By Marc Dupe
TradingMarkets.com
Tony Oz is a professional trader who uses short-term trading strategies for swing and day trading. He is one of the
founding members of Day Traders of Orange County. The popular response to his Short-Term Trading Seminars spurred
him to author a book on short-term swing-trading techniques titled "Stock Trading Wizard." TradingMarket.com's Marc
Dupe conducted the interview with Tony during the week of the Nasdaq's biggest point gain ever in February 2000.
Oz: Comfort level. Thats the time frame Im comfortable with. I look at the bigger picture. I wont enter a trade
unless I think I can make pointsI dont look to make fractions. I look to make at least 3-to-1 on my riskreward ratio, which means if I risk 1 point; I want the potential to make at least 3 points. I dont get that type of
risk-reward ratio with a much shorter time frame. Actually, lets talk about 1999, the longest I had a position,
from the first day I bought it to the last day I sold it, was 32 calendar days. The second-longest was probably 5
to 7 calendar days. No, I take it back. I had another 30-day; they were big winners!
Dupe: So, what is it that helps you define the risk-reward ratio that you want?
Oz: Well the closer that I buy a stock to a support level, the less Im going to risk because if I buy close to
support level, if it falls right on the support, I cut it. Normally, where I look for it to go from that support level is
much higher than support. For instance, I found this stock last week that was pulling back from 60, was in a
decline and trading at 52, and came up with a play and thought the market was going to correct the next couple
of days. We see the stock correct to 45 3/8, which was 3/8 of a point over the 45 level, which we felt was pretty
good support. The price target was back to the 52-level, or optimistically 57, which was in the declining line of
the channel. It took two days for the play to place. I got filled at 45 3/8 and got out at 51 5/8.
My stop loss was at 44 1/4, so I was risking 1 1/8-points to try and capture 52, which was the bottom of the
range. So I was looking to make 6 1/2 or 7 points, risking 1 1/8. So we had almost 6-to1 on the bottom line of
estimates of the risk-reward ratio. Thats the type of trade I like to make.
Dupe: How do you go about finding these types of setups? What is your process?
Oz: Ok, I have three different sources that I get my trades out of. One is I have a watch list of 25 to 40 stocks
that I follow religiously--that means every day. And I will update that list. A stock will make the list and a stock
will be dropped out of the list once they stop trading in a certain pattern. So those are the stocks that I will look
at every day. The second source is my overnight scan where I run a scan looking for certain criteria and certain
filters and I look for stocks that are doing certain things.
Dupe: Your list of 25 stocks, how do you generate that list?
Oz: Well, that list has been generated since I started trading and when certain stocks make certain criteria, and I
start following them, then they make the list. Stocks that I stop trading, like US Robotics or Cascade
Communications or stocks that were bought out, were replaced with other ones. The list of 25 is a constant list,
that means very rarely are there changes to the list.
Dupe: Without giving anything away, what are some general things you look for in generating that list of 25?
Oz: Generally Im looking for patterns, Im looking for breakouts where if I find the first day of a move after
consolidation. Thats a great easy play. Like Microsoft had a four-month, channel breakout not too long ago and
it broke out at the 102 level, it cleared that and went straight to 120. Microsoft is one of the stocks that is on
both my constant list and my scan list. Qualcomm is on my constant list too. The way I found Qualcomm was
when it made a breakout from the 140 level, about six, seven months ago--before it split 4-for-1. I played it back
and forth and it was my best performers last year, as well as the best performer on the Nasdaq.
Dupe: So on your scan, you look for stocks that are breaking out from bases to new highs or from recent
consolidations?
Oz: I have ten different scans that I run and each one of them looks for different things. It depends on the
market environment as to which scan will generate the high-probability plays.
Dupe: Which scan do you think generates the highest-probability plays?
Oz: If I like the market and I want to go long, there is a scan I like that looks for stocks that have traded more
than their average daily volume and have closed at the top of their trading range. If it is a strong day, I might get
80-100 results. And I look for the one that is in the first day of a move or the one that broke the downtrend.
There is a lot of meat in that trade. The ones that have been going up, you know, six, seven days in a row, the
risk-reward is not great because the support levels are way down there. There is just not a logical support level
to get in. So we'll follow some of these stocks and wait for a pullback. We might play them off intraday support
and resistance levels but those are not major levels. So, again it is not a high-probability trade.
Dupe: For the ones that you say break a downtrend, are you talking about a stock breaking a defined down
channel line to the upside?
Oz: : I might just look at the last five days of a 5-minute chart and look at the trend I have there. If that trend is
broken, if there is enough volume that day and the stock closes at the top of its trading range, and of course if it
trades higher the next day than the previous day's high, then I'll enter a position. Normally on these types of
tradesand it depends on how much of a pullback we've hadyou can find the 3, 4 or 5-to-one risk-reward
ratio plays; they're pretty easy to find. You don't get them every day. But if I don't get the setups, I don't trade.
I'll just sit on the sidelines and wait. I don't trade for the sake of trading. I guess that's been my secret of success.
Dupe: So in waiting for those trades with the higher risk-to-reward ratios to setup, you're obviously looking
for those that will give you the most upside potential. How do you determine what your profit target is going to
be?
Oz: Well, if we buy at support, of course we're going to look at where the next resistance level is, if the stock
has held. If we are breaking into new high ground, that's when it's really tricky. Depending on past performance
of the stock and depending on current performance of the market and the industry and the sector, you have to
make the adjustment as to what you think is the realistic price target. And this will vary drastically based on
seasonality factors. I mean if you play Alcoa (AA) at a certain time of the year, it can give you a lot more than it
will give you the rest of the 11 months of the year on the same type of a setup. So there is more to it than the
technicals, there's also what time of year you are in, what news is the driving force. It's just like fashion: One
season leather is in, one season it's flannel they want. It is the same thing. So you have to keep up with the
fashion and adjust your price targets accordingly. And you have to keep your expectations intact and never get
too greedy, that's what really kills you.
where do I cut what I added if it goes against me? So I'll pyramid by trying to pick those points where the stock
is pulling back as it's channeling up, I'll try to pick those bottoms.
Dupe: How much do you decide to add to a position when you're pyramiding?
Oz: It depends on my initial strategy. I mean it's all planned out. So before I enter a trade, I already know
exactly what I want to do with it. It's a certain risk I'm going to take so if I want to make my risk greater, that
means adding to my position, certain things have to be decided in advance when I start. Well this is what I
normally do. When I try and catch a falling knife, if you will, I will buy a very small position and I will be more
liberal on the stop-loss. Let's say I want to buy 3-400, a third or a fourth of a position. Now if the stock holds
that level and goes up, I know I've bought the position. But if the stock goes right through me, and I had a full
position, then I'm going to experience some serious
pain. I also have to have a much tighter stop-loss.
Some of those more volatile stocks are just
impossible.
see where the trades are printing at 95, at 94 and you know people are executing out of market because that is where the
real market is.
The outside market is any level that is not the best bid or best offer. You can see where each ECN or market maker is on
Level II. The inside market is the best bid and best ask from all market makers on Level II, that's the best quote. The
question is, is that quote "real" or not can you execute against that quote? And that's what you don't know. Now what we
do is we look at the time actual prints, the actual trades that take place. When I can see that trades are trading below
whatever the inside market number is, then I know I'd better go even lower than that if I want to get out. So for instance, if
you had seen Qualcomm (on Dec. 30, 1999), CNBC was going nuts because they couldn't understand the ticker.
Qualcomm would go up 27 on the ticker, and then down 20, it was going all over the place. Trades were being printed all
over the map. And they have 90 seconds to report those trades and sometimes those 90 seconds mean five minutes by
the time they print it.
Dupe: Were you trading Qualcomm?
Oz: (On Dec. 12, 1999) I carried 100 shares (before the 4-for-1 split) overnight. The stock opens for trading at 740 and it
falls down to 640 within 24 minutes, 100 points with no upticks. You couldn't get out. People who put a market order with
the Schwabs and E*Trades of the world, got out at 640. So with my direct access I went out and picked someone at 720
right at the open and got out. So at the time, my order was about 18 points below the best bid, just to be able to get out.
So what you seepeople don't realize it, they'll never talk about that in books out there about buy-on-the-bid and sell-onthe-ask when it comes to direct access: It's about being able to get out when you want to get out and finding the liquidity.
People have to understand how the game works when it comes to these volatile stocks. They don't move like they do on
the upside and the downside for no reason. There is a reason they move like that. It is because the market makers don't
really participate in the market making there. They just walk away.
Dupe: And just the daytraders participate?
Oz: Most of these real volatile stocks, it is just pure daytraders, the ones that move like that. The market makers are
participating more if there is some action or if they have orders to fill from some funds, but they won't take the action.
That's why you see these lines on the one-minute charts that go down 10, 15 points. If I'm in a stock like Commerce One
(CMRC) when it used to be at the 300 dollar level, 3,000 shares of stock sold on the bid, if they preference all the bids
out, can drop that stock 10 points. It just takes the liquidity away and boom!
Dupe: With just 3,000 shares?
Oz: Yeah. Because every market maker is sitting there with 100 shares, you know, and if there is some selling pressure or
a sell program that hits, they all pull off their bids, and it's gone. It is not going to see that much volume.
Dupe: Could you talk a little bit about how you read the market makers to help your trading?
Oz: The only way watching the Level II screens helps my trading is just my ability to execute against them. I don't try to
play the game of scalping, so I don't care who's buying or selling at that moment. But I do care who is buying and selling
over a longer period of time. Just identifying Goldman on the bid or the offer as an aggressive seller for a period of time
and then seeing them on the other side when the market is going against them, tells me Goldman Sachs is heavy on the
other side of the market and he's just starting to cover short. So if I see Goldman on the bid for seven days on a certain
stock as the market runs up, and he's on the offer, selling hard into a lot of buying pressure and the market is making new
highs that day, then I know Goldman is trying to unload his long positions.
When it's the other way around, when I see Goldman on the offer for seven days, and finally he comes on the bid but the
market is tanking like it was with the Internet sector into May from April 14, (1999, when the bottom dropped out from
Nets) then I know the market is reaching a bottom. Goldman gave me the sign of the bottom the day before because he
was the only buyer and the market was tanking hard. I was waiting to come in on a reversal day. The reversal day came
the next day and Goldman was the only buyer the entire day before. He was just sitting there and sucking everything up,
covering and reversing. I had watched Goldman do this on Ebay (EBAY) and RealNetworks (RNWK).
Dupe: Are you saying that Goldman was in large measure responsible for the move and reversal in some of the
Internets?
Oz: By looking at a Level II screen, you're going to see different market makers at different levels below the inside market.
And you can see some of them start disappearing. That means they were executed against. Obviously people are going
out of market to get out.
Dupe: Again, going out of market here means going below where the market is trading at, right?
Oz: Right, going below, or when you want to buy when things run fast, you have to pay more. When these things are
running fast, you put a market order to buy and you get executed at the high of the day. You put a market order to sell and
something tanks, you get executed at the low the day. That's exactly why because there is no . . . what you see on Level I
is not where the market is. In order to hit them out of market I'll have to preference them. SOES won't help in a fastmoving market situation and you'll go to the back of the queue. It depends on the stock, but if there is not a lot of marketmaker participation, it's like a hanging rope. But things are changing. This will probably be ancient history in the next 2-3
months, because they are going to bring SOES back, cancel Selectnet and they're going to give the market maker only
five seconds. The Nasdaq wants to do a central ECNthey're losing too much business.
Dupe: Market makers will have to honor their bids within five seconds, they won't be able to do the 30-second delay . . .?
Oz: Right.
Dupe: And that will be better for independent traders.
Oz: Then we will take even bigger advantage of them than we already are. See this is the market maker, let me tell you
something. Right now, if something falls down really fast, and everybody is panicking and it trades 5 to 10-points below,
and I get a preference orderthat's how you get him, you hit him with a preference orderwell, for 10 seconds I can't
cancel it. And the market maker has 17 secondseven if I try to cancel itthat the order is in his hands. Now, for
whatever reason the stock starts bouncing, because it's a fast mover and when they bounce, they bounce quick, and only
thenwhen the stock's going against mewill I get a fill. You're at a huge disadvantage. Normally the best way to get out
of a fast market is to go to an ECN, because an ECN is real. Whatever you see there is really real. With a market maker,
you never know.
Dupe: You obviously gain an edge this way.
Oz: You see everyone where they are price-wise, but you never know with a market maker how much they are going to
honor. Now the sizes on the ECNs are real, so if you see 1000 shares, if you hit it that fraction of a second before
somebody else does, that's a guarantee fill. But normally when something tanks fast, everyone knows that's the place to
go and you won't find those ECNs at a reasonable price. For instance with my Qualcomm trade that I was talking about, I
basically gave away an extra 5, it was 20 points out of market from the opening price, but realistically speaking, I'm sure I
wouldn't have been able to get executed unless I was at least 15 points below, so I gave away an extra 5 just to make
sure that I went to an ECN, and not be at the mercy of a market maker. In that case I was willing to give up $500 and it
was a great choice, because obviously you saw what happened (where Qualcomm dropped nearly 100 with no upticks).
And you saw the ECNs at different prices and they were getting executed against. There was a lot of selling pressure.
Now remember, the market makers will trade against those bids as well. So if I'm Goldman Sachs and I want to tank
something, I can preference all the market makers and all the ECNs on the bid, all their bids, from $1 to 100, and that will
tank the stock. So you gotta remember that if there is a market maker that wants to get out at the same time and take
advantage of good shorts in this scenario, it's free game for them.
Dupe: Could you give a short definition of preferencing?
Oz: The Nasdaq has the Selectnet order routing which allows traders to negotiate terms and prices electronically. That's
how the Nasdaq was formed. So when you put an order on Selectnet, that order is broadcast to all market makers. When
we preference, we send an order to buy or sell at a certain price, and we can preference it. We can tell one of the market
makers, whoever it is, "Hey, we want to make this deal with you." Then basically for 10 seconds I can't cancel this order or
"proposal." In order to hit ECNs that you don't subscribe to, you have to hit them through a preference order. The
important point that people understand is that direct-access trading is not just about buying a stock on the bid and selling
it on the offer like most books will make you believe. If you don't have direct-access trading, you don't have direct access
to the market. That's the bottom line.
Dupe: Did you make any trades this week where this applied?
Oz: This week, I split a spread on Echostar (DISH)...