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Darren
Clifford
Real
World Trading Interview
Here's
How One Of Bright's Best Traders
Earns His Living: The Darren Clifford
Interview
Dave: Hi my name is Dave Goodboy.
I am executive producer at Real
World Trading.com.
Today I am joined by
professional trader Darren Clifford.
Darren came to us with very high recommendations from expert
trader and industry icon, Don Bright.
Don explains that Darren is on
the cutting edge of day trading
methods and techniques.
Let’s get started. How
are you today, Darren?
Darren:
I’m doing great, thank you for
having me Dave.
Dave:
Why don’t we start out by learning a
bit about yourself and what started
you in the market.
Your basic evolution as a
trader to where you are now.
Darren:
Sure, it would be my pleasure.
I started in the market about
two and half years ago.
I graduated with a masters
degree in economics.
I specialized in financial
mathematical modeling.
I didn’t even know that this
career existed and that you can be a
professional trader.
On
the recommendation of a friend, I went
to check out what they were doing over
at Bright Trading.
Once I saw it, I called them up
and began my career.
I
had to start like a lot of traders, by
borrowing money from family to get
involved with trading.
I started with $5000 as a
sponsored trader.
I lost that couple of times
before I became consistent and
successful.
Dave:
Did you start out as a discretionary
trader, or did you follow Bright
guidelines at the beginning.
Darren:
I was very fortunate to start in the
office in Langley, British Columbia.
Rob Friesen, the office manager, a
great experienced trader himself does
a lot of trading with a specific
trading strategy called, Pair Trading. I was able to sit, learning from him to soak up his
knowledge, in my first couple of
months on the job.
That really helped, so I
wasn’t necessarily on my own.
From
there I have gone on to be more
established and take in more trading
strategies that they teach at Bright.
Bob Bright is now my mentor, a
person whom I trust and keep in
contact with in my trading.
Dave:
I know Bob has quite a reputation on
the street.
He is known as being one of the
smartest guys out there in the
business of day trading. You mentioned
Pair Trading.
What exactly is Pair Trading?
Darren:
Pair Trading is when you are trading
from a hedged position.
I would be looking at two
correlated stocks like Coke and Pepsi.
I may buy one, and short the
other to play the price differential
between the two.
This allows the trade to be a
lot more stable and a lot more
predictable.
There
are a lot of old school traders who
crave and love volatility and they
just wish the markets would move
again.
As a professional trader, I
don’t care a bit about volatility, I
care about predictability.
Even
if something is highly predictable in
small patterns, I can trade it in a
lot bigger size to make my money out
of it.
If something is moving all over
the place, yet I can’t predict where
it is moving, it is going to be
trouble and I can be losing a lot of
money.
Dave:
What do you look for when you are
setting up a pair trade?
Darren:
The first place I will look is
intuition.
You can go through the NYSE and
you may see two companies like
Citibank and Harley Davidson.
They are both highly correlated
with each other.
Statistically this may be true,
but intuitively give me a
justification why Citibank and Harley
Davidson are correlated.
Dave:
Would there be a justification?
To me there wouldn’t be any
at all.
Perhaps when people are happy
they buy Harley’s and charge up
their Citibank credit cards.
Other than that, I can see no
correlation.
Darren:
They are both stocks on the NYSE.
They both react to the market
but that is where the correlation
ends.
Because of that, intuitive
reason is not there.
It is something I would say.
Though statistically you may be
able to come up with a great model for
these two stocks to trade against each
other.
Intuitively it does not work.
The
place that we really look would be for
Citibank is JP Morgan, Bank One, maybe
Bank of America, for Coke, Pepsi.
Dave:
Let’s take the Coke and Pepsi
example.
What is the next step after you
find a pair that is intuitively
correct.
Darren:
So now you come up with a pair that is
intuitive and it makes common sense.
The next step is looking at
exactly how they trade with each
other.
Traditionally, when you have a
sector like Coke and Pepsi, there
isn’t anyone else.
There really are only two of
them. What you see is that some
companies like this don’t trade as
correlated as you expect.
This
is due to the money that may flow out
of one company is actually flowing
into the other one.
Yes, we may like the soft drink
industry, but right now we favor Pepsi
more than we favor Coke; or now we
favor Coke more than Pepsi.
You can actually see
anti-correlated movement even though
they are in the same sector.
After we have gone through the intuitive basis we
take a look at statistically and
historically how they traded.
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Dave: You do this using technical analysis?
You
put the pair on a chart? |
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Darren:
Absolutely, we put them on charts and
take a look at the correlation between
the two stocks.
We see if they have traded
within a range or some sort of pattern
with each other.
The big test is when you see
news events happened with one of your
stocks, and how the stock behaves.
For
example, you are looking for something
that says, ‘Coke moved up $4 this
morning”, did Pepsi move too?
Did Pepsi move at least $2?
You are looking for a real sign
that you have a knowledge based
industry, meaning that company
sympathy is actually going to occur.
When people see coke rally they
figure they should buy Pepsi.
Dave:
Now specifically, when you set up the
chart, is it a daily chart?
Darren:
Well, as professional trader you have
to appreciate that I trade every time
frame.
From short, short term to
longer term.
Dave:
When you say short term do you mean a
tick chart?
Darren:
Everything from a tick chart, a one
minute bar chart, all the way up to a
daily, or even a weekly chart.
As
a professional, I take advantage of
every edge that is available to me.
This means I may be holding a
smaller position for a long time
trying to get $5-6, as an investment
out of it, or I may be taking a larger
position for a shorter amount, trying
to take 5-6 cents out of it.
For
each one of those trades I need to
have a justification for my entrance,
and I need to make sure I am looking
at the appropriate time frame that I
am analyzing for actually making that
trade.
Dave:
Let’s talk about the difference
between trading and analysis.
When you are performing the
analysis on a stock pair, is there a
specific time frame that you use?
Darren:
I will look at everything from the
last 1000 days that it has traded on
down.
You are almost talking about 5
years there, anywhere down to the last
couple of minutes.
I prefer to take a look at, on
the technical aspect of it, most of my
trades intra day, then the last 20
days of data.
Dave:
What type of chart do you use?
Darren:
Generally a candlestick chart with a
moving average and some Bollinger
Bands.
Dave:
I know you trade with a theory that
tries to develop each pair as an
individual business model.
Please elaborate a little on
this idea.
Darren:
This is something that should apply to
all trading strategies regardless of
if you are pair trading, momentum
trading or something else.
Every
time you approach the market, you are
an independent business person.
This is your job, this is your
company, you are a trader.
As you know, every company
before it starts has a business plan.
Dave:
Ok, so this is what you mean when you
treat each pair as an individual
business?
The trade itself has its own
plan.
Darren:
Absolutely, even the small scalps have
a plan.
They are just like
micro-business.
This is the place where I take
profits, this is where I exit, this is
where I take a loss.
Everything has a known entry
and exit before I even begin.
This way I am trying to take
the emotion out of it.
Dave:
Is this a written plan, or is it
something you do mentally?
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Darren:
For my new traders, absolutely
it is written.
Even their small trades I have
them write down where they are
planning to enter and exit.
For
the shorter term trades, the less
likely I am to write it down.
But for the longer term trades,
everything is written down.
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Dave:
The other word for pair trading is
statistical arbitrage. Does that refer to a reversion to the mean type strategy?
Darren:
Well, within a pair, you have to
appreciate that there is actually a
reversion that should occur.
The
natural way that free market economics
works is that you should have a leader
in every sector who has all the
technologies, then these technologies
being adopted by the secondary
companies in the sector.
You
constantly see one company taking
advantage of new technology, and
taking a lead with their stock price.
The other companies within that
sector adapt to the new technology and
catch up with the leader.
Dave:
Like a follow the leader idea?
Darren:
Absolutely, it’s free market
economics at work.
You get a new technology that
assists them, then it comes back to
equilibrium, or at least starts
reverting back.
This
is something that does not actually
occur within the individual stocks.
Mathematical modeling of the
stock market as a whole, is said to be
a random walk.
While there is an upward drift
to it.
The
idea is that we are going to go up in
time but there is no reason that since
the market rallied up 1000 points in
the Dow that we should actually see it
come back down.
Within
a pair, there is a reason that says
when one company rallies $20 ahead of
another company they will go back into
line.
Here is one reason why, the
other company is going to take a look
at what their peer is doing, adopt the
successful technologies to catch up.
Dave:
Let’s say we are following a pair
that has had very strong correlation
within the last 20 days, I am just
using this as an example.
That all of a sudden they veer
off.
Lets say Coke starts going up,
and Pepsi starts going down.
In
a situation like that would you then
short the stock that is going up and
buy the stock that is going down,
betting that they are going to come
back into correlation?
Or does it all depend?
Darren:
There are exceptions to every rule,
but on average my trading strategy
tends to be contrarian.
I
am fading moves so I’ll take the
opposite side in this case.
If Coke pulls back like it has,
which has happened in the last couple
of months, I am buying Coke and
selling Pepsi.
I am expecting it to revert
back to a mean between the two
companies.
Dave:
You guys take pair trading to what
seems to be the next level. You go beyond the simple pair into 3, 4 and even 6 way
trades.
Can you explain?
Darren:
One of the most profitable strategies
we have is trading one company against
a second company.
Going
into a sector like oil where there is
an assortment of similar companies
that do similar things.
Then you start looking at them
and ranking them fundamentally, and
technically.
I then get myself a list of
these companies I want to buy, and
those companies that I want to short.
What
this allows me to do is take a
position in a basket going long and
take a position in a basket going
short.
Say
you have maybe $500,000 in capital, as
a new trader. Then be able to transfer the risk based on which one is
actually performing well and which one
is not.
It
allows you to move in and out of the
different stocks between all six of
them.
You can capture within the
basis of the relationship the
predictability that is there, but you
are getting more volatility to capture
bigger moves and more of the moves.
Dave:
Ok I see, you are limited to your
capital as to how many stocks you can
do this with across a sector?
Darren:
Absolutely
Dave:
How many different stocks have you
ever traded at one time, using this
method? Have you gone as far as almost
creating a small index?
Darren:
Probably the biggest I have done is a
5-way pair.
Two companies long, two
companies short, and one company as
neutral as the middle, where I either
long or short it.
It
allows you to play all five against
one another. If one really rallies, you are able to sell another and buy
more of that and are able to hedge it.
It really works out well for
me.
Dave:
I know you said earlier that
volatility doesn’t really matter to
you, but is there any way you can play
these pairs as a momentum trader
would?
Darren:
Well you can always trend trade a
pair.
You can set up your pair just
like you would an individual stock.
The type of thing you are
looking for is higher highs and lower
lows, buying on pullbacks. You can even do traditional technical analysis, things like
MACD, and RSI, put them on the pair
themselves.
Now
with doing this you can actually look
at everything a regular trend trader
would be looking for.
I
want my long stock to have increased
volume on its up days, buying that to
continue more of the trend, and
hedging that off with some other stock
that you want to go in short that is
not showing momentum characteristics.
Dave:
Okay, lets get off of pair trading and
get onto another one of your
strategies.
I know Don is really big on a
strategy called "opening
orders".
Do you guys utilize this
method?
Darren:
Absolutely, but I do have to revert
back to pair trading here. One of the things that we do on our open is we use them
within a pair trading context.
For
example, if I see an extreme open on
one stock, I’ll take a look at its
peers to see what its peers are doing.
If I see Coke is gapping down
$1, not only will I be buying Coke,
but I am going to sell Pepsi against
it.
Dave:
For our members that may not know
anything about "opening
orders."
Please give me a brief tutorial
and explain the concept.
Darren:
Basically, you are fading opening gaps
on the expected price on the stocks
open.
You are looking at a stock like
General Electric.
It generally is a market
performing stock and it behaves
correlated to the S&P 500.
You
watch the futures contract of the
S&P 500 in the morning to see if
the futures contract is up .5%, you
expect GE to be up .5%.
Now
if GE opens up 1.5% you are going to
short it.
You are going to fade that
extreme open of General Electric.
If
GE opens down .5% you would buy it.
You would say it opened below
where you would expect it to in
comparison to the S&P 500.
Dave:
You are placing multiple orders above
and below the price? So you are basically enveloping the price?
Darren:
Basically enveloping the expected
opening price. Taking a look at the
morning, and we have automated
programs that do it, all the way up to
about one minute before the opening
bell.
I
will look at if the S&P futures
contracts have moved, and the E-minis
right now, where I expect the market
to open.
Using
that information I make an estimate of
where I think my stock should open,
and that is where I envelope.
Dave:
Once the order executed, do you just
take it for a couple of ticks or do
you take it for as long as it will go?
Darren:
To do the entry is actually a very
easy thing for an experienced trader,
once you get into the habit of it.
The entry side is always the
place where traders have difficulty. This is what being an experienced trader really means.
When you do get in to a
position, how you manage getting out.
There
are times where you just take it for a
couple ticks, there are times where
you pair it off, there are times where
you turn around and just take a loss
as soon as you can.
It all depends what you see on
the tape.
Dave:
How many opening orders do you throw
out in the morning?
Darren:
On any given morning I may have 600
open orders out there.
Dave:
Wow, obviously this is something that
is computerized?
Darren:
It all depends on the approach you are
taking.
Some people who just like
focusing on the broad market, and
focus the strategy on five different
pairs and only five pairs.
Everyday
they do the same stocks over and over
again.
But they become very familiar
with their stocks.
While
I am putting an order quite away from
the expected opening price, they may
be looking at putting it five cents
from the expected opening price, and
not get in. They become a lot more
aggressive to get more fills.
Dave:
Let me see if I understand you.
You place your order five cents
away from the opening price and if you
get filled you are betting the
momentum would carry that price
forward resulting in profits?
Darren:
No, not exactly, let’s say you are
looking at a stock that closed at $40.
You expect it to open at $40.50
the next morning because the S&P
is up quite a ways.
Then
what I am doing is taking a price like
$41, and I am shorting.
At a price like $39.50 I am
buying. If I get the $41 short then I
expect it to come back down to that
expected open price of $40.50.
So
in that case I have faded the gap
open.
Dave:
Man, it looks to me, if you have 600
orders out there, often, when you try
to fade a gap, the stock will just
keep ripping.
Is this the case?
Darren:
It happens more often than I would
like it to happen.
That
is when the advantage of being an
experienced trader comes in.
If
I see an opening price of $41 where I
have sold it and I notice that, first
off, going through that open is an
indicator to me that it wasn’t as
good as I thought it was.
It
should be that the opening is quite
often the extreme for the day for a
lot of stocks.
So
that should be a great trade, I should
see some instant gratification there
to it and if I don’t see some
resistance building on that opening
price and others aren’t coming in
and saying ‘Wow, I missed the plane,
I need to get it up here at this
price,’ then it is probably better
off getting out.
If
I do get into a position where it is
running hard against me, I’ll find
another stock that is sympathetic to
it and I’ll buy twice as much to
balance out the position and turn a
profit.
Dave:
Buying the stock that is sympathetic
to the one that is ripping against
you.
Do you have software or some
sort of program to instantly locate
these candidates?
Darren:
I have a quote window on my screen
that tells me what all the pairs in a
sector are doing.
If I do hit something like Citibank, and I am
struggling with that open, I can just
glance at my screen.
If Citibank is up a dollar, JP
Morgan is up 50 cents, Bank of America
is flat.
Well maybe JP Morgan is moving
much more sympathetically to Citibank.
Dave:
I know that you guys have software
that specializes in finding gaps. Tell me a little about your gap system.
Darren:
Absolutely.
If you take this strategy of
enveloping that we have been doing at
the open, and carry it forward into
the middle of the day.
In this case, what you are
looking at is gaps.
Traders
are paid on the NYSE in one of two
ways:
1.
Finding inefficiency, something
that is undervalued or overvalued that
shouldn’t be.
2.
We are trying to take on the roll of a
market maker which is to provide
liquidity.
This is a service to the
market, and over the long term you
should get paid for it.
What
we are doing is putting envelope
orders out around the last print of
the stock, so that if it gaps 20 cents
or 25 cents, you are providing
liquidity for that gap.
This
strategy is something that, especially
if you go back to the late 90s, early
2000 period, the way that the market
was behaving, was probably one of the
most successful strategies that was
there for our traders.
They
were able to provide liquidity in
situations that were trading, and if
things did not work they had the other
side to sympathetically use to make
sure they were not getting overly
hurt.
Dave:
This has been a very insightful
conversation.
Is there anything you would
like to leave us with?
Darren:
We do offer some mentoring and
training up here with our company. You can look at our website www.pairtrader.com.
There
is a group of us, so feel free to look
us up.
We are always looking to
improve what we are doing and to help
the trading community.
Dave:
Do you have remote traders?
Darren:
Absolutely, we have traders all across
North America and some
internationally.
Dave:
To trade in Canada, do you need to
have a series 7?
Darren:
Yes, you do need to have a series 7.
Currently the only province we
have license to trade in Canada is
British Columbia and that is because
we all trade through Bright.
That is the province Bright is
licensed to trade in.
We do have a number of traders
here.
Our Langley office is actually
our second largest office.
Dave:
What is the minimum capital
contribution from a trader?
Darren:
A mentor trader through us is $10,000
as a minimum capital contribution.
You do come spend two months
time with us in British Columbia.
Dave:
Thank you very much for joining me,
Darren.
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