Hirschhorn: Trader Talk with Charles Poliacof

Charles Poliacof has been a trader for more than 12 years. He's trained hundreds of traders, manages between $10 and $20 million, and is considered one of the top traders on the Street. This week, he talked to market coach Doug Hirschhorn about his approach.

Finding Trading Opportunities

"So much depends on your time horizons, your approach, what you believe," says Poliacof. Right now, he adds, he's investing with a far more short-term perspective.

Poliacof looks for the best indicators by deciphering risk and reward, and using a host of quantitative and technical indicators, breadth indicators, and volume indicators.

Even though Poliacof focuses on equities, he still believes that right now, that's where the best opportunities are.

When investing, he finds himself looking for some sort of catalyst—an earnings-driven event, more of a macro event. For example, JPMorgan and Goldman Sachs have been talking about paying back the TARP. That's caused him to look at the price action on a lot of these banks.

Poliacof says he noticed the volume on these stocks was weak, and that means there's some buying, but more a lack of selling or, potentially, some short covering. He also noticed the banks, which would normally be providing some leadership, were acting poorly.

"I'm a big fan of using levels and a confluence of events," he says. One of his key levels is 914 on the S&P. "So I'm looking at 914 and I'm trying to determine how these positions are acting relative to what's happening in the market. When you get these kinds of divergences," he says, "that's when there's an opportunity."

The Mental Game

One of the biggest reasons investors fail, quite simply, is because of the fear of missing out.

Fear of missing out can lead to a lack of discipline and investors losing their controls. That fear of missing a chance to make money can lead to investors to try and make up for that missed opportunity.

There are positions you're in and you got into them for a specific reason. And then you have pre-defined outs. And when those pre-defined outs are no longer pre-defined, the parameters completely change, he says, mentioning that he once had someone talk to him about hoping, wishing and praying.

In short, when the trader loses his "Why?" his reason for being in the trade, that's when the trade falls apart.

Making the Right Trade

Poliacof has broken his day up into three different time segments. The first is from 9:30 to about 10:30. The second is from about 10:30 to 2:00. And the third is from 2:30 to about 4:00.

Anyone who's a student of the market will see that within those periods, the market exhibits certain character traits. And those patterns, he adds, can repeat themselves over time.

"I find the morning can be, more often than not, aversion to the mean trade," Poliacof says. That means if you see a gap in the market, and you see a stock behaving in a fashion divergent from that that gap in the market, that will afford you a potential buying or shorting opportunity. You can use that gap as a means of reducing risk in potential trade.

There will be some sort of reversion to the mean, which means you'll get some sort of sell off, and the market may eventually revert back to its trend or even form a new trend.

At mid-day, the stock market is either digesting what it's done in the morning, or trying to identify its character for the rest of the day. That's when you can start to look at various sectors—what's leading what on the day. If you look at 2009, especially in the run we've had up until now, it's been financials, oils and technology. Using those groups as an indication of sentiment...there's a famous quote: "In the long term, the market's a weighing machine, and in the short term, it's a voting machine." If you're going to determine market direction, you'll use those leading groups as your guide.

The end of the day is tricky. It can be momentum based or volume based and tied to what's happening with those leadership stocks. If you're looking for an up close, you're looking for strength within those groups, you're looking for big volume. You're looking for things that are going to provide you with some sort of quantitative edge that points you in the right direction.

Managing Your Risk

Poliacof believes investors have to be a student of the markets—to know what has been working and what hasn't. "The market is this complex, adaptive environment," he says. "But there are these patterns that happen time and time again."

Investors should keep a journal that follows what's been working and what hasn't. "With risk," says Poliacof, "I look at what's worked for me and what hasn't worked recently.

"If you've ever sat down at a blackjack table and you can do no wrong, you'll continue to press your bet," he says. "It's the same thing with trading—when things are working, you want to try to push the envelope as much as possible while still maintaining your rules and discipline."

To that end, Poliacof encourages investors to be as robotic as possible. As soon as you become emotional with investing or trading, it's game over. You have to maintain discipline.

Let's say an investor had an idea and didn't pull the trigger because he was afraid. These people are likely to start dealing with emotions—frustration, regret, anger or fear of missing out. They start putting on positions they normally wouldn't. "The next thing you know," says Poliacof, "they're losing money on these positions and it creates a cascade of negative events that results in a good deal of money lost."

Bonus: On the Fear of Missing Out

"As a professional trader, this is probably the one element I've wrestled with most in my career," says Poliacof. He says a fear of losing is healthy, but a fear of missing out can be destructive. Why? Because you end up making "shot" trades.