Lukas Frohlich (The Short Bear): Chat With Traders Interview - Notes
I have created summarized notes on Episode 259 of Chat with Traders, where Ian Cox and Tessa Dao interview Lukas Frohlich (
)Early Days of Trading:
Started at a very young age trading forex
Earliest mistakes:
Risk management - he used too much leverage in the beginning and didn't fully understand risk management
Trading random technical patterns and timeframes - he didn't have a strategy or system in place, which caused him to trade random stocks, patterns, and timeframes
Database:
After understanding what your setup is and knowing how to identify it, you can create an expectancy based on historical setups.
For example:
What's the average high of the day from the open
What's the average move from the open until the close or until the low of the day
What's the average move from the high of day to the low of the day or vice versa, if talking about long setups
You want to use the database to create what the average move would be for a particular setup. Your stop losses (SLs) and profit targets (PTs) would be based on those average moves
After this, the only way to refine the strategy is through pyramiding
On short trades, as the stock would decrease the additional profits gained from the stock going down would be used to short more stock
Instead of taking profits by moving the stop loss down (ie. locking in open profits), he would use that open profit to add to the position
He groups stocks either by specific industries/themes OR historical moves of a specific stock. For example, if a stock has had a certain setup multiple times, you can determine an expectancy from the historical setups.
For managing positions, he uses these expectancies to carve out what he believes is the most likely outcome to occur (ie. average behavior of a specific pattern)
This is incredibly similar to another trader (Qullamaggie) who preaches the same thing.
Types of Setups He Trades:
Small Cap Short Setups
Holds intraday and swings multi-day periods
His profit targets are determined from his expectancy (ie. the average move you can expect to see from the open until the low as well as, the move from the high of the day to the low), specific daily technical structures, or dilution (ie. if a company gaps up from $2 to $5 and they have warrants at $4, as long as the stock is over $4, warrant holders are making free money on those warrants. Therefore, it would then follow that selling pressure would start from $5 and slow down or stop at $4)
Institutional Ownership - doesn't really matter, the only place it could matter is biotech
For example, a crappy biotech company will not have institutional ownership but if a biotech has institutional ownership it could mean the company has a good track record and he might not get the expected fade he would get from a crappy biotech name
As his capital grew into the millions, he switched from small-cap names, as there was a greater probability of Black Swan events and ultimately blowing up his account, to mid and large-cap names as the liquidity was more favorable
Mid Cap and Large Cap Swing Longs (Momentum)
Moved more to this setup because of liquidity constraints
Use of moving averages, trends, level reclaims, understanding broader macroeconomic factors
Logic Behind a Trade - Technical and Fundamental Analysis:
Technical Analysis Component - Daily Setup
He uses the expectancy factors to gain further insights
Fundamentals and News Component
This should be in support of your hypothesis or additional reasons why a move may happen
Intraday Technicals
To maximize expectancy
Process for Identifying and Creating Trading Setups:
Need a way to scan for a setup to weed out good from bad stocks.
Trading over time will allow you to make mistakes. You will eventually see patterns and edges associated with certain mistakes you make.
Seeing other trader’s ideas through social media has helped him as well
Agenda Trading:
Agenda Trading - understanding why something should happen with a high probability
Understanding from a technical setup why something would go down
But also, understanding the fundamental mechanics of the stock
For example (for his short setups), understanding the relationship between a company having a history of raising cash (ie. shelf offering in place) every few quarters or years and what they will likely do again in a time of low cash periods
Managing Emotions:
Trading is very much a game of delayed gratification. The work you did yesterday on your review, you might not feel that impact until two months from now and by then you will forget that it was that work that actually made it happen, so it's the sum of all the work you have done that adds up
Need to have the emotional control to recognize that you are having a bad day and stop trading (ie. if stopped out 3 times from a stock, he tends to stop trading for the day)
For new traders, issues can arise when there is dryness in the markets (with nothing to trade) for long periods of time and you get eager to make money and this can lead to trading when you shouldn't or making a big mistake when trying to force trades.
Lack of opportunity and lack of structure (to not notice there is a lack in opportunity)
Losing emotional control really comes from not being prepared enough (it’s like that feeling that you get whenever you need to do a big presentation or some type of public speaking because people tend to get nervous when they don't know what they are talking about)
Habits and Accountability:
When making a mistake on a trade, he will punish himself (in a good way), for example going for a run or review for 2 hours instead of 1 hour normally
He mentions the importance of having a group of people/ traders that will keep you grounded and where you can bounce ideas off of and socialize
Misunderstandings of Trading:
For new traders:;
Not taking trading seriously and not treating it like a business. It’s the preparation, the review, the execution, the day-by-day, and the analysis over long time periods of your own trading that matter the most.
Confusing the importance of win rate or risk-to-reward, when the focus should be on the profit factor, or the combination of the win rate and risk-to-reward
As the win rate may change over time (the market changes in which the setup you are using decreases in win rate) but your risk-to-reward ratio is still high, so you may be able to continue trading that setup. The amount of follow-through as well as how likely the move is (within a particular market environment), will determine if a strategy needs to be altered or removed from your trading system.
For experienced traders:
A lack of understanding of the risk of a Black Swan event. Some experienced traders take risks on certain trades when it's either not needed or they misunderstand the amount of risk they're actually taking
They use a strategy that works on paper really well, but they underestimate the occurrence of a very rare event that could whip them out. It’s the outliers of the outliers that could blow up an experience trader