Mike Mc Mahon Interview

Mike Mc Mahon

Passion and enthusiasm are the "watch" words of Mike Mc Mahon. He brings both to his trading and his teaching, with almost 35 years of experience in the market, as an investor, a trader and a licensed Commodities broker. In this interview, he explains his views on the markets and his recommendations on how to learn to trade.

How many years have you been involved in the markets?

About 35 years overall and highly concentrated work for approximately 25 years.

What makes you a successful trader?

Belief in myself is my best trait. Over the years I have developed a discipline that works. I follow it religiously. This gives me the confidence to do the right thing in virtually every situation. That confidence allows me to be more decisive. And the better decision-making affords me a very nice return. I guess you might wish to distill that into a simple comment of “Discipline is my success secret.” I return a couple of hundred percent typically on my risk capital. 1999 was a very good year for me with a 600% return. I trade with about 18 - 20% of my financial assets, the rest being in long-term portfolios. I am strong equity right now, but I change my portfolio to match the market character. 

Which technical analysis tools do you find the most useful?

I use quite a variety in my trading. First, understand that I employ momentum, swing and position trading in my arsenal. Needless to say, the advent and proper interpretation of Level II is my main source for decision-making in momentum trading. Your question leads me to swing trading, which by definition is based on technical analysis. I use a standard RSI in conjunction with a very simple approach to support and resistance lines. 

I analyze generally with 15 minute charts and watch with 1 minute charts. Market indicators help with decision support for entry and exits. I keep a close eye on S&P futures, the Tick, the TRIN and the market index that I am trading in, typically NASDAQ Composite.

One of my better tricks is looking back 90 days for high/lows approach on NASDAQ stocks. These tend to breakout (up or down) more frequently than Big Board stuff. By using a simple consolidation lines/channels, I look for confirmed breaks through support or resistance and act accordingly. I am currently studying Fibonacci analysis (Fib Nodes, confluence, 3x3 displacement) which is fascinating and appears fruitful...but I am by no means an expert in this field. To re-answer your previous question...another winning trait is that I fully realize that I am in a learning mode. There is never a day that goes by that the market does not present me with a new challenge or a different thought. You need to be flexible and open-minded to achieve.

What weaknesses have you overcome that have improved your trading?

The single biggest weakness I had was in not allowing my positions to fully develop. I was taking money off the table too quickly, while there was still a potential profit. This lead to the next problem of ego. After getting out early, I would convince myself I was right and not get back in immediately, again foregoing profits that eventually were there. In order to over-come this problem, I set myself the task of loosening my trailing stops (in swings and positions). This was quite a change and took a couple of years to get used to. I now will allow a profitable position to erode a bit to confirm it has finished its run. While I am not maximizing my profits, the ability to allow the trade to develop to its fullest has more than paid off, even if I am leaving a little on the table. Needless to say, this is not the strategy I employ in momentum trading. There, my stops are very rarely over 37 cents and generally as tight as a nickel.

What minimum attributes do you believe a person should possess before considering becoming a trader?

Qualitative: Decisive, disciplined, non-egocentric yet individualistic (tough combo), bold (not foolhardy), and enjoys the trade (You have to like this, you have to have a passion for it).
Quantitative: Several years of Market study (to be successful, not to start), appropriate risk capital (with little emotional attachment to it), ability to devote time to a rather harsh mistress (no less than 16 hours a week in research and study – does not include actual trading time).

What knowledge or training does a potential trader need at the minimum before beginning to trade?

There are three ways to learn. The first way is the school of hard knocks – trial and error (expensive error!). The second way is the self-study method of reading every book and listening to every guru and then placing money at risk. And, the third way, getting a formal education, which must include discipline, risk management and capital preservation. Some may think those are the same thing but they are very different when inspected.

Of course, you must learn about the market, the influences of the political arena, indicators, sentiment, world financial influences and human psychology. Certainly, there must be training in the new tools available, Level II reading and interpretation, technical analysis, understanding that there is manipulation in the markets (it is not just supply and demand), etc. There are other topics that need to be understood. For the beginner, you do not have to “Master” them all, but you must be familiar with them.

As you progress, their importance becomes more clear and you then start to use them more effectively. Of them all, my personal beliefs and strategy tend to place more import on the psychological aspects. The market works on perception – right or wrong – perception of danger, perception of profits, perception that someone else perceives differently. Having a working understanding of these aspects allows me to anticipate where the herd is going. Ultimately, the best education is the experience of being in the market. Formal education simply gives you some protections and a few tools to get started with.

Longevity is the real need. Those without training squander money, get caught up in trying to get even, doubling up on the next trade, etc...and, lo and behold, just about the time they “get it”, they no longer have any risk capital to work with. They become “wannabe” traders that almost made it...they just didn’t last long enough. Formal education informs them of the risks, sets a true framework of discipline to work with and develop, and teaches them how NOT to lose money as fast, thus, allowing time and experience to do their job.

Must the trader view his/her trading like a “business” to be successful?

Absolutely. This is true on many different levels. Psychologically, if it is not treated seriously, then it must be “play.” Play is wonderful, however, you tend to do foolish things during “play.” You can pretend, you can be someone you are not, you can afford to be emotional, both exuberance and depression. None of these things are winning traits in trading. It must be treated like a serious venture.

You must realize that there will be trading losses, trading profits, trading taxes, trading expenses. If you are not organized, punctual, determined and aggressive, your venture will fail – trading, selling ice cream or writing software. Because of my psychological makeup, I need to trade on a floor. While this is not necessary for all, and in fact many successful traders do trade remotely, shielded from the “noise,” I have learned, however, that for “Mike” to work well, I need this little discipline (heck, it is actually a Big Discipline).

Of the successful traders that you know, what characteristics or qualities make them successful?

Pretty much the ideas and traits I have already mentioned. Decisive, bold, ambitious, non-emotional (or at least trying), disciplined and (did I mention it) disciplined. Most of the traders that I know who are returning handsome profits all have developed a discipline and style over time. All have a “plan”, a strategy....yet to a person, they are all flexible to stay with an ever-changing market. By the way, most are very tight-lipped on exactly what their strategy is. Both trading strategy and discipline can be very personal.

Of the unsuccessful traders that you know, what characteristics or qualities make them unsuccessful?

Simply take the reverse of the last question and the question on minimum attributes. I think fear is the mind-killer. As I noted, beginners lose, some lose big, some small but all lose. It is getting over that emotional pitfall, “I am a Loser,” and simply realizing that nothing good comes without work and setbacks.

Fear also works on decision-making. Too often a trader sits and watches a price move up the ladder, all the while saying, “this is going up, I should buy ....maybe I will let it confirm... yeah, it is going up, on the next dip I am a buyer.” Needless to say, this person eventually bought it at the top, only to see the position turn over on them, reinforcing the defeat by the fear that disallowed the decision in the first place.

There is no straight road to success...even Mr. Gates had his ups and downs. Under-capitalization is another big killer, as I already mentioned. Surprisingly, over the last year or so, I have seen less of the “Get Rich Quick” attitudes in our classes, so either we are getting more serious students or the media has had a salutary effect on short term trading.

What are the most common mistakes made by the neophyte trader?

Wow, alphabetically or numerically. Sorry, the novice and apprentice are faced with countless challenges that must be overcome one by one. I can break it down into two groups – analytical risk and execution risk – I may be oversimplifying but let’s start there. Again, most see a price going up and they buy. They need to see that a price “Will” go up but buy it as there are still sellers, i.e., as it is about to find support and turn around. This is very difficult psychologically.

I have just demonstrated another problem with bias....for the second time I have used a “buy situation.” Most neophytes do not see anything but up trends. They are biased to the long side. Again analysis has failed them because they do not “believe” that the market can go down and that they can make money at the same time. Execution has become a major issue.

The public is waking up to the fact that they are not necessarily getting the best fills in a timely fashion from their brokers. Thus the hue and cry for more self-directed trading that online brokers offer. Many do not understand the simple differences of Limit vs. Market orders, what the spread (and therefore the load) is, etc. Additionally, with the advent of the Direct Access Trading Platforms, simple keystroke or mouse-clicks get many into trouble.

I tell a story on myself from a few years back: I was short 1000 shares of CSCO before it split. I was bucking the market and thought I had a retracement I could take advantage of (needless to say, this was a momentum trade). The momentum turned on me and I quickly closed the position...sold that sucker fast...oops, now I was short 2000 in an up market. I did not panic, I changed my share size to 2000 and sold it off....I stared in disbelief. I had done it again! (Yeah, Joe Professional, huh?). I finally changed it over to 4000, took my left finger in my right hand and pushed the BUY button and finally got out with about a $700 loser...all due to a lapse of concentration and poor execution.This was a classic beginner mistake, not buying to cover a short position.

Beginners often buy the wrong stock...they have a chart they are looking at but the wrong symbol in their execution box. The bad news is that most will freak out and close the position. Often, the mistaken position will move in the desired direction because the entire market was moving, it was in the same sector, etc. When that kind of mistake is made....don’t be too hasty, look it over and decide. Panic and rash decisions can be devastating.

In teaching Scuba diving, one of our tenets is “Think and then act”....it cuts down on panic. A major mistake that beginners make is in over-trading. It is fun and exciting. However, even with little losers and few moderate winners, commissions and fees add up. They do not take the time to analyze what they have done (why the trade was good or bad) and end up with a large cost for the day without learning anything. Not learning is the biggest mistake.

How critical are the mental aspects of trading?

Incredibly crucial. Again, for me, psychology is a major aspect. Therefore, understanding yourself first is vital. How do you react in times of stress? Are you decisive – both ways, in and out? Are you happy to be doing this? (It is amazing how some are drawn to trading but eat antacids all day...what’s the point, you should like what you are doing). Can you be mentally tough enough to let losers go...or do you fret over them? Again, the mental aspects are there or they are not....you can learn to read charts, you can train to “see” momentum, but if you are not mentally fit, you will lose.

Do you recommend that paper trading, simulated trading or other training tools be used by a beginner before actually trading?

Absolutely, but as everything else in trading is double-edged, so too is simulation. Simulated trading allows the novice to see the workings of the market, if they pay attention. Seeing price action and the movements of the market participants (Market Makers and ECN’s) is invaluable. Simulation also helps establish execution skills...picking the right trade route, the right buttons or clicks to complete the trade, etc. The two bad things about simulation is that it is not LIVE. I said two...the simulators I have worked with all fill the orders easily or with great difficulty. This is not how the real world works.

Unfortunately, the bias is to “easy fills.” This gives a very false impression to the novice, they simply do not know any better. The other half to the LIVE problem is that there is no money at risk. Again psychology comes into play. It is amazing to me that many have risked large sums of money in business or in investments with little emotional response; yet, the very aspect of trading with real money will cause sweaty palms and heart palpitations. Simulation, paper trading or “play-dough” is very necessary but needs guidance and insight from an experienced trader/trainer to avoid these pitfalls.  

What steps should a new trader take to minimize his/her risk of losing capital? 

Every one he can. Seriously, there are some simple steps to minimize risk that all should employ, especially the beginner.

  1. Keep share size small until you are sure....novice or experienced...test the waters, add to winners. Increase share size slowly with experience and comfort.
  2. Decide and if it doesn’t perform as expected, decide to get out...simply put, “When in doubt, get out!”
  3. Set stop limits....both on the individual trade and for the day. I already mentioned my “in trade” stops but how about this as a daily quit point - “1% of risk capital down, quit for the day.” This tells the beginner that if he has $50,000 buy power he should quit if he loses $500.00, whether it be in the first few minutes or near the end of the day. Stop Losing! Find out WHY.
  4. Leave internet stocks, ipo’s and volatile stocks to the pros. Yes, an internet stock may soar 20 points but it can fall that easily too. I have seen too many accounts melted down because of a mistake in judgment. When these guys move, they really move quick and the novice tends to focus on the problem, not the solution. There are plenty more methods...avoid trading during major announcements, don’t add to losers, be patient, learn the characteristics of one or two stocks and don’t stock hop...to mention a few.

What should a trader do to improve his/her skills and performance?

Learn everyday. Make a plan and stick to it until the plan does not work. Then modify the plan and work it again. Write down every trade with “why you took the trade” as the most important aspect. Then review and analyze why it worked or didn’t. Write down a list of disciplines, review it every week and re-write it. Writing is important, you tend to fool yourself with mind games, but if it is right in front of you, in print, it is hard to lie to yourself. Start simple and develop your disciplines over the course of your trading endeavors.

I have found some strange disciplines in my life – I stop trading for 1 week when I have had 30 days of wins ( I tend to lose focus and think too much of myself). I do not trade the opening (Clearing)...the old adage holds true for me....”amateurs open the market, pro’s close it.” I do 1 week (minimum) of study and research before I will take a trade if I have been away from the market for more than 2 weeks (like a vacation). Ultimately, discipline will be the most benefit to the trader...new or old.

How important is having a mentor or a person closely supervise the new trader for the first few months?

Invaluable, however, the old joke is that if I were to help you with golf, do you really want to shoot a round in the low 130’s. The mentor needs to be seasoned and successful. It is tough enough for the neophyte but bad leadership or poor habits will only contaminate them. They are new, fresh....old pro’s have habits suited to their particular personality. I believe mentoring is wonderful but it should be done by a “teacher” who understands the needs of the student. Our XLT program provides excellent mentoring support for traders..

Do you recommend that a log book be kept by the trader of all transactions with notes on all trades?

As noted above (no pun intended), log your trades and LOOK at them. It does no good to write them down if you do not go back and review and analyze. If you think it is too much writing, then I offer that you are over-trading. As experience and skill develop, you will find alternate methods for reviewing trades.

Do you recommend that traders use limit orders on the buy side and stop losses to prevent large losses?

This is a tough question in that it is too broad. There are many times in a running market that a market order is preferable to a limit order. This is also modified by the method of trading – online through a broker or with Direct-Access Trading (DAT). DAT affords you greater transparency and control. However, once dealing directly, market orders are almost unheard of as the use of ECN’s require Limit orders only. Again, most experienced traders would never limit themselves to one execution route. As for Stop losses, absolutely they need to be used. Again, different methods arise. Some will actually set mechanical stops with conditional orders while I almost exclusively use mental points. I also don’t tend to fool myself anymore – kind of like cheating at solitaire. Novices need to use both right away. They are the beginning of the self-discipline. They are also the most often breached.

Would you discourage or encourage a person who believes that trading stocks is something they want to try?

People are curious. Many things attract them to trading. The mystique of being a market mogul. The appeal of fast action and high risk. The deep hidden hope that they will strike it Rich. All of these, and host of reasons more, lead people to the Online Trading Academy. We are happy to answer their questions and, we hope, they honestly answer ours. We constantly strive to warn, disclose and educate these inquisitive people about the risks of this market and its suitability (or not) as a profession. Some immediately see the hard work involved and leave, with their hopes of quick profits destroyed, others want to press on. These few we try to serve to the best of our abilities. Finding a teaching, active trader is difficult. The cadre we have all enjoy teaching for teaching’s sake. Sounds awfully noble, but there are real rewards other than dollars and cents. To answer simply, yes, I encourage people to find out if this arena is for them, but I also stress that is not for all.

Are there any books you recommend that are a “must” for the beginning trader?

I have provided a short list of books that I have read and found valuable. There are many other fine publications, articles and whatnot that I would have the beginner read. Many of the higher-level books are just that...too advanced conceptually without the basic foundation of the trading world.

Note: These books can be purchased from Our Traders Library Bookstore and Amazon.com!

I also recommend the following:

  • Investor’s Business Daily
  • The Wall Street Journal
  • Barron’s Financial Times
  • BusinessWeek
  • Forbes
  • Inc. Magazine

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