TraderInterviews.com: Hello everybody and welcome back to TraderInterviews.com. Thanks very much for joining me with a discussion with another trader this week. We're going to be speaking with Leigh Drogen and I found Leigh on Twitter, like I found a lot of good traders recently. And we're going to talk to him about his trading style and strategies and how he approaches the markets each day. So, Leigh, thanks very much for joining me on the phone today.

Leigh Drogan: Hey Tim, thanks for having me.

TraderInterviews.com: Well, describe yourself as a trader. I always start with that question. What kind of trader are you?

Leigh Drogan: It's a pretty philosophical question. My main thing is risk management. And when I step into a position, I always need to know what my risk is. I always quantify it and have a target. So, I trade a lot of momentum strategies. I run a momentum book and I run a long-short strategy, which takes position on a more quantitative basis as well.

TraderInterviews.com: Okay. Excellent. Well, let's dig into that first part, the risk management because everybody says risk management is important in trading, but everybody kind of has its own little definition, their own kind of personal definition what that means. How do you determine risk? How do you determine those profit targets to determine how much risk reward there is?

Leigh Drogan: Well, when you step into a position, I like to use a 2 ATR stop. A lot of research has been done and when you're swing trading, how much room you should be giving a stock. And based on that 2 ATR stop, you can kind of see where your entries are and what the risk reward for your trades is. So what I do is I take a 2 ATR stop and I normalize all position sizes throughout the portfolio so that every position has the same amount of risk. Now, I also layer in my positions so that one unit of a position has one unit of risk, but I may take several units in a single name.

TraderInterviews.com: All right. This is good. I'm sorry. I love this because this is probably the most specific answer I've heard so far. So, I really want to drill you on this if you don't mind because a lot of people just say, "I look for a two to one ratio or three to one ratio," but truly I don't think a lot of them even know what that means sometimes. So, the 2 ATR, I like that, that's so specific, the two average true range for people listening, is that on a daily basis or a monthly, what is it?

Leigh Drogan: It's on a daily closing basis. Well, I guess all ATR is closing, but yeah. And then what I do is I use a 20-period moving average on that ATR.

TraderInterviews.com: OK. Great. And when you say a unit of risk, can you kind of describe that a little bit?

Leigh Drogan: Right. So a unit of risk would be if my portfolio is a million dollars and I'm willing to risk 1% on that trade. What I would do is, the position size would be equal to where 2 ATRs would equal 1% of the portfolio. So I would be risking $10,000 and that would equal to 2 ATR on the position.

TraderInterviews.com: OK.

Leigh Drogan: That's how you come to the position sizes. And then across the portfolio, positions are normalized so that I'm really trying to capture the essence of trend instead of just a pure price movement. So, a stock or any asset that moves an average of three or 4% a day is going to have obviously a lower total asset value waiting in my portfolio than the position that normally moves 1% a day, which I'll take up a larger size on. And then what will happen is as I gain conviction for those positions, I'll add units of risk every half ATR either up if I'm long or down if I'm short.

TraderInterviews.com: All right. I like this. So, this keeps you from being too exposed in any one position that moves a lot.

Leigh Drogan: Exactly.

TraderInterviews.com: All right. This is good. So, if I'm an individual trader, maybe I'm not managing money in a portfolio, but I have my own portfolio, does this work for an individual as well?

Leigh Drogan: Well, I think the idea of using the average true range to position size is something that everybody should be using. As I said when you have, let's just say, you have a stock like I'm in a position; actually in the momentum book I'm in a position Rhino right now. And I mean the stock moves four, five, 6% a day, and obviously it's going to be a smaller position than a stock like even Amazon doesn't move that much in a day. So, the Amazon position is going to be bigger as I don't want to be exposing myself too much to a smaller position.

TraderInterviews.com: Got it. OK. So, when you say risk management is probably the most important part of your trading because when I said, "How do you describe yourself and you immediately talked about risk management." Why do you approach it from that point instead of finding great trades? Does that make sense?

Leigh Drogan: Yeah. I mean, I think those are really one and the same, and that a really great trade is where you stalk the entry and you come to the conclusion that your risk reward is in your favor. And when I talk about risk management, it's really the sense that I can stalk a trade and have everything lined up and it looks perfect. And if you don't manage risk well, you can take a terrible loss on that trade even if you've done everything else right. Now, in the reverse situation, you can do everything wrong with an entry to a position, manage risk well and still come out with a win. So, I think that's the most important part. And when I talk of risk management, that position sizing is part of that risk management because for myself I know that if I'm swinging around with positions that are too big, I'll emotionally be affected by that and I don't do well when that happens.

TraderInterviews.com: OK. So talk about a typical day for you. How are you deciding what to trade, what to get out of, what are you looking at each day?

Leigh Drogan: So, in the momentum book I run about, it's a maximum of 30 positions at any one time. And then during certain markets, I'll take that down. In the morning, I come in and I run a few scans for what's moving that day. I have a list of about 150 stocks that I keep that are really the candidates for that portfolio. Stocks that show good earnings, growth, good momentum, a lot of all time highs, and I'll review where they move the day before. And then once a week, I usually really bear down and go through about 500, 600 stocks that are kind of in my universe. And then the day is pretty quiet normally. I don't trade a lot as Jesse Livermore said, "The big money is made by sitting not selling or trading." I don't remember exactly what the quote is, but I let the trend work for itself and there are always, I guess, except for last fall, there are always good trending stocks, and if something is breaking down and it's not working in the way that you feel it should, you move on and there's always another candidate.

TraderInterviews.com: In the momentum book or portfolio, what kind of things are you using to judge momentum on those trades?

Leigh Drogan: I always like to see a stock above the 200-day and the 50-day moving average. Entries are usually taken between the 50 and the 20-day moving average. I like to take positions while the stochastics are low and rising off of a base. And I like to see good momentum on the moving average convergence divergence, the MACD.

TraderInterviews.com: OK. How many trades a day do you find that kind of match that criteria?

Leigh Drogan: I sold portions of six positions today. I sold one total position. Last week, I didn't do much at all, and in the week before that, I did a bit of buying. I usually trade between one and four times a day in that momentum book sometimes less, sometimes more. And then the long-short book, which is more quantitative trades infrequently. And then I'll take some one off day trades when I see a nice opportunity in the market and swing trade as well. I caught a nice run in Goldman Sachs along with a lot of other people recently and that was kind of a one-off trade that set up real nice. I was able to quantify the risk and take it.

TraderInterviews.com: Now, were you just a trader in your own account before you started managing money, and then is it family and friends kind of money or you're out there?

Leigh Drogan: It's family and friends money now, and I'll be looking to expand that in the future, but yes, I mean I've been trading to an extent or another since I was about 13 years old, and it was private money and now it's spread out a little bit.

TraderInterviews.com: Do you trade differently now with other people's money than you did with your own account?

Leigh Drogan: No. If you end up thinking like that, I think it largely affects your mentality and the one thing I tell people when they do give me their money to manage is that they have to understand what strategies I run, what the risk profile is and what they can expect out of me, and giving your money to somebody as much about that person as it is the strategies that they run and that you have to trust them.

TraderInterviews.com: A lot of traders I think once they have some success think about managing money because they could be very lucrative to do that. Is it something you suggest that anybody who's had some success for a while give a try to?

Leigh Drogan: I don't think it's for everybody. I think I've met people who it's completely out of their mind that they're even managing other people's money, and they're able to kind of block that out so well and be so removed from it. And it takes a certain personality and I can tell you honestly that I don't have that greater personality to be able to do that, but I am able to do it in a certain sense and I've been relatively successful at it at being able to divorce myself from that part of the business. I think you have to know what you want out of it, and go into it with kind of an open mind and a clear mind and an open heart, understanding the pitfalls and the travails of managing other people's money because you're not only dealing with the money, you're dealing with them.

TraderInterviews.com: Yeah. Especially when it's friends and family.

Leigh Drogan: Of course.

TraderInterviews.com: Absolutely. Well, let's get back to your trading strategies. You talked about the 2 ATR on the stop side, how are you setting profit targets on the upside?

Leigh Drogan: Well, for the momentum book, what I do is I like to peel off little pieces at a time as stocks get too far away from their 50-day moving average. And then what I'll do is I'll increase the position once they come back in towards those moving averages. I like Holy Grail setups so I kind of use those balances off to moving averages to increase position sizes.

TraderInterviews.com: What do you mean by Holy Grail setups.

Leigh Drogan: When you have a rising or falling 20-day moving average or any 20-period moving average, you'll often get a stock that consolidates then runs and then kind of consolidates back into that 20-day to moving average, and if you see it kind of forming a base off that 20-day moving average, you can take a position off of that and set your stop under that average. And if it fails that average, you've kind of lost the trend. Also you don't want to see the price moving, slamming into that average. You want to see it kind of slowly coming down into it. And I can say that I'm kind of a disciple of the AlphaTrends Trend Alignment School of Trading.

TraderInterviews.com: Brian Shannon?

Leigh Drogan: Right.

TraderInterviews.com: Yeah. A lot of people I'm running into follow Brian. He's legitimately a successful trader. I like him a lot, and I like his style, I agree.

Leigh Drogan: Yeah. Brian is not only a successful trader, but he's also an excellent teacher and those two things don't come together in the same package very often.

TraderInterviews.com: No. You're right. It's difficult sometimes to find traders who are, A, good traders and, B, know how to talk about it.

Leigh Drogan: Right.

TraderInterviews.com: Are not always the same. That's kind of the same thing. All right. So, you find these stocks that come in slight kind of slowly into almost like a boat coming into a harbor, retracing into their 20-day average, not slamming into the dock, but coming in nice and gently and then moving back out to sea I guess. It is kind of the analogy that comes to mind, and what kind of time frame? How long does it typically take for this kind of trades to come through?

Leigh Drogan: It takes three or four days for a stock to really form a base off of that moving average. And that five-day moving average becomes very important as when it forms that base, you'll see that that five-day moving average kind of comes flat, and then you'll see the price movement hop above that five-day and on a strong stock, you'll see a large volume off of that breakout, and then it'll come back to retrace that five-day moving average, and then it's really off to the races. The perfect example I can point to you is what happen to Goldman Sachs last week. It was just a textbook move and I think a lot of people kind of caught it very obviously.

TraderInterviews.com: You mentioned 20-day moving average, but then you just mentioned the five, so there's something you'd play off a five-day moving average as well or in conjunction with that 20?

Leigh Drogan: In conjunction, I won't take a position below that five-day moving average, and that's kind off attendant of Brian's trading. You don't want to be taking long positions below that five-day because the momentum just isn't in your favor. Once you get that five-day moving in the positive direction, you really got the buyers on your side or if you're sure you got the sellers on your side.

TraderInterviews.com: All right. So, it comes into the 20, it kind of bounces off then retraces back once. It sounds like you wait for that one retracement before you confirm that it's going to bounce?

Leigh Drogan: Yeah. Or I'll take a little piece, and then I'll take the rest as it retraces.

TraderInterviews.com: What indications will it show on a chart that will say it's made its move; it's time to start peeling off.

Leigh Drogan: Time to start taking positions off. Yeah. Once it gets too far away from that 50-day, when it gets too extended, and you can tell just by looking at the chart that a stock has run a little too far, needs to take a rest and needs to work off some oversold indicators. And I'll look at the stochastics and if those are showing extremely oversold/overbought readings, I'll start to kind of peel little pieces off at that time. And I guess the best example, one that I guess isn't exactly great for me to be showing, but it's a great example of how I trade is what's been going on in Trina Solar, which I have over of 50% profit in from the original entry, but I've been peeling little bits off along the way, and I mean honestly just sitting would have been much more profitable, but I'd been able to kind of reduce my risk as the stock has gotten too far away and then it's come back into the moving averages and kept on going in. I believe looking at the chart right now, it stayed above that 20-day moving average now for almost two months.

TraderInterviews.com: And what's the stock symbol there?

Leigh Drogan: TSL.

TraderInterviews.com: TSL. OK. So, it sounds like you're really kind of playing this ebb and flow of the market. You've gotten pretty good at reading that and making trading decisions.

Leigh Drogan: Yes. Paying attention to the indices is important and that, I guess, saying it's 60% of stock movement is determined by the overall market. And that kind of dictates when I'll try and really load up the book with exposure. I really like to keep between 10 and 15% cash at most times. And then if I get a really good whoosh down I'll kind of load it up and then start taking pieces off little by little as we go. But the actual entries and exits to the stocks or the assets themselves are really dictated by the charts.

TraderInterviews.com: And how did you come up with this basket of 150 stocks you said that are kind of your basis for what you're watching?

Leigh Drogan: So the screens that I run are really momentum-driven and I love stocks that are obviously making new all time highs because they tend to trade on technicals more than fundamentals, and they're much easier to determine the trend because you don't have to deal with long term resistance levels. So, a lot of those come from that kind of ilk. And then a good portion of them are literally just the best relative strength stocks over the past 30 days, and you'll find that usually those keep on running. What's moving will usually keep on moving until being met with the unequal or opposite force.

TraderInterviews.com: That sounds like a little CANSLIM strategy.

Leigh Drogan: CANSLIM, it's IBD. I honestly don't look at the IBD list just because I don't like to kind of infect my own thinking with a list, and then once you start looking at lists like that, you get into a whole kind of, "Is it on the list? Is it not on the list anymore?" And that thing kind of screw with your head a little bit, but it definitely is from the CANSLIM IBD School of Trading.

TraderInterviews.com: Now, I know when you're managing money, the benchmark or the bar seems to be beating the SNP. That's changed a little bit over the years, but it always seems to come back to that. But as a trader, do you have goals for yourself about how much money you want to make doing this maybe not from the management, but just on your own account on the trading side?

Leigh Drogan: I try and produce positive Alpha and the SNP is the benchmark. I'd like to produce at least a thousand basis points of Alpha a year. If I do that, I'm doing my job and I'm trading well. And in a down market, really paying attention to the fact that there aren't enough good trending stocks to really be allocating capital to is extremely important because in a down market, it's really my job to reduce exposure to that indices and produce positive Alpha by not being exposed to the market as much as I would in the market like this, which you need to have if not full exposure almost full exposure too. There are just too many positively trending stocks out there. I mean, I only hold 30 positions and I could hold 60.

TraderInterviews.com: But the volatility has been tremendously low lately. Have you had a tough time outside of that basket trying to find opportunities?

Leigh Drogan: No. To be honest, for a trend trader like myself, a stock that's going up and keeps going up is excellent. There hasn't really been anything in the last couple of months to shake you out of positions. It's really been excellent for the fact that I haven't really even had to trade that much. I've been able to sit on positions and produce positive Alpha and it's been good right now and the key will be when this market turns and it will eventually to recognize that the trend in what I'm looking at the basket of the universe of stocks that I'm looking at that the momentum has kind of disappeared and then that will be the time to reduce exposure.

TraderInterviews.com: Do you look at your portfolio overall to try to see that or are you having a look at individual stocks in there to see that momentum shift?

Leigh Drogan: You're right. The portfolio really does speak for itself in what kind of return it's producing, but it's everything and you really have to be looking at an entire universe of stocks to get a good feel of how the market is trending and how specific issues are trending within the market. And a lot of that is if I see that momentum waning throughout the entire universe of stocks, I'll start to become much more defensive, but right now there are too many good positions to be taking.

TraderInterviews.com: Has your trading strategy changed or have you adjust it much in the past few years?

Leigh Drogan: Of course, when you run a momentum book when the market completely falls apart like it did in 2008, you have to recognize that this is not your time and walk away; reduce exposure and walk away. And that kind of trading that I do kind of saves you from trying to pick bottoms and do that sort of stuff. I'm definitely not a value guy. I'm definitely not trying to catch a falling knife, but the long-short strategy that I use which is a little more quantitative is kind of built on the Turtle Trading School, in that you're buying breakouts from the 55-day high and the 55-day low trading in each direction, and that has worked extremely well over the last couple of years because we've had two extremely good trends in both directions with a host of different assets.

TraderInterviews.com: And are you just as inclined to short something as you are to go long?

Leigh Drogan: In that strategy, yes, of course. We've seen a lot of excellent opportunities, and when you're dealing with that kind of quantitative strategy, you really kind of have to put aside your economic bias and that sort of stuff to purely focus on price and entry signals and not be biased towards the market.

TraderInterviews.com: Now, you did mention before that if the trade is managed well, the entry price is less important, but do you have some rules for yourself for entry execution to make sure you're getting a price that you're comfortable with?

Leigh Drogan: Be a little more specific in terms of?

TraderInterviews.com: Well, I guess so if something is let's use another trade example here, like on the Goldman Sachs, maybe you could talk about that and through that trade kind of talk about how you decided what price you wanted and how you got in.

Leigh Drogan: Sure. So, I had been stacking Goldman Sachs for a few weeks as it kind of I'm looking at a 30-minute chart spanning about two months right now and it had made a low after a gap down on November 27th. It ran back up into a descending trend line, then it came back down and made another low on December 8th. And those two lows showed a nice momentum divergence. It then ran back up into that descending trend line, back down again undercut that low from December 8 just by a dollar showed another momentum divergence. And then it proceeded to break through that down trend line, and this is where I really got interested in it because both the daily and this 30-minute chart had been showing a nice momentum divergence and a nice break of that down trend. It slammed up into the 20-period moving average and then kind of slowly came back down on the top of that descending trend line. And this is where I was really stacking it for an entry.

TraderInterviews.com: A question just came to mind. When you say the 20 are we talking the simple or exponential moving average?

Leigh Drogan: Exponential.

TraderInterviews.com: OK.

Leigh Drogan: And on the morning of the 30th, Wednesday the 30th, I found a really good spot to enter as that five-day moving average started turning up. It hopped above it and I found a real spot right below 163 to set the stop and I entered the position at 165-66. And I was able to take pretty good size because I was pretty confident that if it rolled back over I was completely out of the trade, but it definitely had momentum. So, it then hopped above that 20-day moving average, consolidated a little bit and it was off to the races from there, and I'm still in a quarter of that position now and I think I took some off around 172 and a little bit more off around 174, but, yes, it was an excellent trade and it setup real nice on the risk-reward.

TraderInterviews.com: One of the things you mentioned was that when you took some off at 172, it continued up and you took some more off at 174, I know a lot of traders including myself tend to have a tough time with that because the profits are there and it's great and it's silly that we're even bothering ourselves for the fact that if we had stayed in this we could have made that much more money, yet the thought is theirs, but it doesn't seem faze you at all, did it ever? And how did you kind of deal with that?

Leigh Drogan: What I try and do is just as the same with the momentum book, when I'm trading on more of a daily and weekly time frame. Whenever an asset gets too far away from a certain moving average that you're looking at, and when I swing trade or day trade, but I don't day trade that often because I'm honestly not a great day trader. I'm always looking at those moving averages and everything reverts back to the mean eventually and momentum has to be worked off in one way or the other. So, when I see something getting too far away from one of those moving averages, it's a signal to me that it's time to take a little piece off and even if it starts running, if I'd like to re-enter, it'll give me a better place to re-enter when I can once again quantify my risk. When a stock just gets too far away and it's running too fast or falling to fast, it's hard to know where you should be setting stops and where you should be raising stops to and that was a perfect example. It went straight up for two days and it was just time to kind of peel some off.

TraderInterviews.com: All right. Now, since I've asked about a good trade that worked out, I'm obligated to ask you about a crummy trade.

Leigh Drogan: Of course.

TraderInterviews.com: Can you talk about one that didn't go your way, how you managed it, and what do you think happened?

Leigh Drogan: I got a perfect one, and it was on the same exact day as Goldman. So, Las Vegas Sands was setting up very nicely for a short trade, and I took a position and took a short position right above $15 at 15.02 and that was on December 31st. And I was waiting for it to break 15, which I had tested one, two, three, four times during the month. It looked like it was going to collapse and I knew that they were going to squeeze it, but I saw that I could get a nice whoosh down out of it before that happened. Well, that afternoon it did break 15 as the market rolled over for some profit taking into the end of the year, and I showed up on Tuesday morning and it just completely ripped the shorts in half. And I was out right there right on the open, there's no sense in waiting around for a position to go your way once the pattern has been completely broken. Just take your loss, take your lumps and move on, but I guess this isn't really an example of a bad trade, for me, it's actually an example of a great trade because it's gone from 15.50 to 18 in the course of a couple of days, and that would have just been a monster loss had I hang on to that.

TraderInterviews.com: So is there something you could have done to avoid that, I mean, you knew that they were going to try to do that but you thought you'd have time to make money, but looking back anything you didn't see that you think you should have?

Leigh Drogan: I knew inherently that they were going to try and squeeze this. These falling wedge patterns have recently all turned bullish. These various patterns have just been squeezed over and over and over again and I knew they were going to do it, but I thought they would shake out those longs first with a high volume dump before it happened, and it just never did. So is there anything I really should have seen? I don't think so, but was it definitely a loss? Yes.

TraderInterviews.com: All right. Well, we'll finish up with this. Any tips going here with the beginning of 2010 obviously, so any ideas for this year, any tips? Give us a stock that's going to go up 50% tomorrow, something like that, any ideas for success? That's a bad question. Let me ask a legitimate question here. What do you want to improve for 2010? Where do you think that you are going to be focusing on for your own trading?

Leigh Drogan: Where I'll be focusing? I think having a little more patience with this market. Volatility as you said has just crashed through for, and in many of the stocks in my universe having the patience to wait for them to come back into alignment with where you want to buy them and trusting in the trend and trusting that that trend is going to continue is really something that I'm focusing on, as a lot of people have been looking for the top for so long and every other day we say, "This is going to be it. This is going to be it." But when you look at those stocks in your universe and you're paying attention to your strategy, you don't really have to worry about that.

TraderInterviews.com: All right. Well, this has been great Leigh. I really appreciate taking the time to talk with us today. Listeners, Leigh's got a blog also that you can see what he's talking about. He's got some great insight there. We'll link to him in the show notes. Leigh, why don't you just give me the URL in case there out mowing the lawn or something?

Leigh Drogan: Sure. It's just leighdrogen.com.

TraderInterviews.com: All right. We'll link to that.