what we call the supply and demand strategy. I think you really have to understand the supply and demand strategy, what causes price change is the imbalance between institutional supply and demand regardless of the time frame. We all have to embrace that.

Tim Bourquin: Right, I remember. Even in his articles, he talks almost exclusively about supply and demand that it’s not about earnings. I mean, I’m sure he takes them into account but it’s strictly about how much is out there, and how much do people want it and that’s really what drives it.

John O’Donnell: Absolutely. At the end of the day, what institutions do that the general public doesn’t recognize, institutions trade stocks like merchant grocers trade avocadoes. It’s about supply and demand period. That’s what causes price change for virtually everything including supply and demand for Treasury bonds, supply and demand for interest yield on a bond. I mean everything at the end of the day is influenced dramatically in price volatility by the institutional imbalance between supply and demand.

A lot of people make the mistake of looking at candles as a handshake, a confirmation of the handshake between a buyer and a seller on a price chart. At the end of the day, one of the principles that Sam teaches that’s been very helpful to my trading is that the unfilled orders in the supply and demand zones that ultimately move the price. You don’t see the unfilled orders on a price chart, but yet prices moved away from a particular price zone so fast that there are still latent buyers and sellers in the wood pile just waiting for price to retest. Most technical people know that 80% of price breakouts fail. What they don’t know is why does the price fail and what we teach is price fails because prices returned to a supply or demand zone where there’s latent buyers and sellers waiting for them that you don’t see on a price chart unless you’ve been taught to recognize their pattern. We do teach that principle that ultimately is why that breakout or breakdown is going to fail.

3) The third principle we teach is to learn to apply this supply and demand zone theory. What good is knowledge without application? It’s worthless. You know, what good is the knowledge and skill of self-defense if you can’t apply it.

4) The fourth principle we teach is you’ve got to have a written trading plan. All successful traders have a written trading plan. Now this can be as brief as the back of an envelope or it can be as broad, as encyclopedic in scope. But you got to have a written trading plan that’s centered in your risk tolerance level and there’s a discipline to that and we give people templates and we require in order to be a graduate of Online Trading Academy, that you write a trading plan and we give you templates to facilitate that speed of engagement.

Tim Bourquin: Now let me ask you a question about that number four real quick, though. But the trading plan, a wealthy trader once told me, I never enter a trade without knowing exactly what my exist points are either for a profit or a loss. Is that part of that plan?

John O’Donnell: Oh, yeah. Every trading plan we offer involves an entry in a zone, a supply or demand zone. If it’s in a demand zone, we buy it, if it’s in a supply zone, we sell it or we sell it short. It involves a stop loss, and we like tight stop losses. Part of our trading plan is to accept getting a stop down frequently, around the proximal and distal lines of these supply and demand zones that we teach and then having a target and not even have target 1, 2, and 3 and then have a plan on when to exit once a target is reached. That gets customized to your risk tolerance level, where should you put the stop, how broad should the supply and demand zone of price be recognized. I mean all of that gets customized to your risk tolerance level and that’s something that you have to determine. We can give you some guidelines that we recommend, but at the end of the day, it’s your capital. It’s about your pattern of engagement that’s acceptable and we’re all different.

5) Then number five, and number five, I believe, is the most important variable and it starts with a C. I ask people in my seminars what do you think that is and they give me all kinds of answers and almost all of them get it wrong and they never answer the C that I’m looking for that I think is absolutely critical to your success and that is be part of a community. The beauty of the net today is that you have wonderful, rich community tools. You know, we have a room called our XLT rooms, which are only open to graduates of Online Trading Academy where we’re with our graduates two hours a day, 15 days a month engaged live to the market in making buy and sell decisions, collaborating, sharing information among our community of graduates, which by the way is now over 35,000 strong.

You just can’t beat community. Community is the most powerful force. You know, Einstein said the most powerful force on the planet is compound interest. I think the most powerful force for traders is the compounding impact of communities. Because when you have a good day, who do you celebrate with? When you have a bad day and traders have bad days all the time, whose shoulder are you going to lean on? That’s what community is for and the beauty of our model is that we’re one of the few firms in the world that has integrated the best practices of these brick-and-mortar learning centers. You’ve been to our center several times, you know what they look like, they’re computerized classrooms and then combine the best practices of Web-based community engagement live to the market where you have the power of collaboration as a wind behind your sail. You learn faster, you learn more efficiently, and you reduce the error rate of making bad choices. That’s what this is all about.

Tim Bourquin: Let me ask you about that in a chat room format. You know, there are a lot of chat rooms out there, of course, where traders go in and maybe they pay a monthly fee and somebody calls out traders. You know, one of the things I found early on in my trading was when I went into one of these rooms, I always felt inadequate because somebody was saying how much money they made on this and, oh, I just closed out this trade for x amount, and I thought, man, I missed that and I didn’t get that. So how do you take advantage of that community without feeling like I’m missing trades or that person is a better trader and I really should be, I’m not up to par, how do you avoid that?

John O’Donnell: Well, there’s a learning curve to everything. I mean I don’t know how to—when you have a newbie, when you go into a room like that what we’ve done with our rooms is first of all we have segregated them by interest. We have a stock room for day traders, we have another stock B room for swing traders, we have a third stock room for people who are buy-and-hold investors for their pension plan. So first of all when it comes to equities, we have three different choices you can go into, and yes, there are people and if you’re a novice and you’re new, you’re not going to have the track record of success as some of seasoned people in those rooms. So there’s not a lot you can do when a guy says I just made a thousand dollars on this trade and just lost a hundred bucks on this trade.

The most important thing, you feel like you have a real deficit and you get discouraged but you have to ask yourself the question: 1) is that person telling the truth, did they really make a thousand dollars because it’s not like you have confirmation and what did you do wrong. If you got ten people in that room and each of them said they averaged $500 profit on the trade and you lost a hundred bucks on the trade, what did they do that you didn’t do? How was their entry handled versus and it may be you have to sit down and look at the mirror and say am I executing properly, where is my deficit?

You know, the part of growing and prospering is to recognize we all have a deficit to some degree. I mean, you play baseball and not everybody hits a home run every time they bat and trading is like that. So you have to grunt through that and we recommend everybody come out of our class trade in a hundred-share lots anyway. I mean we recommend you start small. You know, even if you got a lot of money there is that you respect the market. There is a significant steep learning curve to acquiring this skill and you’re not going to—part of the challenge of all newbie traders is they have false expectations. They go to a seminar, they go to an Expo and there’s a hotshot salesman in front of the room that tells them they’ve got this magic software that’s going to make all the wonderful buy-and-sell decisions for them and the damage they do is that they create false expectations in the eyes of the newbie user.

The nice thing about our classes and that we’ve always been, I think, very professional in dampening people’s expectations at the start. You know, we’re going to tell them hey, this may take you several years to acquire this skill. Don’t give up your day job, fit this into your lifestyle, start small, grow at a pace you can handle, and be respectful to the market.

Tim Bourquin: Do you have a lot of people come in and say I’ve got $100,000 in retirement, I want to be a full-time trader? I mean what do you tell people is the minimum they need to have and when are they going to be ready to a full-time trader?

John O’Donnell: Well, we tell them you’re not ready. I mean simply because you have $100,000 to come capitalize an account does not mean you’re ready to trade it by any stretch of the imagination. What we would tell people is there’s a very steep learning curve to this. You’re going to need to go through several of our classes. What style of trader is going to fit you? You know, some people come in and say hey, I want to be a swing trader. Well why do you want to be a swing trader? Well I just read this book by John Doe on swing trading and that’s what I want to do. You know, people don’t really know what they’re prepared to do. It’s one thing to, you know, are you prepared?

We start everybody with our pro trader class, which is a seven-day class, eight hours a day, and we lay the foundation of our core strategy on them, which by the way can be applied to multiple asset classes, futures, options, currencies, equities makes no difference and all time frames by the way. Supply and demand is supply and demand, where do I have high probability of price pivot and change is in one of the supply or demand zones.

So secondly, we’d say if you have a $100,000 account, which asset class and one of the best things we do now that we’ve started a new entry level class, which is basically a three-day class, we give them an introduction to all asset classes, options, futures, currencies and equities and we run them through a discovery process. Because each of them have different leverage, each of them have different assets that you can have exposure to long or short.

A lot of people come to us, as an example, and want to trade options but they don’t know anything but the underlying. Well, first of all, you need to understand if you’re going to trade stock options or options on futures, you need to understand what’s causing the price change in the underlying. You know, al lot of the option software companies and broker dealers that specialize on options don’t put people through a strong educational foundation on the underlying. They just teach them how to use these very sophisticated spread strategies and you think you’re prepared to trade options. We think options are one of the most difficult derivatives to trade that there is, especially if you don’t understand what’s causing the price pivots and price changes in the underlying.

So what we’re going to do with somebody that has $100,000, we’re going to bring their expectations down to reality. We’re going to say you’re not ready to trade $100,000. Why don’t you show me you can trade $10,000 and then we’ll step you up in a graduated basis to where you can really handle $100,000 of exposure to the market and then you get into the conversation of how much equity is it appropriate for you to use because, again, one size does not fit all.

Tim Bourquin: Well let me ask you this, I mean some people would say you need to learn how to trade one market really well and do it over and over again. So if you choose E-minis just become an expert at the S&P E-minis but OT has a little bit different feel about that, right? You feel like you should trade several different asset classes so that in varying market conditions you can trade something.

John O’Donnell: Yeah. Our advocacy is ultimately what you should reach for over time. It doesn’t mean you get there day one but over a period of say, a year perhaps two years, that you learn to trade multiple asset classes because many of them are correlated. And what’s happening with the US dollar really impacts the price of equities. What’s happening with precious metals is really impacted precious metals priced in what currency. You know, gold is priced in euros and pound sterling and various other instruments across the world because gold, in fact, is real money that no central bank can print. So there’s a lot of assets that are highly correlated and our advocacy is we’re what we call a mastermind community group, which is a membership for elite members of Online Trading Academy that have mastered the skill of trading multiple asset classes. As a matter of fact, we have a special room for those people online where they get together and share information. We don’t really mix them with novices.

In answer to your previous question, we try to segregate our rooms. We have certain rooms that are just for newbies, just really green traders that barely understand the language of trading. Then we have more advanced rooms for people that are more experienced in some for multiple asset classes and some just for futures traders and some just for currency traders, and specialization is fine. I mean, it’s all about your personal choice but in a perfect world if we had our advocacy fulfilled among our whole population of graduates, we would like to see them learn to trade multiple asset classes not because we get multiple tuition but because there’s multiple opportunity in having exposure 24 hours a day, five days a week.

Our vision of the future, back to your original question, when we started the trading floor is that we would evolve to a world and we are fast evolving to a world where all financial instruments will trade 24/7. There will be peer-to-peer computing. The role of the broker will change to be that of the settlement agent. As soon as the bureaucrats or regulators of the world get together and we’re fast moving, that you’re going to have a broad access to all kind of financial instruments across the world that trade on something that looks like an exchange, probably look like NASDAQ in its structure.

Tim Bourquin: All right. Well we’re just about out of time but, John, great history of the trading here, and where you’re at with OTA now. If somebody wants to take a class and find out what you’re all about, where should we send them, where should they go?

John O’Donnell: Well, just go to our Web site. It’s Everything is laid out there, all of our classes, all of our curriculum, all of our prices. We have a free newsletter. We have some free Webinars there that everybody can subscribe to. There’s a lot of information about our company and about the markets free there on the Web site. We also have a radio show that’s called that Merlin Rothfeld and I host and that’s all free. It’s also produced in high-def TV quality and so you just go to and can get information on it as well.

Tim Bourquin: Excellent. Thanks very much for that and listeners, we’ll link to that in the notes for today’s interview with John. Thanks very much for joining us today, John. Thank you for your time.

John O’Donnell: Well thank you, Tim, and thank you for being a pioneer in this industry and you’ve helped educate and expose trading and investing to hundreds and hundreds of thousands of people and when the trading Hall of Fame is built, Tim, there’s a place for you.

Tim Bourquin: I appreciate that. Well, maybe we’ll revisit in another 15 years and talk about how it’s so different in 2013 or 2012, so we’ll do this again.

John O’Donnell: Well let’s not wait 15 years. Let’s do it a little more frequently.

Tim Bourquin: Sounds good.

John O’Donnell: I’m getting old.

Tim Bourquin: Thanks, John.

Free Class
Online Trading Academy logo