©2007, Reprinted with permission of The Trader’s Journal magazine (www.tradersjournal.com)
Joe DiNapoli is a professional trader, author and well-known speaker. His book, Trading With DiNapoli Levels, provides a new and keen insight to technical analysis. His deep knowledge about the technical make-up of the markets can help any trader improve their market timing approach.
Joe DiNapoli has been involved in the markets for more than 38 years. He is also a dogged and thorough researcher, an internationally recognized lecturer, and a widely acclaimed author. Joe, a registered C.T.A. for over 15 years, has taught his techniques in the major financial capitals of Europe, Asia, Russia, the Middle East, and South Africa as well as in the United States.
Since that time, he has seen bull markets and bear markets, and has traded nearly every tradable instrument. DiNapoli says he was initially attracted to the “puzzle” of the markets.
His articles have appeared in a wide variety of technical publications worldwide. The following is Trader’s Journal interview with Joe DiNapoli.
TJ : Who is Joe DiNapoli?
JD : I did some of these things during trading breaks – best to say I have been trading 38 years. Before trading… eating baby food and going to school. I started trading at 17 years old. Done many things… raced cars to help win money to pay for school and such worked on the Alaskan Pipeline for a time. Restored Classic cars. Graduated with honors as an electrical engineer from the University of Massachusetts.
TJ : Please provide a background of yourself? What were you doing before you become a trader?
JD : It seems that in one way or another, I’ve been involved with trading all my life. In 1967 I finished engineering college and began seriously trading. Back in those days, I was dealing with low capitalized, small, over-the-counter issues, where you’d lose 15-35 percent just in the bid/asked spread. We used to margin those “equities”, that’s using the term loosely, at the company’s credit union where I was working. It was definitely spooky. In those days, I was also involved in trading options on stocks. That’s before they were listed on exchanges, like they are today. You talk about volatility, when you wanted to sell, the broker would say ‘to who?’. It was strictly a bid by appointment situation. We’d generally ended up paying for an exercise to exit a position. I got involved in trading commodities, about 1980. I like the futures markets. I like many markets actually. Each market has its advantages. Today I trade a fair amount of stocks … index futures and commodities… also Forex. If you can develop strategies to effectively deal with the risk presented by futures , you can carry that over to stock trading and do quite well. In my earlier days I was not nearly as well capitalized so I liked instruments with higher leverage…. That’s not an issue today.
About 1986 I began speaking, initially with Jake Bernstein and Larry Williams, at the Las Vegas Futures Symposium International. They were massive events with hundreds of traders combing the halls at 5 AM.
Right away I filled the room with my strategies. It was amazing, I never thought I’d get that kind of response. It really mushroomed from there. I did not know it at the time but no one talked about leading indicators!! Now, I’ve spoken all over the world, in major centers in Asia, Europe, Africa, and the Middle East. In 1996 alone I’ve spoken in 22 different countries. I’ve met fantastic people all over the globe. The industry has been very good to me, as have the markets.
TJ : Tell us a bit about your trading style, how do you go about it?
JD : The trading techniques I use are substantially different than those used by other people. I mix leading and lagging indicators and interact with prices based on that approach. I use certain lagging indicators like Displaced Moving Averages and the MACD/Stochastic combination, to determine the trend. Once I’m in a trend, I use Fibonacci analysis, as a leading indicator, to position myself within that trend. The last step is to take Logical Profit Objectives. Those profit objectives are calculated by certain Fibonacci techniques. The approach is mine, since I’ve spent an awful lot of time developing it. I use Displaced Moving Averages, for example, in very specific and unique ways. I think I’ve really done my homework on that one, about 3 years worth of research in the early ‘80s. During the mid-80’s, I spent another three years or so determining the most effective method to utilize Fibonacci techniques. I think I’ve done a good job of separating the best, from the good, or the average. Sometimes it’s not a matter of developing a brand new indicator. It’s a matter of utilizing an existing indicator in a more effective manner.
TJ : Please give us an example of what you mean by using an existing indicator in a more effective way?
JD : OK, lets take moving averages. Instead of using standard moving averages, I use Displaced Moving Averages. In fact, back in the mid ‘80s, when I started speaking about this, there weren’t any computer programs out there that I was aware of, except our own, that would displace a moving average. Prior to that, some people used the opens, instead of the close, to determine the moving average, so that they would know what the moving average value was, before the end of the day. When you displace a moving average say five days, you know what the moving average is going to be up to five days out. There was no longer any reason to use the open. Unfortunately, many of the graphics software programs that displace moving averages today, don’t show them past the last day’s price action. It’s an example of programmers creating trading software, rather than traders. Any software we authorize or partner with is done right. Currently we are working with NextView software developing my indicators in their platform. They are a Singapore company and seem dedicated to doing things right.
TJ : What are your profit objectives, and do you have a long-term or short term outlook?
JD : My profit objectives are a function of the time frame I am trading in. Weekly objectives are much larger than objectives calculated on a five minute chart. The methods of calculation however is exactly the same. If there is one single thing a trader can do to vastly improve his win/loss ratio, it’s to use logical profit objectives consistently in his trading plan.
TJ : What risk tolerance do you have?
JD : I have a very low risk tolerance . I once heard futures trading described as learning how to juggle dynamite. That’s not a bad definition .These days it’s the same situation for stocks., just look at the volatility. What you have to get used to is controlling greed so you can realize consistent profit! For a variety of reasons most people can’t do that. Asia traders are particularly vulnerable to the gambling and excitement aspects of trading. I like excitement too but I like profit more.
TJ : What steps do you take to control the downside?
JD : Fibonacci analysis, along with my trend indicators tell me clearly if I’m wrong or if I should get out of a trade. When that happens, I exit at market or look for a way out. Hope is a four letter word when trading.
TJ : Please describe the best and worst trades you have made.
JD : ‘Hot’ uninformed tips are always the worst. Often they come from an entity that is trying to gain commissions or has a position in the instrument they are tipping. Sometimes big bull moves bail everyone out… that’s where the old adage about not confusing a bull market and brains comes from. Informed trading situations that fit my investment criteria are the best and most rewarding trades.
TJ : Trading is a highly competitive endeavor, what gives you an edge in the market?
JD : Experience, control, and an excellent approach, as in a method to trading.
TJ : Everyone is familiar with the old maxim “cut your losses, and let your profits run”. Many traders have difficulty deciding when to capture their profits, sometimes letting a profit turn into a loss. What do you use to make a sell decisions to close a trade?
JD : I don’t do either. My profits are let to run only to the extent of a pre calculated objective. This doesn’t mean I never have distant objectives, it all depends on my time frame for the trade. Also, I might get back in to the same instrument but it will be only at ‘safe ‘ pre calculated levels. I don’t cut my losses, the market does , by violating a pre calculated level or indicator. I just exit the same way I’d get off a street if a truck was bearing down on me. The trick is in having the criteria to see the truck, that’s the method… then the experience and discipline to act on it. When inexperienced traders are in a bad position they think “I don’t want to take the loss” They don’t realize that they already have!
TJ : What advice can you give to someone who is just entering this field?
What would you do to shorten the time and reduce the losses that are usually involved in the learning cycle? JD : People trying to gain profit out of this game have a lot of challenges. I’d recommend they seek out traders who know what they are doing AND have the ability to explain what they are doing to others. There’s a real educational issue here. If they are working the short time frames ,like 5 minute charts, there’s understanding floor and exchange mechanics as well. No one talks about that but me…. No ONE!! Once they have all that down, then they have to master control… anyone getting weak knees out there? The markets do not exist to make most traders money … they exist for the few to legally take money from the many.
TJ : If you were to find a perfect trade, what would it be?
Please describe what it takes for a trade to be lined up with “all its ducks in a row”. JD : I’ll have to answer this in a general way since most of you are unfamiliar with the specific aspects and details of my trading approach. Trades need to conform to the following criteria. I’ve used this approach continuously for years. I buy dips in an uptrend and sell rallies in a downtrend. The lagging indicators allow me to determine trend. The leading indicators, primarily Fibonacci analysis, allows me to “safely” place myself within that trend. I use Logical Profit Objectives continually and I have oscillators, which are used as filters, to keep me from entering in the direction of a trend which is too dangerous to bother with. I also have 9 trading patterns or conditions which act to give me the direction of a market. If they are in conflict with the trend analysis, I always go with what the patterns are telling me. Within that criteria there are obviously standout situations but you wouldn’t understand the terms I would have to use to describe them.
TJ : What markets do you trade?
JD : Any Markets that move and conform to proven money making situations.
TJ : Is your trading system mechanical?
JD : No, but the secret to making a judgmental system good is to make as much of it as possible non-judgmental. I’d say about 80% is non-judgemental.
TJ : How do you calculate the trade profit objective?
JD : I use one or both of two methods. The first is Fibonacci analysis, see the Fibnodes Web pages. I also use the Oscillator Predictor.
TJ : What displaced moving averages do you use and for which markets?
JD : I use the same DMAs for all markets. One the ways you can tell if you’re on to something good is if it works across different markets. Otherwise you get into this curve fitting morass that buries so many new technical traders. I use the 3×3, 7×5, 25×5. They are all simple moving averages of the close. The second number is the displacement amount.
TJ : Are those moving averages appropriate for longer-term traders (daily charts)?
JD : Yes, in fact I use DMAs for daily, weekly, and monthly charts. I use the MACD Stochastic combination for intra-day as well as daily, weekly, and monthly charts.
TJ : Are your techniques published? Can our readers read about them somewhere?
JD : I have Trading Courses available and a very good book and a DVD. With them you get some free time on our client forums. That means you get me and/or another DiNapoli expert, at no additional charge.
TJ : How much capital should a person have?
JD : That depends on the person. If you were a billionaire, I’d say $200,000. If you don’t have that much to trade, my best guess is at least $5,000. But, you have to be very conservative.
TJ : What are some of the key rules that you feel are most important for a trader to keep in mind when evaluating any potential trading opportunity?
JD : The guy on the other side is always smarter. This one came straight from my Dad. Loss of opportunity is preferable to loss of Capital. Have predetermined profit objectives and stop loss points. Use leading indicators for entry of all positions. Keep position size conservative until he big opportunity unfolds. All the usual stuff about not averaging a loss, etc.
TJ : What mistakes do most people make in the markets?
JD : That would take a week to answer. New traders think it is too easy. They are worried about not making enough when they should be worried about preservation of capital. More experienced traders rarely ever come to see how the market really works. The forces behind it and the methods necessary to interact profitably with it.
TJ : Let’s talk about trading education. How long do you think it would take for someone to master the art of trading?
JD : Well someone with a good basic aptitude might get reasonably good in 6 months or a year.
Otherwise, anywhere from 5 years to never. It runs the gamut. There is so much to overcome… so many misconceptions. We help people by first not lying to them. By not appealing to their inherent greed. We provide the necessary steps from training materials to appropriate software to private seminars. The truth is however… If there is some serious issue like Jealousy or excessive anger in a person’s personality, that person will not make it as a trader. The market will bring that flaw out and destroy a person like that. If you have a reader that falls into that category I can help him or her but only after that person has visited a shrink and figured out what is wrong. The market is a very expensive analyst.
TJ : You conduct seminars too. Why do you do that? What do you teach at the seminars?
JD : I do what I like to do. I like to teach and to speak. I’m good at it and one of the secrets of life is to do what you are good at. It is one of the most rewarding things I do… may sound corny but it is a type of service.
TJ : What advice would you give to someone who is thinking about trading for a living?
JD : Be prepared for a long difficult haul. Seek out experienced, sincere, and capable people to help you because you will need them!
TJ : Any last thoughts to our readers?
JD : Hope to see you in Singapore and Malaysia.