TraderInterviews.com: Hello everybody and welcome back to TraderInterviews.com. Thanks very much for joining me on another episode this week. We're going to be speaking with another successful trader today asking him about his strategies and his ways of approaching the markets that you may not have thought about before. So I hope that you can get some ideas for your own trading style and for your own way of trading. Like I usually say at the beginning of all of these interviews, if you could just pick up one or two things that you can kind of add to your own trading style and strategies, the whole thing's worthwhile so hopefully we can do that today. Our guest today is Chris Farrell. I talked to Chris recently in New York and asked him if he'd be on the show with us so, Chris thanks very much for joining me on the program today.

Chris Farrell: Thanks for having me Tim.

TraderInterviews.com: Well, I guess let's start by talking about your overall philosophy. How do you kind of clarify or categorize yourself as a trader?

Chris Farrell: Well, I've always looked at the market through the lens of supply and demand. I started my career, I was a former market maker for a firm Gruntal & Co. which was right across the street from the New York Stock Exchange. And I made markets in New York Stock Exchange list of stock and what was know as the third market or the institutional market. So, my training was very different than what possibly a traditional investor or a portfolio manager how they would view the market. I always look the market in terms of...In the short term, it is not fundamental and it's not necessarily technicals that move the market. Its supply and demand imbalances and typically what happens, oftentimes in the media, on a day when the market is up, they often say that there are more buyers than sellers and that's what's driving the market up. Well, that is not necessarily true. For stock to trade, there has to be an equal amount of buyers and an equal amount of sellers or the stock cannot simply trade. So I view the market basically as a collection of buyers and sellers trying to transact and the market will adjust higher when sellers are able to get a higher price for their stock and it will adjust lower when buyers are able to get a better price for their stock. So, it is a constant process of negotiation that's going on in every single stock, every second of the day as long as the market is open. So, within that framework, what I'd like to look for are temporary gaps between where the buyers are willing to buy and the sellers are willing to sell and back ten years ago, this would be reflected in what is known as a wide bid/ask spread. In other words, a wide gap between where the buyers are trying to buy which is the bid and the sellers are trying to sell which is the ask. Now, as the markets have become more electronic and as we've moved from a market that traded in fractions to a market that traded in decimals. A lot of these gaps between the buyers and the sellers have appeared to narrow. So you have to look at the situation through...You have to use more tools to view the situation. Now, luckily, there's technology that is at the disposal of any active trader, NASDAQ level II system or the New York Stock Exchange, NYSE OpenBook which allows you to see the depths of the market. In other words, how the buyers are stacked up below the bid and how the potential sellers are stacked up above the ask and that gives you a more true indication of the supply and demand picture in the stock.

TraderInterviews.com: Yeah, let me ask--

Chris Farrell: Oh, sure.

TraderInterviews.com: --let me ask you about that really quick because what does that look like then in those things you just mentioned, the NASDAQ Level II and in the OpenBook. When you talk about these gaps, can you give us kind of a garden variety with an ABC, maybe a phantom stock that what would it look like to you?

Chris Farrell: Absolutely. I would say that the gaps, first of all, the less liquid the stock, the more likely there are to be large gaps between where buyers and sellers are. For example, a very active stock like IBM is going to trade with typically tight spreads, but if you look at something that may not trade as active like it could be a utility or a reach or even like a closed-end bond fund. What you might see is a situation where, let's say the stock is trading at $5 and the market is five bid and offered 5.05. Well that simply means there's a buyer, trying to buy the stock at five, the bid and there's a seller, trying to sell the stock at 5.05 which is the ask. Now the reason the bid is there and the ask is there is because the buyer and the seller cannot agree and that's why neither one of them have transacted. So, what I look for is that we'll look below that bid at five. Let's say that there is a buyer, a penny below that bid at $4.99 and let's say he is a buyer of 500,000 shares. Well when I see that, even though that the bid is five and the ask is 5.05. That buyer, a penny below the bid, which you can see on any Level II system that has a New York Stock Exchange open book on it, that indicates to me that there is a very strong level of buying interest in the stock. In other words, unless that order is filled or he cancels, the stock is not trading lower than $4.99 and that can have huge ramifications for where the stock will trade. I would say one of the most important things that I've learned in 14 years of trading is that what typically drives the stock higher or lower in the short term, a stock that's falling fast, it's at the order book, it is the buyers and sellers away from the immediate quote that deteriorates or crumbles long before the stock drops. So that crumbling of the buyers below the market will oftentimes lead to a very quick drop in the stock. So it's simply not enough to look at the highest bid and the lowest offer to base your buying decision on.

TraderInterviews.com: Now, NASDAQ Level II, one of the key thing for a lot of traders, it flashes by so quickly. You'll see an order come up there and then disappear immediately, how long did it take you to really get confident and when you see these things happening, to process it all 'cause it does happen very fast.

Chris Farrell: Well, to answer that, it goes back to...This is one of the reasons why I have always preferred trading New York Stock Exchange listed stocks over NASDAQ. There are plenty of momentum traders that prefer trading the most volatile NASDAQ stocks. That's their game, they're able to flourish in that kind of environment, but as your question hinted to if the supply and demand is moving around at lighting fast speeds, it is very difficult to get a feel for it which is exactly why I prefer trading slightly slower moving stocks because I find it as a more pure indication of supply and demand that's going on. Oftentimes, you know, there seems to be a bias among traders that everyone gravitates towards the high flying stocks. Well I find that the odds of profitable trading in those stocks because of the level of competition and because of all the bright people that are trading them are fifty-fifty at best. But I find other corners of the market where the stocks are less liquid and there might not be as many traders following them, the odds can be a lot better and it's, unfortunately, I hate to use the analogy of a casino, but it's similar to a casino in the sense that the odds are constantly changing and each game whether it's black jack or roulette or craps, they have different odds. And so you always want to be in a situation. If you're risking your capital and as a trader, you're not just risking it once, you're risking it over and over and over again, you have to bet only when the odds are in your favor. So, a large portion of the day is spent waiting for the odds to come into line before you put your capital at risk.

TraderInterviews.com: OK. So you're looking for less liquid stocks because these gaps present themselves more often in this than this slower moving ones, what would be the minimum daily volume or average daily volume you'd like to see before you'll take a look at something.

Chris Farrell: Well, I talk about it in my books that one of the dangers of trading a liquid stock is that it can tie your capital up. So, you want to be in a situation where I would say the stock trades at least 100,000 to 200,000 shares in a day, at least, at the minimum because something that, you know, the New York Stock Exchange has several thousand files and issues. Some of the things that trade on the New York, you know, things like debt hybrids and there could be a preferred stocks that's still listed from 20 to 30 years ago that never trade and that kind of thing that can be a trap. It can be easy to get into something and then impossible to get out because it may not be a market; there may not be anyone else to potentially sell to once you own it. You know, that old expression in poker is true, if you can't tell who the sucker is, it's probably you. And you have to really, really be careful especially in this day and age, markets never give money away. They never give money away. The only way you're ever going to be profitable as a short-term trader is to provide a service to the market, in other words, to provide liquidity to the market. To be a buyer when the market needs buyers, to be a seller when the market needs sellers. When you do the opposite, you know, when you're panic buying when everyone else is panic buying or you're panic selling when everyone else is panic selling, you're part of the problem, you're not part of the solution and in that situation, you're going to lose money almost every time.

TraderInterviews.com: Yeah. That's interesting because it's counterintuitive because I'm thinking, if everybody else thinks this is a bad, bad and nobody else is buying then what in the world am I doing thinking that I should be buying but, and yet that's where these pro-traders are making the most of their money is taking the opposite sides of these trades when the sheep I guess of us all and I'll admit too, I've been one of the sheep before, decide that it's not a good buy.

Chris Farrell: Absolutely. It's counterintuitive. You always have to; you have to look at the trade from the perspective of the person that's taking the other side of your trade. People look for reassurance in the stock when everyone else is buying it and unfortunately that is the time when the danger is at its highest and the odds are at its worst and the odds are at their best precisely when things don't look good.

TraderInterviews.com: So this is the question, the question then becomes how do I know if I'm buying something that everybody's offloading for a reason and when it's just a temporary panic and it's a good bet. I mean, I guess that's the $64,000 question but how do you handle that?

Chris Farrell: Well, that is one of the most important questions in trading. There's a concept called, this is a very advanced trading concept, but this is one of the most important things that a trader can learn especially trading New York Stock Exchange list of stocks. There's a concept known as clearing the order book and what that means is that if you see a large seller in the market, if you are going to buy from that seller, you have to be sure that whatever price that that transacts at, that that clears the order book. In other words, that price is at a point where that seller's entire order trades. So I'll give you an example. Imagine that the stock closed at let's say $5 and on the open you see, five minutes before the stock is open, you see in your Level II screen that there's a seller of 20,000 shares at 4.50. So 50 cents lower than where it closed. When you see that, that is not an indication that the stock is going to open at 4.50 just because that seller is trying to sell at 4.50. He's putting a limit price on it. So he'll say and I'll sell for 4.50 but no lower than 4.50. So if there are, let's say there is a buyer of that equal amount of stock at $4.75. So we have a seller at 4.50 and a buyer at 4.75 and the stock closed at $5. Well when you see that, absent on any sort of other buy and sell that might be queued up as a market order that no one can see, that stock has a very high probability of opening at $4.75 and that's where that buyer and that seller are going to match and if it is for the same share amounts, if they both have the same amount of shares are willing to be bought and sold, well what happen is that that is a market clearing price. The order book will have cleared, so once that seller is out of the way, it is likely that that stock had bounced back to where it closed the prior day, absent other market conditions. So it's not a guessing game by any stretch of imagination. A lot of this is based on just reading where the buyers are and where the sellers are and determining from that where the stock will open and then whether that large buyer or seller gets filled and is then out of the way. This is exactly how the specialist on the floor had traded for decades. They're the ones that have always...They basically set the market clearing price and if there are not enough buyers or sellers available, they'll risk their own capital to help clear that trade and they're going to do it a price level that's favorable to them. They're not, you know, they're not in the business of throwing their money away and this explains some of the exaggerated moves that you see, for example, during panic selling where you see stocks just get crushed on the open and then second they print down there, they'd have a drastic move the other way and a lot of times it's based on the fact that the specialist is a large buyer on the open and then people see that print occur. It catches everyone by surprise and they can't believe it and then it brings bargain hunters in and then the specialist who bought a large block of the stock and sells at a lower price level, then feeds it out for the rest of the day and makes some nice trading profit for himself.

TraderInterviews.com: Yeah. On that side...the other side of a NASDAQ trader might say, "That's the reason I stay away from New York because I don't have as much transparency there." Do you not agree with that statement?

Chris Farrell: That is a very valid argument and I've heard that from my entire career and the only thing that I would inject in that is that if you put buys in that are above where the specialist ends up printing that opening stock, you're going to buy it with him at his price. So that's a way of...It allows you to essentially bet with the house. You know, the specialist is the house. He's the odds maker, he's the price setter. No different than a Saratoga Raceway where they're taking bets and they're setting the odds. The advantage is with the specialist. Now granted in this day and age, there's, you know, a lot's been said about how their trading advantage has been somewhat eliminated and they're making less money than they were in the past. That's definitely true but there are absolutely times during the day especially on the open where the odds are substantially in their favor and for someone like me to be able to make a living, I usually like to be on the same side of a transaction as they are and what's great is that it's not rocket science. These guys, very simply, they're buying on weakness and they're selling on strength. They are the counter party to a lot of these, you know, these large buy and sell imbalances.

TraderInterviews.com: And you hear that a lot. You hear that you need to follow the professionals, the smart money but are there clues also in OpenBook and NASDAQ Level II that tell you that, "Hey, a top trader at Goldman is thinking this is a buy." I mean, I've always heard that and yet they don't name these firm's traders individually by what they're trading so how do you kind of get a feel for what those guys are doing?

Chris Farrell: You know, if you go back like the New York Stock Exchange, everything is going to be anonymous. You're not going to see who the other party is to it but back in the day, NASDAQ was a little bit different but I'll go back ten years ago to the Internet bubble when all of those stocks like Amazon and Yahoo are going crazy and back in that time period, you could transact directly with the Goldman Sachs and Smith Barney and all of those firms and you could actually see what they were doing based on how they were showing their hand to the market and it was a huge...it became a huge poker match because if a big buyer like a Goldman Sachs kept showing up on the bid and were aggressively buying, it led all of the day traders to believe that they had a huge order to fill and they were aggressive buyer in the stock and that alone could cause these very volatile stocks to blast higher. A lot of that in this day and age has been minimized and it has become much, much more of an anonymous game which has some advantages and some disadvantages, but it's always being a successful trader, it's always about being able to adjust to changing markets. These markets are constantly changing especially with technology; the rules are changing so you always have to stay ahead of it. What might have worked ten years ago may not work in this kind of market. I mean, the basic fundamentals of trading are always going to be the same, but the little nuances on how to get orders executed and some of the monkey business that goes on is always changing.

TraderInterviews.com: Now, and that makes sense and based on what we've already talked about of course, just looking at price action though you can still get somewhat of a feel for what people are doing. We've talked about that. But how about you personally when you see this happening, you see one of these gaps, you see an opportunity, my gut always tells me well let's try and put this in a penny or two below and see if I can get that price inevitably it moves away from me because I try to be greedy and get a better price. How are you then executing those trades? I mean you're ready and you see an opportunity and say it's time.

Chris Farrell: That is a huge problem too. I can't tell you how many trades I've missed by a single penny. Sometimes something would open down a dollar and you're by, like let's say closed at 22. You put a buy in a 21 because you think it's going to open there and it opens at 21.01 and you don't buy it. That's not by accident. That's the competition in the market that could be the specialist that could be other traders who see the same opportunities as you do and that's the problem. That's trading. Everyone's looking at the same thing; everyone kind of has a similar mindset among traders. Everyone's trading against the investing public. One thing that I've always done to try and minimize the effects of getting pennied like that is I'll stagger orders out there. Like if I'm looking to buy 5,000 shares of something, I won't put it all in at a single price point. I may spread it out a nickel apart. Even if I think, for example, the stocks are going to open at 21, I may put 1,000 in a 21.30, 1,000 in a 21.20, 1,000 in a 21.10 and 2,000 in a 21. Therefore I know at least if it opens a little bit higher than 21, I'm still going to be a part of that piece of stock and in that case, to get no stock, it would have to open at, you know, my highest bid in that case is at 21.30. So if the stock opened at 21.31, I wouldn't buy anything, but anything that opened at 21.30 or lower, I would be starting to transact as part of that order and that's one of the keys. It was more of a problem several years ago and there was something called a negative obligation rule on the New York Stock Exchange which got several specialist firms in trouble where these guys were essentially pennying customer orders. If there was a buyer, like me at 25 and someone want to go sell to me, the stock would trade at 25.01 and the specialist would buy himself and I wouldn't be a part of it and it was a violation of a rule known as a negative obligation rule which stated that the specialist on the floor actually had an obligation to step aside if customer buyers and sellers could transact at reasonable prices and luckily in this kind of market, as we move to a more electronic market, that kind of stuff during the day; it's not a problem anymore.

TraderInterviews.com: Yeah. I was just thinking the other day when I was watching CNBC, I remember ten years ago when you couldn't even walk around the floor and that it was so crowded. In these days, no matter when it is, even the first half hour it seems like a ghost town. Certainly, that's an indication that mostly everything is going electronic.

Chris Farrell: Absolutely and these guys have to make a living too and if there's no opportunities for them to transact. You know every profit is always made at someone's expense and if they are not in there, and they're not able to profit off of these trades, they're not going to risk their capital in there. So with them out of the way during the day, that's why you kind of have more of this electronic Wild West going on that has its advantages and its disadvantages during the day. You have a lot more fragmentation; you have a lot more trades going off and a lot more erratic move that sometimes aren't really reflective of where the stock is really trading. It could be one large buyer or one large seller, moving these stocks around like it's a ping pong ball and they're just whacking it back and forth. So that's something you have to be really kind of be careful of. Back in the day when the specialists were providing liquidity, these stocks traded in a stair step manner. Something rallied, they would typically be in bulks and they would move slowly higher and each print may occur 25 cents higher than the last maybe for large trade sizes. Nowadays, you don't see that at all.

TraderInterviews.com: Now, you talked about the limit orders that you put on entry. Are there instances where you would just put it in market because you wanted to get in?

Chris Farrell: There are rare instances, but I never like that situation because it puts me at the mercy of the market. It's the difference between setting the odds and taking the odds. You put a market order in, you may get lucky but you also could get really hurt. If there was some situation where you'll always have to think that supply and demand that you're seen in the market, there could be extra supply and demand that comes in at the last second that could potentially drive the stock in a direction where an unforeseen event. Most of the time it doesn't happen, but sometimes it does. For example, like if you think that it looks like there's a bunch of sellers and the stocks are going to open down a dollar at 25 bucks let's say. So you put a market order and expecting it to open at 25 but what if at the last second, a huge fire came in and instead of the stock opening at 25, it opened at 26, a dollar higher. Well said you are now at a 26, a price level that you would never have wanted to buy that. So usually, I always, I would say 99% of the time, I'm putting limit prices on to prevent that kind of slippage from happening.

TraderInterviews.com: And how about your exit strategy? Do you use those similar, different levels to try and get out when you're scaling out of a position?

Chris Farrell: Well, I typically found that and this is no surprise that it's a lot harder to get out of a stock than it is to get into it. At least on you're on way in, you can set your price levels and you can only buy it when you want to and when it's not at your price, you don't buy it. But once you own it, that's a different story and then other emotions come into place here and greed and everything else. So it's very tough to be as disciplined on the way out as it is on the way in. If a stock is rallying and it's going in your favor, then it's very easy to piecemeal it out like that and that's a great strategy because you're going to be a winner almost every time when you do that. That's a perfect kind of trade but oftentimes, the market doesn't allow you a clean exit as it does an entry. So there's and old rule that says that, "Sell when you can, not when you have to." And that means that if there's a temporary updraft, I'm usually in there trying to take the profits because even if the stock runs further after that, if I have to then panic sell when that temporary updraft cools down, that could end up causing you a lot of money. Essentially, you're almost always leaving money on the table. You're never going to have a perfect situation that's going to allow you to buy the bottom and sell the top.

TraderInterviews.com: Are there times when you do see that updraft and you say, "I want to take advantage of this if it continues up but I got lucky in some profits, you'll take some off the table and then let some ride?"

Chris Farrell: Absolutely. That's another, you know, I love that kind of strategy. Selling half, take your profits on half and then you let the other half ride. And it is interesting because after you've already made a little bit of money on a position, it does become easier as the position is lighter to let it run. When you're holding a big position, you're going to be a lot less likely to let it run because you're going to be trading, you're going to be a lot more nervous, but after you've liquated a part of it then you can...It's almost a feeling of playing with the houses money at that point and those trades always work out great.

TraderInterviews.com: Isn't that interesting how when you feel better about the money that's at risk, you're ten times better trader. I know what it made me.

Chris Farrell: Absolutely. Because fear is removed from the equation and fear is the worst emotion to have when you're trading.

TraderInterviews.com: Are you pretty strict day trader? Or do you swing trade as well?

Chris Farrell: In this kind of market, I prefer day trading to be honest with you because I found that, you know, it's a little different now, well here we are in August and we've had a major run up in the last month but this market was so sketchy for so long going back to this time last year that the open was always, for me, the point of having the best odds. It seemed like once the stock opened and things, wherever that point occurred and then the stock kind of rectified itself then anything can happen and I never liked to be in a situation where I feel like my odds are only fifty-fifty because you're not going to make a living. When the odds are only fifty-fifty and you're constantly, you're risking and re-risking your capital over and over again, you're not going to make a living at the odds of fifty-fifty.

TraderInterviews.com: So does that mean you'll trade just the first half hour, maybe the first hour oftentimes?

Chris Farrell: Sometimes I'll trade the first half hour, the first hour when in those really volatile periods last year in September, I was trading the first two to three minutes and that's it and I was just looking some large imbalances grabbing them and then selling them when the market kind of rectified a little bit and then I was out and that was some of my best trading ever actually but that really only works in times of severe market panic. And coincidently, during that time period, it was reported on the news that the specialist on the floor were risking a larger amount of capital than they had in a long time and that's also indicative of these guys are not stupid, they know when there's good opportunities. When there's so much fear in the market, these guys are buying on the open and that's their best trade of the whole day.

TraderInterviews.com: How many trades a day are you typically taking?

Chris Farrell: It all depends, maybe 20 to 30 in this kind of market. It could be upwards of a hundred maybe in a more busy market. It all depends on what I'm seeing and really where I can get things executed. I'm putting probably at least a hundred orders out there, maybe 200 orders out there sometimes on the open and you're only hoping to buy the cream of the crop, the very best of those orders. So oftentimes you'll find that you could put 200 orders out there, maybe only get sold on ten of them or five of them. But the five or the ten that you get sold on are great.

TraderInterviews.com: And those trades that you're putting in, are those based strictly on Level II or OpenBook knowledge and what you see there or do look at the charts and things outside of that?

Chris Farrell: Well, I always look at charts and longer term fundamentals just as a lose picture because that is definitely true. Supply and demand changes so quickly that you don't want to be on the wrong side of the technical or a fundamental move because then you could really, really get hurt, but in that ultra short term, you got to look at supply and demand as the main thing because that's what's moving the stock. Without that supply and demand, it doesn't matter what the fundamentals are or what the technicals are. You're going to end up being on the wrong side of it. Sometimes the best trade fundamentally can have the worst supply and demand situation on it which means the odds the stock is going to head lower and not higher.

TraderInterviews.com: And how about any indicators RSI, MACD, Bollinger band anything like that, do you watch?

Chris Farrell: You know, I've never been a big fan of those things because I feel like it influences my trading in a manner that's outside of supply and demand. And so that's why I haven't really focused on that. I'm sure that there are, you know, I never want to dismiss any legitimate technical analysis or anything like that because there are plenty of people out there that use it and they're really good at it and it helps them but for me, I think a lot of it has to do with the way I was trained and just learning that, just the market of buyers and sellers. Everything is secondary to that so it keeps your focused on that immediate price, where the buyers are, where the sellers are and where they're trying to trade.

TraderInterviews.com: Well that makes sense. I mean if that's what drives the market, why watch anything else I guess.

Chris Farrell: Absolutely.

TraderInterviews.com: And from being a market maker, do you sense that the retail at home trader that most of us are trading on either a direct access or maybe even E-Trade or Ameritrade. How much of a disadvantage do we have out there truly? I mean are we really playing against the house constantly? I mean is it that bad for us?

Chris Farrell: Well, basically Wall Street has always been in the business of trading against its customers and I think unfortunately, most of the investing public, they didn't realize this and this is back in the day when a lot of them relied upon brokers instead of online. A lot of the online traders were just kind of coming into being and people always use market orders. Spreads, bid/ask spreads were wider and they were always using market orders and they didn't really view the market from the standpoint of well, who's the bad person taking the other side of my trade? Why did the trade occur at this given price? And usually, nine out of ten times, the reason that a trade occurred at that price is because the public was buying at a price where a market maker was selling or shorting it to them and then going in the market and buying it themselves cheaper. And they weren't aware of these great fair order handling rules on the New York Stock Exchange that allowed them to buy on the bid and sell and the ask. Well, ten years later, I think the retail investors are a lot more educated on this stuff. In part because of technology and also too because they've seen several bubbles come and go. I mean, we've had more market bubbles in the last ten years than probably in any other period. I mean, we had the September 11 attacks, we had the Asian Currency Crisis in 1998, we had two wars and then we had this latest recession and if that doesn't force you to focus on your own financial wellbeing instead of relying on a broker. I mean, buy and hold as an investment strategy, if you bought ten years ago and holding, you'd probably still be down money right now. I know that at the bottom of the market at March, you would have been down money over ten years and obviously, buy and hold does have a place in people's investment portfolios but you got to have self discipline. There's always a price at which a stock is worth selling, and I don't believe this idea that you just buy something forever in the sense it's almost been like, not a scam, but it's a way that a lot of financial stock brokers who back in day were getting paid on commissions and then they would just put you in something and then they wouldn't have to worry about it. The next is gone, cold call and then talk another client and try and generate more commissions instead of watching your position and selling it when it was right to sell it and luckily, I think, a lot of that perception has changed.

TraderInterviews.com: Well it certainly changed the mindset of a lot of folks. Well, we'll finish up with this assuming most folks won't have the ability to be a market maker to get that experience that you did and they want to trade the way you're trading, what advice do you have for them? How can they learn how to do this?

Chris Farrell: Well, number one is that rallies are for selling and on days when the market opens down, those are days to buy. That's the basic fundamental rule. As an old cliche in the market goes, "Be fearful when others are greedy; be greedy when others are fearful." That's number one. Number two is that oftentimes if a stock goes out weak in the afternoon, the next day is not going to be a good day for it. So you got to be very careful about trading later in the afternoon and buying something and bidding down money and then have the trade essentially get away from you. And then number three, what I would always suggest to people is no harm done in trading a very small amount of stock even a hundred shares. Sometimes it's great just to pick a broker that's not charging you ten bucks per trade, but like is charging you a dollar or two dollars to trade a hundred shares, whether that be an Interactive Brokers or Trade Stations or one of those and just trade a hundred shares. Pick a stock that's nonvolatile and practice your entry and exit points and as long as you're not racking up a huge commission on doing that, that's going to serve you overtime because you're going to see that oftentimes where you can transact is a lot different than where the quotes indicating. And there's a big difference between where you can sell and where something seems to be quoted. Just the last piece of this is that your presence in the market affects the outcome. It's not an objective place, when you're in there, you're going to be influencing the buying and selling of others and your buys and your sells are going to be moving places around just with everyone else. So you got to understand that going in. In other words, it's like a scientific experiment where you're altering the outcome of it as you're participating in it and that's a very important thing to realize.

TraderInterviews.com: I didn't ask you but are you doing much shorting?

Chris Farrell: Absolutely. I will go short anytime I can get...If there's a big buyer on the open and it looks like they're aggressive and they're willing to pay through, I will absolutely short on the open. I don't like shorting overnight especially in this kind of market, but transacting on the open absolutely.

TraderInterviews.com: But how do you know? I guess back to the same question. How do you know that big buyer isn't indicating something more to come?

Chris Farrell: That's absolutely true; the way that I would answer that is that I'd like to keep tight mental stop losses in there. Let's say if a stock close at 20 and it opens at 21 and I think that's a good place to short and I shorted at 21. Well I'm going to be watching that like a hawk over that. If that stock fails to come in over the next few minutes and allow me to cover, sometimes I will just simply close that out even if it's at a loss. Sometimes the best trades that you can make are trades that you take a small loss on because small losses keep you in the game. You never want...If you're only going to make quick profits of 20 cents on the trade or 30 cents and you're trading 4,000 at a time, you don't want to be in a situation where you lose a dollar or two on a trade and you're down eight grand in the first ten minutes of trading because that can't happen. There's always risk. These markets are as I've said in the beginning, these markets, they never give money away, and they never give money away. You make your money only because you're able to provide liquidity to the market.

Tim Bourquin is the co-Founder of the Online Trading Expo and the Forex Trading Expo, and CEO of TNC New Media, a tradeshow and online media company.  Register to attend the largest convention for foreign currency traders, the Forex Trading Expo, by clicking here.