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This interview was first published in Your Trading Edge (www.ytemagazine.com).
For all the traders that missed the recent Zanger seminar due to his serious sickness here is an interview I found that Dan did back a few years ago to give traders some insight into his world record setting performance and his continued success in the markets. We all hope you get well soon Dan.
Dan Zanger is a world record holder. During the tech bubble in the late 1990s, the Florida-based trader recorded the biggest-ever percentage increase in a personal portfolio in a 12-month period. He grew his account a remarkable 29,333 per cent, with the results fully audited. In the process he multiplied his $10,000 stake to $42 million.
After blowing his inheritance trading, Zanger refined his swing trading technique that involved buying fast-growing momentum stocks breaking out of bullish chart patterns, then selling quickly when the stock began to falter. He has used simple techniques – charts showing price and volume action – to generate the returns.
Zanger’s success continued beyond the tech bubble: he made a $20 million-plus profit trading Google. Like many, he’s finding the current market conditions tough. But he is helping other traders get good results, launching the www.chartpattern.com site, which has a subscription newsletter.
Dan spoke with Your Trading Edge’s Ben Power.
1. How did you get into trading?
My Mom got me into trading. We used to watch the original CNBC format on a little TV station in LA called KWHY that started in 1967. It was a very low budget operation. They had the original ticker tape on it. Mom used to watch it all day long. I’d come home from school and watch it and I got addicted to the ticker tape.
There was a guy, Gene Morgan, who came on after the market closed with a show called ‘Charting the Market’. He used to mark up the charts: flag formations, wedges, channels, you name it. He showed stocks breaking out; he would show short-term charts and long-term charts. I thought it was pretty amazing that you could foretell future movements of stocks by looking at chart patterns.
2. You turned $10,000 into $42 million, which is a remarkable feat. How did you do that?
The internet stocks took off in 1998 around February when Bill Clinton signed a key legislative package in the US that prohibited taxation of shipment of goods bought over the internet. Stocks never looked back and would triple and double on a regular basis.
Just prior to this I had gotten crushed in the market due to the collapse of Long Term Capital Management (a hedge fund that blew up in 1998). I’d had to sell my car and put the proceeds, $10,000, into my trading account and start over. This time I put some disciplined rules in place.
When the market took off in the next three months stocks would go from $40 to $90, $40 to $80, $25 to $60. I just had the right trading tools and mentality. My swing trading style really fit the new bull market. I constantly multiplied my money. I was all-in in one or two stocks at the time: stocks like Yahoo!, Amazon, CMGI. It was amazing: stocks broke out of defined patterns and would run from $80 to $160. I was also holding all my stocks on margin 2-1. This went on for almost 20 months.
3. But you weren’t an overnight success. You blew up a few times didn’t you?
I really trading started in earnest when my Mom passed away and left me with $100,000 in 1989. The Gulf War started in 1990 and stocks took off when people realized it was going to be a short campaign. I turned the $100,000 into $440,000 in about three months.
Basically I went downhill from there. I started thinking I was going to be a multimillionaire in six months. In my very first market correction, the stocks that I owned just got crushed. My $440,000 went to $230,000. I was whipsawed back and forth over the next six years and ground it into nothing. I remember one stock I owned at $27. A newspaper reported they were cooking the books and it fell to $6 overnight. I had all my cash in that stock, but amazingly that was one of the very few stocks that were not marginable. That saved some cash for me.
I really learned my lesson: when stocks don’t act right, or start acting funny, get out! After that I really got disciplined; I realized the stock market isn’t here to make me money, it’s here to take my money. After six years my money was all gone. I was so pissed, I decided there would be no more ‘Mr Nice Guy’, no more listening to a stock’s story; I’d purely look at the charts, purely look at technical action of stocks and their intraday behavior.
4. Can you briefly explain your trading strategy?
I’m looking for high-powered movers: stocks that know how to make big moves. There are lots of stocks with nice chart patterns that don’t go anywhere. If a stock has made a $20 to $30 move in two to three weeks, that brings my attention to it. It means it’s capable of making a big move. Google, Yahoo, Amazon had made tremendous opening moves and continued up for many, many months thereafter.
I’m then looking for the stock to give me a set-up that creates a bullish pattern: consolidation, high channel, retracement work, descending channel, falling wedge etc. As the stock begins to reaccelerate and break out of those high-level bullish patterns, I then buy. I also look for extreme volume: 200 to 300 or 400 percent increases. When the big institutions move the stock I want to go with them. After it rises $20 to $30, the stock will begin to decelerate and I’ll begin to peel out of my position.
5. What are some of your favourite chart patterns?
My favourite one is the bull flag pattern. After a sharp move up of maybe four to five days (which creates the pole) it then tapers out and the stock falls down and does some minor retracement work. It creates a falling channel (the flag). Any high level channel is extremely powerful.
6. Apart from price and volume do you use any other indicators?
I don’t use any other indicators, just price action and the ability of a stock to respond to volume.
7. Do you look at fundamentals?
I look at fundamentals and trends in the marketplace. In 1998 to 1999 the trend was in internet stocks. Lately we have had over the last three years powerful trends in commodity stocks, oil, copper; a lot of fertilizer stocks have also made some pretty spectacular moves. I have a 40/40 rule: I like stocks with earnings up 40 per cent and revenues up 40 per cent for the quarter.
8. How long do you tend to hold trades?
The market’s gotten very volatile. It’s hard to hold a trade more than two to three weeks these days.
9. Unlike the late 1990s, the current markets aren’t trending. How does your style perform in those markets?
In 2003/04, for example, I could hold housing stocks for three to six weeks then I would probably check out; anything longer than that I’d have got pretty hammered on pullbacks. This market’s tough, it’s choppy. In the 1990s you’d get stocks breaking out of a pattern and they’d run up for months on end, but not anymore.
The market started to change in 2006: stocks would rise up for two to three weeks then make a 20 to 40 per cent retracement of the recent move. Extreme swings like that have led to the massive bear market we’re in right now. A lot of stocks are down 50 per cent, while the S&P500 is down 18 per cent to 20 per cent or more as of this interview. Many, many stocks have just been crushed.
You’ve got to really be aware. You have to adjust your style and hold for three to four days, four to six weeks, or more, depending on what the market is giving you. It’s a real game out there and you’ve got to learn to play the game. Once you feel ‘this is how it works’, they’re going to change it on you.
10. 2008 has been a tough year, how have you performed?
I’m down about 20 per cent this year. I was up about 30 per cent. I’ve had a nice, wild swing. My retirement portfolio (which doesn’t use leverage) is down about 7 per cent. But my margined account is down about 20 per cent.
11. You’ve said in the past you make most money in a bull market. Are you still short selling?
Even though I’ve had a few monster gains shorting a few stocks, I have never been real successful shorting most of the time. I got hammered shorting stocks in 2001 due to large whipsaws. I kind of quit. I follow big, fast-moving stocks the market really wants to own. I find that a stock going from $100 to $50 is a rare occurrence. But it’s easy to find a stock that goes from $50 to $100. In a bear market like this, I’m more or less sitting on the sidelines doing nothing.
12. Your early wipe outs were related to using leverage, but it’s also been a key to your success. How do you use leverage without blowing up?
The first down day, the first sign of choppy behavior or erratic behavior, I just sell out or reduce my position by 30 per cent to 60 per cent. That’s how I learned that particular trading style. I just don’t allow myself to get involved with a stock that’s moving down.
13. You seem to take on and accept risk. Do you think too many traders are trying to avoid the fact that if you want big success you have to take big risks?
Most traders don’t understand how risky the market can be. I think many of them just don’t really realize the market is a brutal, nasty, vicious place to be. They get chopped up. They sit on a stock and it’ll just collapse on them. Then they hold waiting for it to come back one day while another stocks zooms and doubles. They just don’t get it and don’t do the math. They also do not set mental stops and adhere to them.
14. Apart from stop losses, you rarely talk about risk management in broader terms. Do you restrict each trade, for example, to a certain fraction of your equity?
I try not to have a lot of stocks because I can’t watch a lot of stocks. I like to have maybe 6 to 7 stocks. In a very strong, new bull market I’d maybe have 12 stocks. In 2004 I had as many as 20 stocks – there were a lot of stocks making new highs: housing stocks, tech stocks etc. I try to have good diversification and not to have too much money in one stock. When I see the market turn down I just start reducing my shares.
15. One of your most successful trades was Google. At the time most experts were saying it was way overvalued. What did you see that they didn’t?
Most of them were talking it down saying it was expensive and overpriced. Actually it was one of the most under priced stocks I had ever seen. Earnings were up 150 per cent and revenue was up 120 per cent. Even before the internet bubble, a stock growing 100 per cent annually would have a PE of 100. Google had a PE of 45: it was trading at half its growth rate. I haven’t been as excited about a stock as I have on Google. It shows how clueless those broadcasters on TV are. [Zanger made $20 million on Google.]
16. You place a lot of emphasis on operating in hot sectors. What sectors do you think will be hot in the future?
Fertilizer stocks look relatively good going forward at the time of this interview, but that could change. Solar stocks still have great earnings growth potential in the future, but they act very badly. The bank sector wants to come back; some of the financials will come back. I think the energy sector will come back. But I don’t see a whole heck of a lot out there. You’ve got to wait and be patient.
17. What is your daily routine?
I’m in front of the computer all day during market hours. I make a quick sandwich at lunch. I then do three hours of homework after the market closes. On Saturday and Sunday I do another five to six hours of homework.
18. What books do you recommend traders read?
The greatest book of all time is ‘How to Make Money in Stocks by William O’Neil‘. I consider that the bible of traders, so to speak; it teaches you to find the stocks you need to key in on. I’ve read that book 8 to 10 times and selected chapters 30 to 35 times over a six year period. It gives a completely whole new way of looking at stocks that is absolutely mind blowing. It takes years of reading and re-reading to re-programme your brain.
20. What are the biggest mistakes traders make?
Believing in a stock is number one. Believing you can’t get hurt and believing a stock will come back. All those beliefs – it’s all in your mind – are things that you have to re-programme. Never believe in a stock.
21. What are some key steps that traders can take now to be successful?
Have a good chart program where you can download every night and look for chart patterns. Read Thomas Bulkowski’s Encyclopedia of Chart Patterns. Have a plan to put in stops. Learn not to own a stock below what you paid for it; learn the ability to say, ‘that’s it I’m out’.
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