What is Vertical Trading?

These words of wisdom, slightly edited for brevity, were penned by someone claiming to be Gary Smith (I have no reason to doubt the author is who he says he is) who wrote among other things How I trade for a Living. Its worth sharing.

Disclaimer: To avoid any controversy, let me just say this post pertains *solely* to my particular style of trading. Due to differences in trading time frames, goals, and most especially risk tolerances, my style may not be everyone’s cup of tea.

I only wish I knew years ago, what I know now. But then don’t we all. In hindsight, much of what I’ve made over the years has come from one particular pattern - tight rising channels and with little to no volatility along the way. Bruce Gould ingrained in me years ago that trading success comes from exploiting repetitious patterns and for Bruce it was price movement that defined repetitious patterns. Trading success also comes from having an edge. And the price movement pattern that has given me the most edge has been whenever an index or sector - be it domestic, international, equity or bond - is ascending in a steady cadence over a period of days, weeks, or months.

The longer the cadence, the more profitable because it permits me to implement a concept learned from not only Bruce Gould, but also Jesse Livermore, Nicolas Darvas as well as many others who achieved trading success in their lifetime. And that’s the concept of vertical trading. This means when you get on-board a trade that is a winner - your initial horizontal position - you then move to a vertical plane as you continually add to that original position.

According to Bruce, true wealth accumulation comes when a trader shifts from a horizontal plane to a vertical plane - when the trader recognizes that he is on-board a winner and maximizes his efforts and capital staying aboard that winner. Wealth accumulation in trading (and business) according to Bruce is nothing more than your ability to work with your winners. Big money is made by taking horizontal opportunities and turning the winners into vertical successes - much like Ray Kroc did with McDonalds or Conrad Hilton with hotels.

While this may not jive with everyone’s trading beliefs, I am adamantly opposed to setting price targets or objectives. Let it run till the cadence changes its beat and don’t try to predict when that change may come. Of course that is easier said than done and regretfully a principle I’ve been known to occasionally violate.

Much to my surprise, after trading just about everything under the sun - from stocks, warrants, and convertibles to futures and options - the trading vehicle that has enriched me the most has been mutual funds. And that’s because the funds trend more persistently and in tighter rising channels and with lesser volatility than anything else out there. The reason that is desirable, at least for me, is because I can trade the funds at a much greater level of level of aggressiveness than the other trading vehicles. For me, trading the funds were my solution to the age old problem most traders are faced with - how to overcome one’s natural intolerances towards risk with the need to be prudently aggressive. If you ever want to accumulate a sizable nest egg from your trading efforts, **you must be aggressive and be willing to take risks!**

I’ve mentioned this before, but I haven’t shorted for years. Although some of my best trades on a horizontal plane while trading the stock index futures were from the short side, I never was able to trade on a vertical plane from the short side. That’s because the dynamics of a bull move are much different than that of a bear move - at least for me. Meaning, the bear moves are much quicker and violent and prone to just as quick and violent rallies against that bear trend. In other words, too much volatility to implement vertical trading where I can accumulate positions. While I may have made money consistently while trading the stock index futures, it wasn’t until I went into mutual funds on a vertical plane that I was able to accumulate any significant trading capital.

Obviously there are lots of tight rising channels to exploit during the bull phases in the market, but they nonetheless also exist during the bear phases. For example, during the brutal bear market of 2000-02, at one time or another you had tight rising channels in such areas as the REITs, TIPs, and small and mid-cap value, to name just a few.

I’m a believer in simplicity over complexity, in my personal life as well as in my trading. I didn’t come into trading to be intellectually stimulated, just to make money. While there may have been times earlier in my career when I veered into the arcane and esoteric, I always found the most simple worked best. When you are simply trading the movement of a line in a tight rising channel, you have little need to get bogged down in tedious research and analysis, indicators, or most importantly, your opinions and biases.

In How to become a trader I said you should find a mentor. Gary Smith is a perfect example of what I mean… someone who has the spirit of a teacher, who speaks authoritatively from experience and wants to see others succeed.