Having experienced three market crashes as well as multiple bull and bear cycles, Steve Patterson is extremely familiar with the ebb and flow of the markets.
After starting his career on the trading floor of a brokerage firm in Toronto, Canada, back when open outcry – the method of shouting and using hand signals to convey information and make contracts – ran rife, Patterson went from being a messenger to a dividend clerk and ultimately a stockbroker.
Then, with the emergence of electronic communication networks in the 1990s, he became one of the first home day traders. “I was probably one of the original ones, you know, way back when you had to pay like $800 for a satellite data feed into your house and my computer monitors were 21 inches and green,” Patterson tells Opto.
He traded on and off throughout the intervening years, dabbling in the restaurant business and even becoming a professional card counter in Las Vegas.
“Poker is about fixing your mistakes in the game itself and strict bankroll management, and that is exactly what trading is as well,” Patterson, who still remains a semi-professional poker player, explains.
“Poker is about fixing your mistakes in the game itself and strict bankroll management, and that is exactly what trading is as well”
Later, Patterson decided to try his hand at becoming a fully-funded prop trader. Then, when the Dodd-Frank Act came into law in 2010 following the financial crash and proprietary trading was made illegal in the US, Patterson became a full-time retail day trader.
His trading style is centred on both swing and macro trades and based on his ability to “paint the fundamental picture” without becoming distracted by any news that’s not important. A good example of this is how Patterson successfully used US President Donald Trump’s tweets to take positions on the companies that the president was calling out.
“I’m a discretionary trader that uses order flow on a smaller timeframe and my proprietary way of reading order flow, and using the tools and techniques I learned as a floor trader, to find precision entries into macro pictures. I’m also interested in buying or selling at undervalued or overvalued situations,” he explains.
“I’m a discretionary trader that uses order flow on a smaller timeframe and my proprietary way of reading order flow, and using the tools and techniques I learned as a floor trader, to find precision entries into macro pictures”
Here’s a look at Patterson’s typical trading day.
Before the markets open: building the macro picture
As a self-described “health nut”, Patterson’s morning routine is a quiet, considered time. He doesn’t drink coffee, but instead has a lemon juice and water followed by exercise, which normally consists of tai chi.
By mid-morning Patterson has fired up his six-screen setup and is checking the news via his Twitter feed to see what happened overnight. He does this to build a general macro idea of what the world is talking about.
Once he has an idea of “what the buzz of the day is”, Patterson will look at the markets.
“How did they open? How did they close? I don't key off of them, but I just want to know what they're doing. I’m looking for anything extreme, a big reaction that is going to influence that day,” he says.
“I’m looking for anything extreme, a big reaction that is going to influence that day”
As soon as Patterson has a general macro view then he will start drilling down and looking for stocks. “What’s active? What’s up? What has a lot of volume in pre-market trading? What are people talking about?”
If they meet his criteria, Patterson will arrange chart packages to follow these stocks as part of his setup. Each trade has a varying timeframe, making it important for him to be prepared as possible for those assets. Then he relaxes.
Early trading: from fundamental analysis to considering risk
“I usually don't start trading [straight away]. What I'll usually do in the first 20 minutes of trading is I’ll watch the market. I’ll watch the S&P 500, the Nasdaq, the Russell as well as what oil and gold are doing. I don't even watch the stocks at this particular point in time. I want to get an idea of what kind of day the market is having,” he explains.
It’s important for Patterson to let the day develop before committing to a trade.
“Most of the time, what I'm doing is I'm looking at my shortlist. If the markets are strong, [even if I] still want to short it, I will wait for a better price before I will engage it. If the markets are having a very weak day and it is selling off then I'll be much more aggressive in my shorts on that asset,” Patterson says.
“If the markets are strong, [even if I] still want to short it, I will wait for a better price before I will engage it. If the markets are having a very weak day and it is selling off then I'll be much more aggressive in my shorts on that asset”
If the markets are having a strong day he will take a 0.5% risk, whereas if the big picture is negative then he might put a 1.5% risk on a trade. The hours between 10:30am and 12:00pm are the most active time of the day for Patterson.
Afternoon trading: best time of day for trading
Patterson won’t start trading again until after lunch. “I'll manage positions, but I really won't open a new position again until maybe 13:30pm or 14:00pm. I'll try to get a position into the close because by that time I have a lot more information,” he says. “Those are my best trades. My early trades are my worst.”
By late afternoon, Patterson is looking for “easy situations,” or “something extremely obvious” such as a really strong uptrend or a really strong downtrend.
“I'll manage positions, but I really won't open a new position again until maybe 13:30pm or 14:00pm. I'll try to get a position into the close because by that time I have a lot more information”
It was during that part of the day that some of his best trades of the year so far have occurred, including a successful short on Roku [ROKU] and several marijuana stocks. However, while these trades have provided Patterson with some of his best returns, they’ve also been the subject of some of his biggest losses.
Throughout the day, Patterson is actively posting his trades to his followers on StockTwits. These trades are also covered in Steve Patterson Trading – a service that provides analysis and information about the markets – that he started in 2017.
As an educator, one piece of advice Patterson would give to other traders would be “to stop treating trading as if it were a video game that is all about charts and indicators”.
For him, trading is more like an auction process, and as such understanding how professionals engage with this process is important.
“Just looking at charts without understanding this is like looking at the ocean and thinking you know what is happening below the surface from the size of the waves,” Patterson explains.
“Just looking at charts without understanding this is like looking at the ocean and thinking you know what is happening below the surface from the size of the waves”
Disclaimer Past performance is not a reliable indicator of future results.
CMC Markets is an execution-only service provider. The material (whether or not it states any opinions) is for general information purposes only, and does not take into account your personal circumstances or objectives. Nothing in this material is (or should be considered to be) financial, investment or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by CMC Markets or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person.
The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although we are not specifically prevented from dealing before providing this material, we do not seek to take advantage of the material prior to its dissemination.
CMC Markets does not endorse or offer opinion on the trading strategies used by the author. Their trading strategies do not guarantee any return and CMC Markets shall not be held responsible for any loss that you may incur, either directly or indirectly, arising from any investment based on any information contained herein.
*Tax treatment depends on individual circumstances and can change or may differ in a jurisdiction other than the UK.