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Yahoo Finance Uncut: Brian Shannon, Founder of AlphaTrends.net

Yahoo Finance’s Jared Blikre sits down with Founder of AlphaTrends.net, Brian Shannon, as they discuss financial markets, trading, risk management, and stocks.

Video Transcript

[MUSIC PLAYING]

JARED BLIKRE: Welcome to "Yahoo Finance Uncut." I am your host Jared Blikre. And I am sitting here with Brian Shannon. He is the founder of AlphaTrends.net

He has been alongside me many times in our studio and also on a remote basis over the years at Yahoo Finance. Great to see you here today, Brian. And I should give a note to my viewers this is taped, and we're going to play this over a couple of weeks. But yesterday was a huge down day in the market.

That's when we had the NASDAQ down 5%. And we want to talk about that because, Brian, we've seen these moves before, seemingly coming out of nowhere, but they come out somewhere. We know this. Inflation being top of mind for investors. Of course, we focus-- well, you focus mainly on technicals. Just what's your 30,000 foot view of the market right now?

BRIAN SHANNON: Well, you know, 2022 has been marked by a lot of volatility. But when you look at the sum of the rallies versus the sum of the declines, the sum of the declines has been greater. That's called a downtrend, and that's why we're down about 17% year to date. Now, like you said, yesterday we were down, I think, over 4% in the NASDAQ.

And the thing is it kind of came out of the blue in that we had a little bit of strength leading up to it the prior couple of days and then it was a real big gap shot lower. So we had-- I think it was exacerbated by people who were kind of thinking, you know, maybe we're going to make a little bit further bounce.

The key though, is that we had a catalyst. And, for me, at least, in my time frame, which is swing trading, generally if it's a bad one, it's a day trade, but up to maybe two weeks. But when we have a catalyst like the CPI coming and we're in this environment where it's important-- you know, a year and a half ago, CPI didn't matter. But now it matters because we're in an inflationary environment and everyone's hanging on every little tick in that.

So I like to lighten my exposure prior to something like that event, similar to an earnings report. If I'm long the stock, I'll try to trim my exposure prior to it. To me, the fear of the unknown and the possibility of a bad day like we saw is better to avoid that than staying in and hoping that maybe we get some good news and it continues higher. So fortunately, you know, for traders, you know, you can manage risk around these things. For an investor, man, it's got to hurt. And that's why I'm not an investor. I don't like that kind of pain.

JARED BLIKRE: Well, I don't blame you there. And let's talk about how traders can be approaching this market. You mentioned-- knowing your-- well, there are two things, I think, you and I can agree on which traders should know, maybe more, time frame and risk tolerance. And you're talking about both of those there. And just kind of let's talk about where-- this is-- I'm on TV. I talk about markets. I may be talking about a time frame that the person watching has that's different.

You're on Twitter. The people posting content there are going to be on different time frames. And there's not a whole lot of discussion about what exactly the context is we're talking about in terms of what we're expecting in these market moves. And yet, it's fundamental to what we're expecting. Just can you expand on that and the importance of knowing and communicating these things?

BRIAN SHANNON: Yeah. I mean, Jared, truthfully, I don't envy your position in terms of that. For me, I try to make it clear that here's my time frame, and this is the time frame I speak from, but, you know, make the trade your own. So what I'm trying to do is to tell people this is my time frame. This is how I engage.

But the beautiful thing about technical analysis, which is my approach, is that it's fractal. The principles that we learn on one time frame are applicable to every single time frame. Support broken tends to act as resistance. We can see that on a one minute chart if you're day trading the S&P 500. You can see it on a monthly chart going back 10 years of a big blue chip stock like Microsoft.

So, you know, the things that you just identified, time frame and risk tolerance, they're both highly personal. And you just can't get a generalized source of information and apply it. You have to always make the trade your own. Understand what your objectives are, understand who the speaker is that's talking, what's their bias, what's their time frame, what's their reference, and their risk tolerance, because often it's going to be very different from you as an individual.

So take it as a starting point and then personalize it for your objectives and say, hey, that makes sense to me. I'm going to use that in my analysis to expand on what I'm doing. Or say, hey, that guy is, you know, completely different time frame, doesn't matter to me. I'm going to ignore it like I ignore what Warren Buffett does. I have zero interest in what Warren Buffett's doing.

JARED BLIKRE: You know, I came to Yahoo Finance in late 2015. And back at the time, we were hosting the Berkshire Hathaway annual shareholder meeting, which is a big deal, and I just kind of didn't get it way back when. Now, I've come along to the understanding of being a value investor. I've talked to a number of great value investors, a lot of them longer term in perspective.

And I do have a great respect and understanding, I guess, minimal understanding of at least what they're doing. But a lot of them are on a lot longer frame, so I think that kind of speaks as to what you're getting at here. Want to talk about--

BRIAN SHANNON: Very similar, Jared. I mean, tons of respect for what Warren does, but it's got nothing-- he plays basketball, and I'm a swimmer. I mean, they just don't translate.

JARED BLIKRE: Yeah, I'm throwing the javelin here. Watch out, crowd. I'm not the straightest shooter here. I want to talk about some of the tools that you use and that you've honed and developed over the years. I know one of them is Anchored VWAP.

This is an indicator that I've watched for years. And there's been various incantations, and you can set it up. But basically we're talking about an average. People probably know the 200-day moving average. That's that squiggly line you see on a chart. It's basically an average of the last 200 days.

Well, you take a low point, a high point, or a calendar at a time in the market, and you can calculate an average similarly and glean where market participants may be feeling some pain or some greed, some pleasure. Break it down for us.

BRIAN SHANNON: Yeah, I mean, I kind of refer to it as the ultimate sentiment indicator, Jared, for that reason that you just said. You can take any point on the chart and say who's in control from that very point there. So for instance, yesterday we saw the CPI report. And you put an anchored volume-weighted average price to the beginning of the trading that day.

We got hit hard. It rallied up, touched that volume-weighted average price midday yesterday and then dropped hard from it in the NASDAQ. This morning we saw a rally right up to the volume-weighted average price from yesterday's CPI. And again, we fell away from that. So it tells us factually who's in control from any point in time.

The best way that people really can understand what a volume-weighted average price is-- it's a mouthful-- but it's really a dollar cost average. What's the average price the business was transacted at from a certain point? It's not time-based like a traditional moving average, but it is a cumulative moving forward from that point, and it accumulates-- it averages out from there. So you invest $1,000 per month in Apple at the beginning of the year, at the end of the year you've made 12 purchases.

Some of them might have-- one month you might have purchased eight shares, another month you might have purchased five shares, but what's your dollar cost average? That's what the government is interested in. When you go to try to-- when you go to sell it, what did you pay for this? And that's your anchor point. You're anchored to your price.

The market is anchored to that key event, be it the CPI, or, you know, as you pointed out, earnings reports, important highs and lows, year to date volume-weighted average price, month to date. I mean, you can go really deep into it like I have or you can just use it as a basis of who's in control from the beginning of the year, how does price move around that level? Are buyers defending it? Or are sellers coming and getting aggressive as it approaches that level from underneath?

JARED BLIKRE: What I love is kind of how you characterized it, as a very good sentiment indicator. And the way you describe the markets, there's a big emphasis on price and price action. In fact, that phrase plays a pivotal place in your first book, which I recommend to all traders here. And I guess, at the end of the day, you kind of take a simplistic approach. And I've seen this from a lot of other traders who have been around for a while. They study the price bars, you know, candlestick bars.

There's a lot of information embedded in there. A lot of the indicators that some of the pros use aren't the most sophisticated tools, but it requires a lot of depth of understanding and a lot of screen time, watching the markets. And just can you speak as to your approach when you're just watching or when you're looking at a chart for, maybe, the first time in a while or first time ever?

BRIAN SHANNON: Right. You know, a chart is, again, as I said, you know, as far as the VWAP being a sentiment indicator. When we traditionally think of sentiment, it's based on a poll. The AI, AAII sentiment index. A bunch of people say-- you know, they vote, I'm bullish or bearish for the next week, month, or year.

And they're just talking. They're not talking about here's my actual dollar commitment. So it's 100% objective. Only price pays. That's a phrase I've always said. And that is really, at the end of the day, the only thing that matters.

Now, we use technical analysis to categorize and organize the data so that we can understand, you know, is money flowing in or out of this stock, is it extended, is it-- is there a good risk reward? So we use it as a basis of, one, find the idea, two, set our plan. Is the risk worth the reward on maybe-- so we identify the stock on a bigger time frame, on an intermediate term time frame, we drill down and say, where is the potential for this thing to go, and what's my risk? So the risk reward development.

And then on a shorter term time frame, we use that to kind of fine tune the entry. And the fourth and most important part is risk management. One, for an initial trade, when we get involved we say, here's how much I'm willing to risk. If I'm wrong, that's it. The market disagreed with my analysis. The market knows all. I'm not smarter than that. I'm not going to argue with it.

I know the outcome when I argue with the market. And then to manage risk in the trade, that's a piece that a lot of people overlook or don't give enough credit to. They think, oh, well, my money is in the market. It's house money. I'm up on it, so it's house money.

I look at every single dollar of accumulated gains as just as important as the very first dollar I funded my first trading account with. It's my money. You're not going to take it away from me. If you do, we're going to fight. That's my money.

I'm being very defensive here. And I have to be, otherwise we can see these disastrous events happen where former leaders are down 60%, 70%, 80%, 90%, not bouncing, in companies that people thought were good companies. So I'll slow down there a little bit, Jared. [INAUDIBLE]

JARED BLIKRE: Well, that's good there. I love talking about risk management. Want to talk about that. The importance of having a plan before we get into the trade. You just checked a lot of boxes of stuff I want to get to, so let's just stick with risk management for a while. First, before you go into the trade, having a plan, and then as you're in the trade, as you said, fighting for every dollar, sticking with the plan or adapting as facts warrant. I would say most people, especially newer traders coming into the market, don't have either.

And that is just kind of setting up for disaster, but after you have to refill your trading account a couple of times and you're learning some lessons, licking your wounds, how do you approach the markets? And how do you come up with that initial plan, especially thinking about risk reward?

BRIAN SHANNON: Yeah, so for me, I'm not big on price targets. I'll look at a chart and say it looks like it has a reasonable expectation. Let's say I'm buying the stock at 26. It has a reasonable expectation. It can go to 30, but that doesn't become my price target. It helps in my basis of is the trade-- does it have the potential for profit and then in relation to the risk I'm willing to take?

Maybe I see that-- what did I say? We're buying it at 26. I'm looking for it to maybe go to 30. If I can set my stop at 25, and not based on a random percentage or because it's $1, but instead I base my stops on the definition of trend. If we're just breaking out and the stock makes a higher high, I'll go back and look at what's the most recent higher low.

And I'll set my stop under that, because if it's truly an emerging trend where the definition of an uptrend is higher highs and higher lows, if it makes the higher high and I buy it and then it comes down and violates the most recent low, in other words, it makes a lower low, then I've got no business still holding this stock. So as the stock progresses and it goes higher, it's not in a straight line, sometimes you get lucky and it is, but it will rally $0.75, pull back $0.38, and then it'll rally again $0.50.

Well, I'll set my stop underneath the new higher low. So I'm using the definition of trend to lock in those gains as long as it's making higher highs and higher lows for the time frame I'm looking at. And for swing trades it's generally going to be a 15 minute time frame. Each candle is constructed of 15 minutes, and I'm going back maybe 10 days.

So as long as that stock is making higher lows, I'll raise my stop under those. Let's say I get stopped out at 28.50. My price objective, I was looking for it to go to 30, but the market made a lower low at 28.50. So why would I still hold it based on this price objective? And most people-- and that's what you were referring to, Jared, is most people are focused on that price target.

Oh, it's not at 30. It hasn't hit my target yet. I'm not-- and then they let it-- they give back all their gains and then they take a loss at $24-- at $25 a share when they bought it at 26 instead of letting go at 28.50 when it made the lower low and locking in that gain. It's about listening objectively to the message of the market. And the objective part is easier than most people make it because, again, the definition of time.

JARED BLIKRE: I think that's an excellent point. And it comes down to simply being able to read a chart, a price chart, bar by bar, as opposed to-- let's say, I can take any given platform. If I put on a trade, there's usually a little text box that says would you like to put in a trailing stop? 5%, 10%, 2%, whatever, but that's arbitrary, not based on actual market prices. If you can read the chart, and I recommend everybody read your book before, it was on the tip of my tongue.

Didn't remember it. "Technical Analysis, Using Multiple Timeframes," you go through this. And you take example by example how people can be thinking about trades and reading the charts and constructing these in real-time.

BRIAN SHANNON: Right. And again, it's risk-reward. And what people-- you know, a lot of people focus on the pattern. They want to memorize cups and handles and heads and shoulders and ascending triangles, and rather-- and there's nothing wrong with that. And there's nothing-- and having a trailing stop is better than no stop at all.

But going back to memorizing patterns, what's more important is understanding the psychology of what's going on. And it's just simple supply and demand for the stock. That's all it is. If we can say-- you know, if we see these higher lows developing under a point of resistance, it tells us the buyers are getting more aggressive.

Let's say, again, it's breaking out at 26. The stock maybe started at 23, right up to 26, pulled back to 24, went to 26, pulled back to 25, ran to 26. So what we're seeing is those higher lows are indicating the buyers aren't waiting for a pullback to 23 anymore. They're instead saying, hey, I want to bid 24 for this stock. I'm getting more aggressive price wise. And then as it pulls back and rallies up, rejects, it comes down to 25. They say, hey, I'm going to start buying in here.

So they're becoming more aggressive price wise. What we often see as well is the test between 23 and 26 might have initially been six weeks. And then between 24 and 26 was four weeks. And then 25 and 26 was two weeks. So it's telling us also-- and we're painting in an ascending triangle-- what we're seeing is the distance between those tests is narrowing and people are getting more aggressive, not only price wise with the higher lows but time wise with the more frequent tests.

And at that 26 level, there's a source of supply. And we keep coming back and chewing through that. And once that supply is overwhelmed. The demand exceeds supply, the stock breaks free and it's ready to run, then we set our stop. So again, it's about understanding the psychology of buyers becoming more aggressive price wise and time wise. The market's speaking to us, and we need to learn to recognize it beyond the mere recognition of these patterns that are good to recognize, but understand the psychology of what's happening is more important.

JARED BLIKRE: Excellent. And let's stick with that because a lot of markets, a lot of individual tickers here are exhibiting some of those consolidation patterns, whereas they took huge hits at the beginning of the summer, maybe May, June, but they haven't been making new lows even as some of the major markets have been making new lows. And I'm just wondering, could you give an example or two of something you're watching now, one of those stocks that is beginning to show some signs of life after what has been a terrible year for most stocks?

BRIAN SHANNON: You know, I can point to one that a lot of people like to look at, which is NVIDIA. I mean, it's been for decades a phenomenal upside winner. But, you know, earlier this year we peaked out at about 3-- late last year actually, we peaked out about $340 per share and then we started to break down. And as the stock broke down, it broke key levels of support, it broke below key moving averages.

So a very simple one, for instance, is the 50-day moving average. A rule of mind for a swing trade is if the 50-day moving average is rising, I generally am bullish on that stock. There's more factors to it. That's just a general basis.

If it's below a declining 50-day moving average, then it tells me money is flowing out of this stock. I don't want to fight that trend. And money is still flowing out of NVIDIA. Just made a new low here for the year today. Down-- you know, I see it right now at 132. So when we look at these stocks, what we want to say is it's in a downtrend. It's a good company. No one will argue that.

I don't even know. I don't know if it's a good company. They make a lot of money. Everyone tells me it's a good company. I've never visited them or talked to the CEO. I just trust that other people's analysis is generally good here. They increase their revenues, they increase their earnings. So generally it's a growth company, but a growth company has not been a growth stock this year. It's been a wealth destroyer.

And people who are stuck in the psychology that it's still a good company are arguing with price and instead if they-- it's still entrenched in a solid downtrend. People have-- no one has successfully picked the low in this stock this year. And I know from looking at Twitter, a lot of people try and try to pick the low. But rather than try to pick the low, wait for the sellers to be rid.

We've got to go through the accumulation process again. The long decline-- if they don't scare you out. One of my favorite phrases you know is this, is if they don't scare you out on the way down, they'll typically wear you out. A [? V ?] bottom is not the typical type of bottom. You know, NVIDIA might be like Cisco was in 2008, which still hasn't hit a new high.

I'm not calling that for NVIDIA, but people need to realize and look at precedents and say just because it was yesterday's winner doesn't mean it will be again today and let the institutions do the dirty work of creating the support. And they haven't done it yet. We're at a new low today. So that is a stock, I think, to avoid.

And everything else in here, Jared, I'm looking at, you know, my stocks. I entered one stock today. It's AXSM. It's Axsome Therapeutics. I really don't even know what they do. It's got a great-looking chart.

JARED BLIKRE: You got to love this about the people that follow technical analysis. Not always too up to speed on the fundamentals. Maybe you want to know where the earnings-- when the earnings report is, but sorry I interrupted you there.

BRIAN SHANNON: Yeah, no, you said it perfect. I mean, I do want to know when the earnings report is so I don't get blindsided by that. That's a big threat. In biotechs like this one, I looked at it and it's a non-profitable biotech. It's got a great looking chart pattern, but I have no idea what they're doing. I don't know if the FDA is due to report on their drug tomorrow.

So I'm looking at this thing strictly from the chart standpoint. And I've taken already a third of my position off profitability with a $1.80 gain today, and I've ratcheted my stop up significantly and above my entry price. So theoretically my risk is out of the stock, but if I hold it overnight and the FDA does report tomorrow and it's bad news, the stock could be down 60%.

So I need to make the decision by the end of the day, do I want to hold this stock? And I really don't know yet. So I'm just really skeptical of this market after yesterday's big CPI shock. I think we're going to stabilize a little bit and let the dust settle, in other words. There's no hurry to rush back into everything and look for bargains. Let them settle out and listen to the market rather than always feeling like I have to be involved.

JARED BLIKRE: Yes. And despite my previous comment about kind of ignoring the fundamentals here, you are talking about some macro factors like CPI. I don't know if we've mentioned the Fed. The Fed's always in the room here. Maybe-- so do these macro factors at least affect your position sizing, anything that you take to the market that actually influences your money here?

BRIAN SHANNON: Yeah, great point. So I think we started the conversation, I was-- the market had been rallying on Friday and Monday of this week, and then we had the CPI and it got sunk. I knew the CPI was coming so I intentionally reduced my exposure because it's the fear of the unknown. And I'm not an economic expert. And most of the economic experts, even if they get the number right, they're not going to be able to tell you 9 times out of 10 what the market's going to do with that information, whether it's going to rally or decline.

So I am really kind of a chicken market, but to me, risk management truly is job number one. I don't like to lose my money, so I minimize whatever-- you know, the odds of losing money any way I can. And that means knowing what others are looking at. What are the potential catalysts that are going to drive people to maybe do irrational things and make it so that I can't reasonably control my risk?

So I am aware, of course, when the Federal Reserve is going to meet, and I want to reduce my exposure for that. If a company that I like is looking good on the chart, and even if they have good fundamentals, if I have an accumulated profit three days running into it, I will typically sell it. Or if I like the stock, but they report tomorrow morning. There's no way I'm going to buy it at the close today and just gamble on earnings.

So I want you to be aware of the catalyst that drives other people to buy and sell, potentially create supply and demand shifts for the stock, and that's what it is. It's about understanding the motivations of others. And it's very similar-- you know, an earnings report is a fundamental catalyst. A pullback to a 50-day moving average has the potential to become a technical catalyst. It's a level of interest where supply and demand might start to balance out.

So I want to be looking there, and I want to take action. So in a way, they're all-- kind of-- I view the technicals and fundamentals the same in a way that they have the potential to influence supply and demand, either on a date because of the fundamentals or at a particular level because of the technicals.

JARED BLIKRE: It sounds like you're honing in on a grand unified theory of market analysis. I like that. Kind of a holistic view combining the elements of fundamentals and technicals, but through different lenses achieving a similar result. I do like that. And I want to talk now about your experience as a business owner in the field of trading and some of your customers. We've had a lot of retail customers new to the game over the last couple of years.

Everybody's kind of fighting their first bear market or the last bear market. There are some differences there. But anybody who's come into the market over the last two or three years has had quite a different experience than people who came in 10 years ago or before the global financial crisis, before the dotcom boom. What are some of the challenges that some of these newer investors face that maybe some of the older investors didn't have at the time, or they have to work through?

BRIAN SHANNON: Well, I think we all tend to learn the same way, which is by our mistakes. That I remember when I was new to the market I felt like my opinion of the earnings would matter, or my opinion of what the Fed would do would matter. So I would make a bet, and I would get those bets wrong a lot, and I would realize that in a binary outcome, I end up losing a lot.

So I learned to let go of my ego. And I think that's something that a lot of people are learning the hard way, is that the market doesn't care what you think. You might think GameStop is still going to the moon, but the market disagrees with you right now. Protect your capital as it declines and stop adding to a loser.

And it's not GameStop in particular. That's just one that a lot of people learned on that were brought to the market. But the psychology and the cycles of supply and demand and the four stages of accumulation, markup, distribution, and decline repeat on all time frames, in all markets. So start with a real understanding of market structure and how money flows through the markets and learn to move your opinion aside.

So when we spoke about the CPI and the Fed and the earnings reports, I'm aware of those dates, but I don't have an opinion about what's going to happen. I look at it and say, this is a catalyst. It's going to change perception most likely, which is going to influence people to buy or sell, therefore the supply and demand for the stock or the market is going to change. Is it too unpredictable to get involved or do I have an edge here?

And 9 times out of 10-- more than that. 99 out of 100 times out of 10 when it comes to a fundamental factor, I don't feel like I have an edge. I can't control my risk. So I'd rather be in cash. And another-- you know I love these phrases, Jared. One of them is I'd rather be on the sidelines in cash wishing that I was in than be in the market and wishing that I was out.

JARED BLIKRE: I like that. I like that. I quote your phrases all the time-- until they'll either scare you out or where you out. I probably say that at least once a week. I'm going to have to write that one down. I like that one, too.

I want everybody watching right now to pay attention to the way that you've been talking and the way you are talking, which is like a trader who's managing their risk, doesn't speak in certainties, talks about edges and potential outcomes, potential this. There is not a lot of definitive talk here. And unfortunately, on Twitter, sometimes on TV, maybe often, and in other places, that's what you see.

There's a lot of certainty that goes into these calls. I think it's going here. There's not a lot of discussion around risk management or what might be beneficial to particular traders in their particular positions. And so it's easy for me, and probably you, to look at somebody on Twitter and say, oh, this guy is kind full of it, they're just selling something.

How should-- I'd like to give investors and people out there who are trying to make it in trading some guidelines to figuring out who the good people are. And my simple thing is the good people keep it simple, they're relatively humble, and they're honest about things, and they own what they talk about and they're not trying to say, well, GameStop's going to a million, and if it doesn't, you know, I'm going to throw the towel in here.

BRIAN SHANNON: You know, I think that you hit a really important point, that-- you know, a lot of people speak in terms of certainties, and there are no certainties in the market. Nobody knows. Chairman Powell doesn't know what's going to happen when he talks to-- you know, he doesn't know what's going to happen in the market.

He thinks, maybe I can steer the market in this direction, but he might miscalculate. The market does something else. Stanley Druckenmiller, he doesn't get them all-- no one gets them all right. And that's not the point. The point is to make more money when you're right and lose less money when you're wrong. So for me, the red flags are people who speak in certainties, people who have these massive price targets on things and never address risk.

Every single time I put a tweet out there, I have a stop on it. And I say, this is my worst case stop. Make the trade your own. Meaning, here's where-- as a swing trader, I take no-- if you come back to me-- and I learned this the hard way. I wouldn't put stops out there. And I'd say, I like this stock at 26, and it looks like it's maybe going to 30, and I would get stopped out at 28.65 or whatever I said earlier.

And then two months later it'd be down at $18 per share, and someone would come on Twitter and say, hey, Brian, I'm still holding this thing. What do you think? I'd just be flabbergasted that someone would still be holding it. So make the trade you own, always have a stop. And just because that's my stop, doesn't mean it should be what you do. That's my stop for my time frame.

So to answer your question directly. If somebody doesn't mention risk, at least their risk, ever mention risk, just-- I ignore them completely. If people come onto my Twitter and start saying Bitcoin's going to do this, I generally mute them if I'm in a good mood. If I'm in a bad mood, I block them. It's-- there is no certainty. So risk management is always job number one no matter what your time frame.

JARED BLIKRE: Now, let's talk about how investors can shift the odds in their favor because we're using terms like edge. Do you have an edge in the market? I'd like to throw out something there. I read this a long time ago and I think it's held true. The average trend trader, and that's especially true in the commodities industry, which I come from, people trading for weeks, months at a time, they're only looking for a win-- a hit ratio of maybe one in three. Even one in four can be profitable, even one in seven can, if you have outsized winners versus smaller losers.

And that gets all-- that gets back to knowing your time frame, knowing your risk. And if you're a professional trader, knowing a lot of other things as well. But how do investors find these edges and then put them to work for themselves?

BRIAN SHANNON: So again, for me, it comes down to technical analysis to-- and I think the proper ways to use technical analysis are, one, to identify an opportunity. And a lot of times it's just the simple culling down of stocks. So for instance, a fundamental person might say, I only want stocks that are a PE ratio of 15 to 30.

And a lot of people will obviously say, well, that's ridiculous fundamental thing to say. And I'm not suggesting it's a good one. But they might say, look, this is where I begin my search for value stocks, and then they'll look at cash flow, et cetera. Well, for me, you know, if it's above the 50-day moving average, and the 50 is above the 200, then it becomes-- to me I look at it and say, overall money is flowing into this stock.

It's in an uptrend. I can't just buy it after it rallied from 32 to 36 in the last four days. I want to see it pull back on a shorter term frame and then start to turn sideways and then anticipate the move. So there's a lot of anticipatory analysis, waiting for things, imagining-- it's a game of chess. It's not of a move of right here and now, it's thinking three steps ahead.

If it can pull back another day, turn sideways for another day, the five day moving average begins to flatten out. Then, by three days from now, it might be in a position to be purchased. Meanwhile, I would like to see a higher low form that-- it's at 26. It looks like it can go to 30. If it creates a higher low of 25, I'm interested.

Now, I set an alert at $25.90 in case I'm not watching the stock carefully. It triggers the alert. I start to watch it, and then I go back and say, what's the overall market doing? If the overall market is getting smashed, I might look at it and say I still like this trade above 26, but I'm only going to trade half of my normal position because we have market risks. So there's always variables.

There's no-- again, the only certainty for me is where I'm going to get out. That's the only thing I know that's non-negotiable. Again, the only certainty should be, where do I admit defeat so that, if I take a loss, it's a small loss? And then if I listen objectively to the definition of trend, maybe I don't get stopped out at 28.65. Maybe got stopped out in two weeks at $33.27, and now I was risking $1, but I made $7 on that trade.

So it's letting the market work for you and having-- you know, beginning with that risk from the start and obsessively managing it from the moment it starts working. One of the-- people say, well, winners take care of themselves. And they don't. You've got to raise your stops. You've got to manage your winners so that you don't get your gains taken away from you.

JARED BLIKRE: Yeah, and there's something to be said that there's an opportunity cost by just holding a stock. So some people I know who are successful traders, if the stock doesn't do what they think or what they want it to do right away, they have a set period of time, they have a mental stop or an actual stop with respect to time, not only to price, but the point is they have a strategy there and they're sticking to it, I would think.

BRIAN SHANNON: Definitely. I generally will do that as well. Because I look at-- I'll consult up to seven or eight time frames if I really want to drill down on a stock and it's something that I really like a lot. I might go out to a monthly chart that goes back 10 years ago to look for, hey, this looks like it could be a bigger move. Maybe I want to hold a small piece a little bit longer.

I'll go down into the weekly frame, the daily time frame, multiple intraday frames, all the way maybe down to a one or two minute time frame, and find that edge so that I'm getting involved right when-- by setting my alert at 25.90, I'm ready for it. I'm watching the stock trade. Do I see a big offer on the level 2 at 25.98 and it's not getting taken out and it goes back down?

Maybe I'll reset my alert, it drops back down to $25.88. Maybe I'll reset my alert at 25.95 so that it comes back up there. I want to start paying attention again. So it's a lot of being patient and not giving into those four dreaded letters, F-O-M-O, FOMO, fear of missing out. Chasing names, getting involved early because you're excited, you done the work, and you feel like I've done the work, I read the annual report, I looked at 12 different websites, looked at the analyst reports, and everyone agrees with me.

This is the best idea ever. Well, that's generally going to be the worst idea when everyone agrees with you. But you get the point, is that it's about anticipatory analysis and just trying to-- the edge comes from how much risk do I have relative to where it has the potential to go. So two questions I always ask and answer, are one, where does it come from? If it just ran from 22 to 26 in the last three days, I don't want to buy it above 26 because it just ran, you know, 12% or whatever it is.

And if instead it's been sitting sideways for the last four days building energy underneath and making those higher lows, that's great. I can manage my risk. And where does it have the potential to go before it's likely to encounter an equal or opposite force, which may change its momentum? So the loss of momentum. An object in motion continues in that direction until met with an equal or greater opposite force.

In the stock market, the buyers will remain in control until there is enough supply that's equal and halts the advance, or it becomes greater and it declines. So preparing for those two things would keep you from that FOMO trade and being objective, not letting your emotions drive your decisions, but instead let price action crowd behavior and your anticipation of what they do and then manage risk, let that guide your decisions.

JARED BLIKRE: Brian, I've got to say, I love this conversation where you're quoting physics laws and definitions. I think you just went moment of inertia. I hadn't thought about that in a couple of years. But I just want to say to people listening here, if it sounds-- if it sounds like there is a lot of technical stuff and it's just going over your head, just replay it for a second because this is how traders talk and they think about the market. And it comes naturally after a while. It's what I would describe as you having a feel for the market.

And it just comes from dozens, hundreds, maybe even thousands of hours of screen time and you just kind of build up an internal model of the way things probably should go and then you measure it against real-time. I'm just wondering what your internal process is now, and it's easy to get-- it's easy to gloss over it because it's kind of internalized. But what is your process about thinking through some of these market movements?

BRIAN SHANNON: Well, again, it's always about what can happen next most. People are focused on what did happen. Instead, hey, this stock went from 22 to 26. Looks like it can go to 30. OK, is it reasonable it's going to do that right away? Or does it need to settle down and digest those gains a little bit because there was a prior level of support at 26 three months ago and it needs to work through that? So, you know, I was trying to simplify it with the physics there and a lot of--

JARED BLIKRE: Always simplify with physics. Yeah.

BRIAN SHANNON: Yeah. It's supply and demand. That's all it is. And supply and demand are really pretty simple concepts that everyone should be able to understand. And that's-- that's the beauty of it, is looking at it. And when I look at a chart, I say who's in control? How long have they been in control?

Is it reasonable it can continue-- or if I bought down there, would I be looking to-- a lot of people want to buy the breakout. Let's say it breaks out at 30 and people will be like, well, I want to buy the breakout. Well, it just ran from 26 to 30 in 3 days and now it's making a new high. Well, guess what? The people who owned at 26 are feeling pretty good about it, and you're going to be late.

So guess what's going to happen. I'm going to sell a little bit of my stock to you because I know that FOMO money is getting involved. Try to put yourself when you look at a chart and say, how would I feel if I was long from this point? How would I feel if I was short from that point?

And think about it not just in terms of yourself but the crowd behavior, the psychology, the cumulative effect of millions of participants, and how they form the herd mentality. And don't always try to assign logic to it because there's another phrase, Jared.

JARED BLIKRE: All right, I'm writing this down.

BRIAN SHANNON: That, you know, the collective intelligence of the crowd sinks to the level of the least educated participant. That's why we see some scary moves sometimes. Like, who are the people that were buying GameStop above the $300, $500 a share? Just didn't seem very educated to me. Some of them made money with it, and that's great. But at least have an exit plan.

So my thought process is, you know, what's reasonable? Where can I reasonably expect the stock to go? What can trip me up here? Is it that there's an earnings report due? Is it that the Fed is going to make a speech in Jackson Hole or that the CPI number is due out?

Those are things that could trip me up. And I might still like the stock, but I'll just reduce my share size. Instead of risking one risk unit and putting the full position on, we're buying it at 26 and risking $1 per share. Let's say my normal risk unit is $1,000. Maybe I'll say I'm only buying 500 shares because we have market conditions that aren't quite as favorable.

The stock could go, but the odds are greater that something bad could go wrong, so I'm going to change my position size. And if it does go, I can't beat myself up for not taking a full sized trade. It's about being comfortable with your process as well, and it takes time to develop. It takes a lot of skill, it takes a lot of practice, and learning and personalization. And so the beginners should just start small until they learn their process and what their time frame is, what the risk tolerances are.

Maybe you're the type of guy who just does the YOLO GME trade and that's it. You know, I do one trade a month, everything into it, and sometimes I get lucky and win big and I keep playing. You know, it's not for me certainly, but I'm not here to tell anyone what to do if it works for them.

JARED BLIKRE: Well, and I think that's the important part, too, what you're talking about. Is this is an actual business, act of trading. We're not talking about buying the S&P 500 and setting it to work for 10 years and checking your account every couple of months. This is a process. Love the conversation here.

We got a couple of minutes left. So I want to turn the floor to you. You know, you've got to have some great stories over the years. I talk to people who might be positioned in various places, but you've had some various looks at the market. And I think a unique perspective based on day trading, swing trading, over an extended period of time through so many different market epics, what kinds of events or-- what stands out to you here?

BRIAN SHANNON: It's really the simplicity of the market. Another phrase for you. The simplicity of the market is its greatest disguise. It truly it is. I mean, I would never discourage anyone from, you know, looking at stochastics, moon cycles, and Gann levels and Fibonacci and anything that they might help find an edge, but to keep all those things on your chart. Well, they might be sending conflicting information. Keep it simple.

So when I look at fundamentals for a company. I'm interested in two things. Is the company selling more stuff, whether it's disk drives, whether it's electric automobiles, whatever it is. Are they selling more of it? That's what businesses are supposed to do. And second, are they making more money than they used to?

So that's it. Those are my fundamental factors. I don't get into cash flow and, you know, earnings ratio-- debt ratios. I keep it simple. And same should be true with technical analysis. Only price pays. Start with price, start with volume, these multiple time frames, and then add little pieces. Do they add value to you helping make money? A lot of people get caught up in the minutia and be the statistics of the market.

Well, there's been 36 down days where the market's been down 4%, and 12 of those days-- the next day, the market was up 1.3%, the average return was 0.2. How do you trade that? It's like the back of a baseball card. That's interesting stats, but what's that guy going to do right now? Is he going to be able to hit the ball or not? How's the wind blowing in the arena?

Whatever the factors are, it's always-- there's variables. So make-- you know, make the trade your own, keep it as simple as possible, and try to personalize it as best you can as quickly as you can and experiment always. We all want to crack the code to the market. And sometimes it seems like some people do, like Renaissance Capital seem to, and as soon as that book came out, they were down 50% the next year.

So no one has truly cracked the code to the market. It's an intellectual challenge that is fascinating. And if you manage risk and don't get cocky, especially after those successful runs that you had and think you own the world and let your guard down, that's where the market strikes back at you, is when you let your guard down. Complacency is really the silent enemy.

JARED BLIKRE: Yeah, and good-- all good points there. Jim Simons and Ken Griffin over at Citadel, very much-- probably the two closest people to having a permanent edge in the market. Of course, they've got high frequency backstops there as well. Really appreciate your time here. And I think we've got time for one more quick comment here because I've noticed, simplicity, very, very important to the markets.

One of the things I've taken with me. I've lost money in so many different ways that I can put myself in a position to say, here's where I would have lost money, and here's how I'm going to avoid that. Just another example of how we can use our failures for success. Wondering if there's anything like that on your end.

BRIAN SHANNON: You know, any time I have a loss in the market, I know whose fault it is. I know whose fault it is. It's not the market makers. It's not the Fed's fault. It's not some guy on CNBC or Yahoo Finance.

JARED BLIKRE: Not me.

BRIAN SHANNON: More importantly, it's about being objective and listening to the message of the market, letting go of our ego, and just trying to go with the flow of what the market is telling us. Don't force our opinion out there. So I'm not sure I answered your question, Jared.

JARED BLIKRE: Yeah. Yes, you did. And we're going to have to leave it there. Really appreciate your time with us. Everybody should watch and listen to the words here. There's so much wisdom.

Listen twice if you have to. And also, don't forget about that book we've been talking about. Brian Shannon, a friend of the show here, founder of AlphaTrends.net Always great to have you on. And thank you--

BRIAN SHANNON: Always a pleasure, Jared. Thank you.

JARED BLIKRE: And thank you to everybody who's watching.

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