Kenneth Reid is an active futures trader and also coaches aspiring traders and professionals worldwide. He first traded stocks but made the switch to strictly futures finding benefits and an easier path to success with a focus on one market. He is a competitive tennis player and uses principles from sports psychology in his coaching practice. Dr. Reid completed his undergraduate work in engineering at Columbia University and has a Ph.D. in clinical psychology. He works with private traders through www.daytradingpsychology.com and serves banks and hedge funds at www.trader-analytics.com. We sat down with him to learn more.
How did you get started in trading?
In the 1990’s I was in my 40’s and had some money and time on my hands, a dangerous combination for an entrepreneurial person. The stock market was heating up and I became fascinated with it. Having an experiential learning style, I figured I could learn to trade by trading, so I jumped in.
The day I made $5,000, my feet never touched the ground. But, I still remember the devastating feeling I had the day I lost $30,000. In retrospect, I had no real method, no mentor and no business putting on trades.
After studying the equity market intensely for about five years, I landed a job as a stock picker and commentator for a thriving financial newsletter. It was January 2001. I was hired because I had a very different perspective about the market than my boss. I could see the bear market coming. It wasn’t just intuition, I had learned to use technical indicators and they told a scary story.
Now, what is your trading approach?
I became a technical trader in the 1990s, but I also had a graduate degree in psychology and I found that the two perspectives were complementary. I naturally personified the market. I was able to “tune in” to its state of mind, read its moods and perceive some of its hidden intentionality. This helped me sell rallies short during the bear and buy the dips in the subsequent bull. This dual perspective became my standard approach and I still use it on a micro-scale trading futures.
Do you have a favorite futures market that you trade and why?
Currently, I trade only the Nasdaq e-mini futures contract (NQ). I do think it is important for most traders to pick a single futures market and marry it. Like a person, markets are complex and evolve over time. It takes years to really get to know one. The way I see it, the better you know it, the better you will do.
Why the NQ?
It’s just crazy enough to feel normal. I suppose it reminds me of my family growing up.
What are some of the advantages of trading futures?
I think everyone appreciates the leverage, the low margin requirements, the fast fills and the one-tick spread. Of course, these things come with additional risks as well.
What are some psychological challenges futures traders need to master?
Futures are zero sum markets, which have very different behavioral characteristics than equity markets. The participants are different and the ‘game’ is different.
How is it different?
I have found that equity trading relies on standard technical analysis, which is a trend-following approach, whereas in the futures markets mean-reversion strategies dominate. Futures traders ‘fade’ standard technical setups.
What is the most common mistake you see among futures traders?
Professional futures traders are excellent risk managers, but at the same time they are not afraid of risk. They know their job is to put on risk, especially when others think the situation is too risky. They mostly trade levels and don’t sweat the small stuff. Amateur futures traders, however, trade way too tight and way too late, so they get stopped out by noise and by simple stop-run games.
What are characteristics that you see among successful futures traders?
The best futures traders trust their method 100% and therefore have the ability to stay in a trade to target. They have the patience to let the market work for them. They trade smarter, not harder. Some pros might take two to three trades a day whereas most amateurs over-trade.
How do technological developments toward trading from the cloud and mobile trading offer benefits to the futures trader?
Having a light-weight cloud-based app on one’s phone makes it easy to monitor positions, adjust stops, limits and check balances.
What are your thoughts about the current commission environment for retail futures traders?
The legacy commission environment places an inordinate burden on aspiring futures traders. Tradovate is breaking new ground with their business model. It’s radical and could change the entire industry for the better.
How have the markets changed in recent years and how do retail futures traders need to adapt to this?
The shift from pit trading to screen trading has been a huge change for the futures markets. On the one hand, this has leveled the playing field. Mom and Pop Trader can now get the same information at the same time as professional speculators, the ‘locals’.
On the other hand, algos are now responsible for a significant percentage of futures volume and these mean-reversion bots are designed to take advantage of various all-too-human tendencies, such as buying or selling breakouts or assuming that sudden moves are significant and will continue.
Tell us about how you help traders.
I understand trading from the inside and in great detail, but in the end, my psychological training is what helps others. I don’t have a one-size fits all coaching program. I always start out by asking questions and listening. There are at least 50 ways one can go wrong trading futures. Some traders need help with technicals, while others have a workable method, but are coming up against psychological barriers. Sometimes the fix is quick; and other times a trader needs ‘rehab.’
It’s hard to see ourselves as we really are, we are creatures hidden in plain sight. So I generally include personality profiling for everyone, which helps traders understand themselves better. For this I use professional psychometric instruments, as well as my own proprietary model. I have a database of the personality characteristics of very successful hedge fund traders and use it to help clients cultivate very specific character traits and behaviors correlated with trading success.