Combining Elliott Wave and Price Action for Swing Trading

TraderInterviews.com: Hello everybody and welcome back to TraderInterviews.com. Thanks very much for joining us for another show. Our guest today is Don Miller. We interviewed him a few years ago - maybe two or three years ago - about his trading styles and strategies. We're going to get an update from him about what he is doing in the markets as a trader and also, he's got a blog that he shares his thoughts on as well. So Don thanks very much for joining us.

Don Miller: You're very welcome. Glad to be here.

TraderInterviews.com: Well, for those who don't know you or aren't familiar with you, talk about your background and how you got into trading in the first place?

Don Miller: Well, I've been trading about a decade. I became a member of the Chicago Mercantile Exchange back in 2004 and that was a point in my trading career where I'd really made the full transition from equities to exchange traded funds and finally the futures. Since 2004 I've reall been focused one hundred percent on trading the future so mostly online trading the S&P E-mini. I do a little bit of work with the German DAX and some of the European indices but pretty much my bread and butter is the S&Ps. I do everything from provide market liquidity to short-term speculation based on certain opportunities that I might see.

TraderInterviews.com: We've heard that term a lot and I usually ask for the newer folks when you say "provide liquidity" for the markets what exactly do you mean?

Don Miller: Well, essentially what I'm looking to do is enter at what I would call a "wholesale price" and exit at the "retail price" and that may mean taking everything from a pull back on an uptrend or a downtrend and entering and exiting as the trend continues. I'm usually buying on a bid or selling on the ask either right at the inside market or once the market starts moving - and in doing so hopefully, if I understand the patterns well enough and trading psychology and all that then I'm able to profit fairly consistently over time while at the same time allowing other people who want to actively buy or sell the market to have someone on the other side of the trade.

TraderInterviews.com: It sounds like for a lot of those folks that's where pros make their money - basically taking the other side of the amateur's trade.

Don Miller: It is - and not only gaining the spread, which is probably a small piece but it adds up over time, but that certainly is a small piece of the income. You hit the nail on the head which is especially when we look at the Fall of last year taking advantage of trader emotion. I was mentioning in my blog the other day that I was thinking back to some of the Fall trades where I would call 10 points a "scalp."

TraderInterviews.com: I remember some of those days. Now how would you describe your overall philosophy or your approach to the markets. Are you a technician? Do you look at fundamental news? What is it for you?

Don Miller: I would classify myself as a discretionary trader that basis his decisions primarily but not solely on technical analysis. The analogy I like to make Tim is that I'm riding in an airplane and I've got a pilot up front I want that gentleman or woman to be using his or her experience. Certainly I want that person using all the indicators and taking that into consideration but I don't want that person flying on auto-pilot. So when I look at my own trading it's a lot like that. I use selective judgments anytime I decide to get in or out of the market. But that judgment is largely based on technical analysis so I use a combination like many traders of trend indicators, momentum indicators everything from moving averages to stochastics to tick movements to watching what the VIX doing on a given day and all of those indicators really combine to paint a picture of the market. That's largely the basis for what I do but at that point its up to me on personally deciding what to do in terms of getting in or out.

TraderInterviews.com: What moving averages specifically do you like to throw up on technical analysis charts?

Don Miller: Well, I use 15 period. As I tell a lot of people it really doesn't matter in my view you know what timeframe people are using or what settings you know if it's 15, 20 simple exponential. All I'm trying to do is get a general feel for whether the market is trending or not and if it is it really provides a pretty nice channel outlined and so again I mean I happen to use 15 period moving average but you know that's not to say that that certainly is the only way to look at it.

TraderInterviews.com: And do you find that by trading just the S&P Emini many are focusing mainly on that they'd be able to kinda get a feel for the behavior of it on a daily basis.

Don Miller: Absolutely. And it's interesting because I spend quite a bit of time over the past couple of years really trying to conquer the rhythm if you will of some of the Europe indices and my strength, my comfort level and frankly my profitability all really lies within the S&Ps. It's something I think where if you specialize in whatever you're pursuing that you just learn to live and breathe it basically and I hate to be corny and so you become a part of it but I mean there are certainly times I think when someone is trading "in the zone" whether it's on a daily basis or a prolonged period where you really feel like you're dancing with it and you can feel the market's pulse and that's certainly the case. That's not to say I don't have my bad days and challenges and all that. But by and large it's the market that I'm the most comfortable with.

TraderInterviews.com: So a lot of people think that in order to kinda get that pulse, that feeling that you talked about you really need to be in front of the computer during market hours at all times. Is that the case for you?

Don Miller: I am able to monitor the market quite a bit. I do have, as many traders have, with non-market obligations that does take me away from the screen at times but by and large I'm able to monitor the market and see what's happening and to your point I think it is important that the market really is a flowing river if you will and you know it's kind of funny because I think if you start taking your eyes off of it at times or pull yourself away more than you should you sense that you get out of rhythm and at least in my case it's kind of hard to pick that back up again if you spent too much time away from it.

TraderInterviews.com: So how do you then say like everybody's away from the market you need a vacation. How do you - just coming back - what do you do?

Don Miller: Well, the way I like to put it Tim is I like to swim in the river rather than watching it from the shore and I know it sounds corny but what I mean by that is I am a big believer and just getting in there rolling your sleeves up again and your hand is dirty. Now that's not to say if I come back to the screen that I'm all of a sudden doing something but by and large and since I'm pretty good at providing liquidity without getting hurt a whole lot I like to get in there and start getting a sense for the field. What's the volume? What's the pace like? Pace is the word I use a lot and it's really important I mean even more so than patterns, more so than volume you know. What is that rhythmic beat to the market, if you will? And so the best way that I can get a handle on that frankly is often getting in there and trading and it might be with light sizes at first. A good example I think is at the beginning of the day where I might do some GLOBEX overnight session trading and I maybe active but I maybe you know trading maybe 15% or 20% of my normal size just to try to get the rhythm, get the feel. I never want to put myself in a situation where I've got what I would call "trigger lock", a fear of pulling a trigger. That's typically not a problem for me and I'm sure I incur some cost in doing so. I'm sure I incur a commission expense and at times profitability, loss in profitability but to me that's a necessary trade offered to be in there during the active times and not to have that fear factor approach.

TraderInterviews.com: How many trades are you executing a day and your average for holding periods?

Don Miller: A holding period is probably a little bit easier to describe. I pretty much use 1, 5 and 15 minute charts and I'm looking for extremes, contraction to the extremes or pull backs with the trend and depending upon what timeframe might be in play, that would go a long way in telling me how long I might stay in the trade. If it's a five minute charts and I'm just trading a very small pull back gosh it maybe a couple of minutes. If it's a longer a larger timeframe chart like a 15 minute chart that might be a little bit longer. Typically I'm taking the trade off as soon as the market is moving in my direction at least to some extent and again depending upon the chart formation and the perceived opportunity sometimes leaving more on for that. In terms of volume and contracts traded and that kind of thing it really varies. I've been mentioning in my blog this year so far that January has been very light for me and when I say light I've got a couple of days which have actually been days were I traded under a thousand contracts round term - which for me is very pretty light.

TraderInterviews.com: So what does that mean in terms of your size per trade? What's your typical average there?

Don Miller: Well, it depends. I typically I'm ranging anywhere from I'd say 15 contracts up to over a hundred and at times I'm much heavier than that. Last year was a good example where the market was so darn fertile. Once you got a handle on the rhythm which it took a couple of days to get knocked around to do, where I was actually heavier than that at times - but that's a typical range. Last year if I recall looking back I think I traded 540,000 contracts over the year.

TraderInterviews.com: Wow. Okay.

Don Miller: Divide that by 230 some trading days 250 actually if you exclude vacations which I rarely take. You get a pretty good feel its up over two grand a day typically.

TraderInterviews.com: So do you consider yourself a pretty strict day trader I mean would there be incidents where you would hold it overnight?

Don Miller: I never hold overnight. I always close positions out at the end of the day. And while the term day trader has a lot of negative connotations I think over the last decade or so people they think about people quit their job and that kind of thing. Yeah, I like to call it intra-day trading where certainly I'm trading over the course of the day. By the end of the day I am absolutely flat every night, every week, every month that does not change.

TraderInterviews.com: So one of the questions that always comes up Don when we get emails from listeners is they say, you know I don't know where to set my bar in terms of what successful. Is it a specific dollar amount? Is it a percentage of my account? How do you judge the success of the markets for yourself?

Don Miller: That's a very good question. I'll answer in a couple ways. I've always looked at it as running a business and while rate of return certainly is a benchmark that makes sense at times, I'll always been a bottom line guy. I've always looked at the market in terms of okay, what do I want to make in terms of income. By looking at it that way I think what happens is hopefully as your account grows over time you're able to - it depends on how old you are too - but I'm 47 and I've gotten into the point of life where I don't want to be putting on my capital at risk as might done in the past. So what happens if I stay focused on bottom line then I'm likely risking less of my capital over time and your rate of return may drop as a result but you know what you're trying to get out of the market may stay very consistent. Last year is a good example because what I did, Tim, is really for the first time in my trading career, I basically developed some self-imposed targets in terms of both bottom line and return, and I've really never done this before. And I went into 2008 basically saying, okay Don, let's give it your all this year and let's go fall out everyday, buckle yourself up in a way that you've never done so before, stop the teaching, stop the articles and all that and just have out it and the results is indicated in the blog well I don't want to the point because I'm in 2009 and I focus on the future the results were very much exceeding my expectations.

TraderInterviews.com: So I've got to ask because I know listeners are saying why didn't you just ask the question? Are you willing to share with us what you made last year?

Don Miller: I will. It's on the blog and as soon as the word escape my mouth I'm going to forget about it but I started with about $700,000 as my trading capital. I earned over 1.6 million dollars and I earned over 200% return on the starting capital.

TraderInterviews.com: Fantastic. I appreciate you have the honesty in sharing that with us. It's rare in the industry and I understand why. Look I don't tell people how much money I make but in the sense though it's an important thing to know to understand who we're talking with.

Don Miller: Well, the reason why I mentioned that and certainly I encourage anyone who's listening this to check out the blog not for what we just discussed but one of the aspects of the trading industry that's always been a pet peeve of mine if you will is you know I've not seen a whole lot of... I don't wanna say honesty because there's a whole lot of great people in this business, but what I've tried to do both in the past and in the blog is really provide my trading diary day after day, week after week, month after month and talk about the hard knocks, the tough days, the battles, the mini slumps and so I'm very candid in talking about the tough times. I had a couple of rough spots last year. There was one day I remember I took a very large hit, it's well documented. It was as the market was starting to climb the VIX finally get itself over 50 and then it just broke into its own new rhythm that no one had ever seen in the history of the market - for months - as the VIX climbed eventually up over 80. And a few of us got knocked around a little bit at first and I was very candid in terms of talking about that but because of that you know certainly I have no problem sharing the good times and the results. It was a very satisfying year personally. I benchmarked myself against the top CTA performances for 2006 and 2007 as published in Futures Magazine and I used that as a benchmark and it was a self-imposed goal and I had some fun over it.

TraderInterviews.com: Yeah. Let me ask you when you had those hard times what do you say to yourself? Do you say, look my strategies are not working something is wrong here and you tweak it or do you say it's going to happen I can't avoid this I have to just get through it.

Don Miller: That's exactly how I look at it. You know I look at trading as being a skill, it being a mental sports just like there maybe probability in terms of certain patterns paying off I believe there's a great deal to be said for probability of a skill trader being on this game or not being on this game. I am a trader that takes advantage primarily or market emotion. I will take the other side of that trade when the market is getting out of hand, when people are bailing - whether its shorts or longs - I'm typically there on the other side and I make a lot of my keep that way. Last year and you may recall some of these days Tim when the market was down you know six or seven hundred points (The Dow) and then it opened up and it continued to plummet the next morning another 200 before. I mean these were moves that no one had ever seen before.

TraderInterviews.com: So how do you know when the market is changed permanently? If there's such a thing and that you need to readjust completely? How do you know when this is temporary? How did you decide that for yourself?

Don Miller: I think what I look at last year was I don't think that the strategy changed or needed to change. I mean if anything certainly you have to get use to the larger swings. No doubt about it. But I told other people I think what happened last year is all of the trading strategies and premises and methodologies that have been placed for years still held true. The market still is a collection of mass emotion. It's just that the emotions went haywire. So the underlying principles of day trading I think remain the same but the extent of the movement is what changed and it took me a day or two with these gigantic moves to start figuring out, "okay, nothing really has changed except the extent" and once I figured that out then you know the September, October, November timeframe last year it was the best three months stretch I've ever had in trading ever. You know I think we're getting back to your point about needing to work through things when something is not working. I think your bottom line tells you when something is not working but that's really the only adjustment I had to make last year and I know a lot of good traders last year talking my broker got hurt last year because they'd never seen the market with the VIX over 50. Never mind 60, 70 and 80 and so there had to be some adapting on the adapting on the fly and I guess I was fortunate enough to figure it out before I got hurt too bad.

TraderInterviews.com: How long did it take you Don in your trading career to get to this point where you feel like and I'm assuming you feel confident that you could make money and pretty much any market environment now would be okay at least on an annual basis (maybe not on a daily basis), but how long did that take you to get to that point.

Don Miller: I've told people over the past year that I really think it has taken me about a full decade to get to a point where I've seen everything and I wouldn't have really thought that until we went through what we saw last Fall. I've made several analogies on the site, Tim, to what I call the Chinese Bamboo Tree. I'm not sure if you're familiar with that at all. It's a story of a tree that basically takes several years to develop its root structure. It's working underground. You see nothing on the surface and then what happens is, I think it's in the fifth year or so, the tree finally breaks ground and then it literally grows hundreds of feet over the course of a very short timeframe (I think it maybe a month or two). And when I look at my trading career certainly I was successful in the past but the extent of which last year happened is largely like that tree. There was just a lot of building that had to take place, you had to see things year after year after year and sharpen yourself to a point where you could get yourself in a situation where you could maximize opportunity. I know a lot of people backed off last year in the fall. I did exactly the opposite. I went for it and I just felt that what I have been through for the past nine years or so, was for some reason that I can't quite explain, preparing me for what happened last Fall and it was a dance with the market that lasted for me about three months. It was really incredible.

TraderInterviews.com: So for the traders who are listening out there who maybe are in year two or year three to hear that it can take 10 years can be frustrating. Any suggestions for those folks about staying track and getting through that period and getting to that point.

Don Miller: A good question. Certainly you know I'm not saying it's going to take everybody 10 years and again keep in mind I've been fairly successful prior to 2008. But I also had a lot of other commitments. I was asked to do some teaching and writing for the industry so my mind and my focus certainly wasn't a hundred percent on what it could have been and I think that if traders are focus 100% on the market then maybe that ten years becomes four or five or whatever. I guess I look at this business as I would any other skilled profession like a surgeon, maybe a professional golfer, maybe an airline pilot where it does take a certain amount of experience there's the old saying when you're stepping out on an airplane you see the pilot a little bit of gray at his temples and normally you think that's a pretty good sign!

TraderInterviews.com: Yeah. You feel a little better.

Don Miller: He's got some experience, he's been through some storms. He's maybe had a couple of close near crashes and has lived to talk about it and that's exactly the way I look at this business. So I think you know my only words to people that might be getting frustrated out there is if you really think this is your calling and by the way it's not for a lot of people. The failure rate is very, very high. But if you think it's your calling and you've got a way to stick with it then I think the only other thing you need is time.

TraderInterviews.com: Now looking ahead for 2009, we'll finish up with this question. What do you see ahead for you? Are you setting the bar higher? Does this bar go higher now? You had a tremendous year last year how do you up that or meet that? I mean it's going to be tough. Don't you think?

Don Miller: I don't know yet. It's funny because last year I actually went into the year with a million dollar goal and that was the matter exceeded I think it was by September and so I raised the bar again, I raised it to a million at a quarter and blew past that that and of course the score is what it is in terms of what I ended up at but it has left me. It actually zapped a lot of energy out of me last year. I made a lot of sacrifices in other parts of my life and I'm not going to do that this year. So I've started so far for 2009...well, I said that I was going to trade for fun initially. But as competitive as I am I think that intention as good as it may have been is starting to be replace with the competitiveness that field me not only last year but in the years beyond or years prior. So I don't yet know. You know I've got certain targets in my mind. I'm not planning on sacrificing as I did last year. I'm not, you know, in terms of bottom line I'm not looking for that again. I'm very fortunate Tim to be in a position where I am right now. I've seen a lot of people earned strong keep whether it's in trading or poker or what have you and they lose it all. And it is so very easy to start that downward spiral. Maybe to end here one of the things I did last year and one of the things I want to continue to do this year and one of the big impacts or one of the biggest reasons for what happened last year is I go on everyday thinking I'm trading from behind. I have a mental chart on the front page of the blog that basically shows a massive draw down that shows an equity chart, spiking to a peak and then a real quick downward move and I look at that everyday and that's how I really believe my equity curve stands. What that tells me it's like you know the past is past and irrelevant. I found myself always trading well over the course of my career after drawdowns. So I'm trying to get myself in a mental state of everyday. I think I'm coming back from that drive. So in terms of 2009, I think 2008 was a losing year. I really do. And when I decide to trade harder, I've been trading everyday but I've been trading fairly lightly. When I decide to step it up its going to be with that same mentality. It's going to be as if last year never occurred but see what the market provides this year and it will provide the answer.

TraderInterviews.com: Well of course we'll link to your blog and the show notes and description on the website but for those folks that are in their car or mowing the lawn is we heard from one of our listeners last week see you blog and site so they can go there.

Don Miller: Yeah. It's pretty easy. It's donmillerjournal.blogspot.com. donmillerjournal.blogspot.com or you can Google Don Miller Trading. It will pull it up pretty quick.

TraderInterviews.com: Well, Don thanks very much for your time. I really appreciate your frankness (if that's a word - frankness) - your honesty with your trading strategy. I think this interview will help a lot of people with goals to shoot for. So thanks for your time.

Don Miller: You're very welcome. It's great to hear from you again Tim.