Interview with Peter Reznicek on the Speculators Podcast

Peter Reznicek, founder of ShadowTrader was recently on the Speculators podcast. The conversation covered Peter’s approach to trading, morning preparation, qualities of a good trader, qualities of a good trade, how to improve as a trader and much more. I had many takeaways from this episode.

This post contains my notes from the conversation.

WWSHD: The Most Important Concept

When What Should Happen Doesn’t (WWSHD)

This framework should govern your trades, constantly keep asking:

  • What is the market doing?
  • What is the market trying to do?
  • How good of a job is the market doing effectuating that thing?

I think this is the most important concept for traders. When something happens that you think shouldn’t be happening, it is 99.99% of the time will cause a rip in the other direction.

Classic example is a trending morning. Say the market goes down from 9:30 – 11:30. Two straight hours of decline. Then you have the flattening out. The decline starts to consolidate. Then a few things can happen. Either a strong bounce, which can be a short trade as the bounce will likely go up to VWAP or a declining Moving Average, and you short that. That is the easy trade.

The hard trade is the 2 hour decline followed by 3 hours of sideways consolidation, no break in either direction. Consider what is happening. The psychology. If prices are staying low, near the low of day, the majority of players have to be net short, because they brought the market so low from the open, and have kept it low during the midday period. If you are short, you have to be careful, because you have the setup for the market to go up hard in the opposite direction, because of WWSHD. Common sense for what should happen, is that the bear flag will break lower in the afternoon, and very often it doesn’t break, it rips up in the opposite direction.

Good Losses & Bad Losses

Every trader has losing trades all the time. The question is what kind of losers are they, what is the reason behind the losers. There are good losses and bad losses. You have to know how not to take bad losses. Bad losses come from taking a trade that should not have been taken in the first place. A good loss comes from taking a trade that did have all the proper criteria, but just happened to not work.

Approach to Market

  • Utilize the Market Profile analyze directional moves of S&P and NASDAQ
  • Split trading 50-50, directional trades and collecting credit
  • Need every trade I do to be in the same direction as the market, you can’t know what the market is doing without having a good grasp of intraday price action in the Futures
  • 85% Options, 10% Futures, 5% Equities

Products Peter Trades

Focus is on a “small universe” of products:

Weekly Options Plays, FANGMAN + T: META, AMZN, NVDA, GOOGL, MSFT, AAPL, NFLX, TSLA

SPX & NDX Options

Morning Prep

Morning Analysis consists of 85% market profile & 15% technical analysis

Start the day by assessing how you think the broad market will unfold for the day, you want to have an outline of several scenarios of how the broad market could play out for the day.

Deep dive on overnight activity in the ES, focus on overnight activity, is it long/short, where the overnight activity has traded in relation to prior day’s settlement, is trading inside or outside the previous days range.

The objective is for you to develop an edge at the start of the trading day, so you don’t jump in blind at the market open.

Trading Day

Will be on the screen for entire 6.5 hours that the market is open.

Typically have 5-15 trades on for weekly options.

During the day looking for confirmation on what the broad market is doing to answer the fundamental question: do I stay with these trades or do I need to make an adjustment.

Around 3pm will start to review longer-term charts when the market slows down.

Qualities of a Good Trader

Must have a process: what instrument(s) do you trade & how do you trade it.

No process = gambling mentality

Measured in actions, can’t be quick on the trigger.

How good are you at waiting it out? Waiting through the downturn, to be able to bring in all the data points and know that even though your trade may not be going in your favor in the shorter time frame, in the longer time frame the trade fundamentals haven’t changed, and you stay with your convictions.

Qualities of a Good Trade

  1. Trade is in the same direction as the broad market.
  2. Solid Technical Analysis, a specific technical event has occurred that will tell us why we want to execute a trade.
  3. Manage the trade, follow the plan, only adjust or take the trade off when the market tells us to do so.
    • Either our target signal was hit, time to exit.
    • Or a signal is given that the trade is no longer working as planned, don’t play the hope card, kill the trade.

How to Improve

  • Get your non-trading life in order (diet, exercise, sleep).
  • To develop a consistency of profitable trades, keep a log of your trades and study them.
  • Study your losing trades
    • Was this a good or bad loss?
    • Was it my fault? What was the thing(s) that I did not see when I took the trade that should have signaled me not to take that trade.

Overcoming Trading Challenges

  • Identify your trading “Achilles heels”, and separate them, don’t think you can overcome all of them at the same time.
  • Weaken them one at a time, attack each one for as long as it takes until it’s out of your system and then move on to the next one.
  • Find the one that is most egregious, and focus the next day/week/quarter on focusing on eliminating or weakening that issue.
    • Keep records, e.g. on my next 10 trades I will not make this mistake, then can I go 20 trades, etc.

Peter’s Turning Point in Early Days

Not understanding timeframes, and getting out too early from trades. Not having a bigger vision of where things could go. The choppiness in the market is often due to the short time frame batting back and fourth, but the actual trade that you’re trying to do has to be more in line with the larger time frame. Understanding this was a huge turning point.

Advice for a New Trader

Take your mind away from the green and red (P&L), bring your mind to the context of what causes that.

When a new person enters the market, they are too focused on how much money they are making and losing. That’s a problem because that is not where their focus should be. Their focus should be on the process, what is happening contextually that is causing the gains or losses. The P&L is never a good judge of whether it’s a good or bad trade.

Why Haven’t Computers Solved the Market

Why haven’t computers just figured out the market? The inputs are constantly changing. If you boil down success in the market to one thing, you have to know when not to apply the strategy. Computers are not good at that. Success in the market comes from avoiding losses, not from making gains. Instead of asking what should I do to win, ask what should I do not to lose.