Joe Vidich is an equity trader and a hedge fund manager that combines long-term positions with short-term trades. Since the start of his fund, and for more than a decade, Vidich has had an annual net return of 18% with a maximum drawdown of only 8%. The Gain to Pain ratio of his ‘Manalapan’ fund is high at 2.4.

Joe Vidich Trading Advice

■ Two types of market sentiment

There are two types of sentiment. There is the popular sentiment, expressed in the media, and then there is the sentiment that is expressed by the market. What matters is the market sentiment, not public sentiment. I judge the market’s sentiment based on how the stock moves. If everyone is bearish because that’s what CNBC says, that is public sentiment, but if the stock gaps are higher after a conference call, that’s the market sentiment. What matters is the market sentiment, not public sentiment. I try to drown out the public sentiment.

■ Position sizing is a great way to manage risk

The larger the position, the greater the danger that trading decisions will be driven by fear rather than by judgment and experience. If you are diversified enough, then no single trade is particularly painful. The critical risk controls are being diversified and cutting your exposure when you don’t understand what the markets are doing and why you are wrong. It is really important to manage your emotional attachment to losses and gains. You want to limit your size in any position so that fear does not become the prevailing instinct guiding your judgment.

■ Be ready to change your opinions

To be successful in the markets, you have to be willing to change your opinion. Most people are not willing to change their opinion. You have to be humble about your ideas.

■ When the market trades against the news

If there is bearish news before the opening and the market does not trade down much during the first hour, it indicates that the smart money is not selling and that the dip is a buying opportunity.

■ Scale-in and Scale-out

I scale-out, and I also scale in. The idea is don’t try to be 100 percent right. That way you will never be completely wrong, and you can reassess the situation if the market goes lower. It is all about keeping the portfolio from weighing you down.

Equity Trading Advice

■ In a bull market, prices open up lower and then go up for the rest of the day. In a bear market, they open up higher and go down for the rest of the day. When you get to the end of a bull market, prices start opening up higher. Prices behave that way because in the first half-hour, it is only the fools that are trading [pause] or people who are very smart.

■ When the market closes near the high of the move, there will be some traders who want to sell near the high, and they will be sellers on the next day’s opening.

■ The right way to manage risk is to monitor your positions and to have a mental point at which you reevaluate the position. The amount of room you would allow until that point would be different for different stocks. Every stock has its own risk profile. Some stocks could go down 50 percent, and it wouldn’t necessarily mean anything. But for a stock like Coca-Cola, you should reevaluate if it moves 5 percent against you.

■ One of the best chart patterns is when a stock goes sideways for a long time in a narrow range and then has a sudden, sharp upmove on a large volume. That type of price action is a wake-up call that something is probably going on, and you need to look at it. Also, sometimes whatever is going on with that stock will also have implications for other stocks in the same sector. It can be an important clue.

■ There is no high for a concept stock. It is always better to be long before they have already moved a lot than to try to figure out where to go short. When P/E multiples get to 50, 60, or 70, you are in the realm of concept stocks.

□ Joe Vidich (Long-Term Trader)

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Source: Dialogues from the New Market Wizards {Jack D. Schwager}