Brian Shannon from Alphatrends.net sat down with Stockbsessed to reveal how he got his start into trading, how he manages his trades, and how he became the Godfather for Anchored VWAP. They also discuss Brian’s new book, Maximum Trading Gains with Anchored VWAP. Read more in Stockbsessed written interview below.
Brian Shannon is a successful veteran trader and author who is known for his expertise in technical analysis and his contributions to the trading community. He is the founder of AlphaTrends.net, a community that has helped to train and mentor thousands of traders worldwide since 2005.
He is famous for developing and applying the AVWAP, which has become a popular tool for traders to analyze and identify key price levels in the market as well as understand the thought process of institutional investors. He has been featured in various financial media outlets, including Bloomberg, CNBC, and Forbes and has also authored extremely valuable trading books, including:
1. Did you have any main traders that influenced your system or any books that you’d say you based most of your methodology off or was it more something you’d consider self-taught as education from the market?
– Well, you know, the market is the best teacher for sure, but there were several influences early in my career that gave me the confidence to get involved in the market. The first one was Stan Weinstein’s book back in the late 80s and that was Secrets for Profiting Bull and Bear Markets. Stan’s book and his work has had a tremendous influence on my career.
– In 1991, I worked as a broker assistant, really starting out in the business at the top producing broker at the Lehman Brothers office in Boston – he had a strategy of looking for positive earnings surprises and backing them up with a chart, so he was looking at a combination of fundamentals and technicals and I learned a tremendous amount from him. I then just devoured all the books I could find on trading, and then later on got more and more mature about psychology of investing and realizing that that was really the key.
– My style I think is similar to what most people’s styles should be, you read the Investor’s Business Daily, How To Make Money in Stocks and Stan Weinstein’s book and you kind of figure out which of those areas make most sense to you, and then kind of create your own style for your own timeframe and add little pieces along the way to help you make sense of the market as best you can.
2. Were there any specific psychology resources that really helped you jump from a less mature trader to one that was fully focused on mindset and risk management?
– The first trading psychology book I read was Trading Psychology Explained by Martin Pring, and I learned quite a bit from that book as well. Later on, I read books by Ari Kiev, and then Brett Steenbarger has had a number of books which have been really impactful and influential in what I do and how I think, and understand what my motivations are and to reassess my interactions with the market, those are some of the top ones to start out with, I’d say.
3. So just considering yourself, how would you say your overall investing methodology has evolved over time and currently, I know you consider yourself mostly a swing trader, but was that always the case or was that something you evolved into?
– I kind of have come full circle, although actually it’s veered a little bit here in the last year or so in that I started out really as a retail stock broker – mainly I was holding stocks for clients for 3-6 months. Then when I became a full-time trader, I was more about day trading initially, simply because I didn’t want the risk of holding things overnight.
– And as I built up my portfolio a little bit, then I started adding swing trades and found that swing trades are really where I’m most comfortable in the market, anywhere from – if it’s a bad swing trade, I get stopped out on day one, but ideally holding 2-3 weeks.
– However, this market in the last year / year and a half, has really kind of shifted my approach simply because of the way the market doesn’t follow through in really either direction, and I’m much more comfortable on the long side so it’s unfortunately forced me into a shorter term timeframe than I want to be engaged in.
– So the key thing there is the timeframe is dependent on what the market is telling me and where I can best manage risk. I don’t enjoy it, but right now most of the best risk management I can engage in the market happens to be on the day trades to maybe 2-3 days rather than several weeks at a time.
4. So wouldn’t mind just going through your process of the overall situation of how a name comes onto your radar, to what leads you thinking that trade? What are those criteria which really get your attention?
– I want stocks that have some range in them. My master list, as I call it, has evolved over the years, you could start a list of, let’s say the NASDAQ 100, and then you start to add stocks that are active, subtract the less active, and you start to build this master list, which for me is probably about a 1000 stocks and I look through that each weekend.
– I don’t always expect to find the perfect ideas, but by looking at the stocks on an individual basis, bottoms up vs top down, I get a much better feel for what’s moving in the market and where the potential moves are likely to occur.
– It gives me a little bit of an edge in that I can anticipate where the momentum is just starting to develop. Whereas other people are going to be waiting for the semiconductor index to break out, meanwhile, 3 or 4 components have already made a really nice move ahead of that breakout, and then maybe time to sell some into that breakout as other people start to realize it. So, my List evolves – one of my basic criteria is it has to have an average daily volume of 500k shares over the 20 day average. So that eliminates a lot of stocks, which is nice as I don’t want to deal with stocks where there’s the potential for a liquidity problem. Generally stocks between $15-$50 a share would seem to be the place where I do best. I’m not opposed to trading 1$ or $2 stocks and I’m not opposed to trading $1000 stocks, it’s just that the majority of my success has come in that $15 to $50 range for whatever reason it might be.
– Then I look at each stock on multiple timeframes to look for trend alignment, to make sure that I can get involved at the onset of a new momentum campaign and make sure I manage my risk appropriately.
5. Could you tell us about the importance of multiple timeframes and trend alignment and why it’s such an important aspect?
– I’m not looking to fight the overall momentum of the market. That’s just foolish – If a stock’s in a down trend, it tells me there’s big institutions selling this stock – Why on earth would I want to step in there with a relatively small order and try to act like the hero and think that I know more than what they know. That’s just foolish. I’m a trend trader if I want to short a stock, it’s a stock in a downtrend, I’m never gonna try to say, “hey, that stock’s up too much, this market’s ridiculous.” I did that early in my career, and you learn the hard way, which is losing money, that, that just doesn’t work. I like to say don’t buy the dip, buy strength after a dip.
– So what that really is, is my bread and butter, I’m looking for a stock that is in an established uptrend for the case of a long, and then it’s experienced a pullback and that pullback has then settled down for a day, maybe 2-3 days, then as the strength starts to come back into that, getting back above the AVWAP from the prior peak, holding the AVWAP from the prior low.
– And as it makes that higher high, that’s where I want to get involved right at the onset of new momentum. My stop, my most important piece, is that if I get stopped out of it, I want to make sure it’s a small loss. So I use the simple definition of trend, higher highs and higher lows. If we have a stock in an uptrend on a daily, then I want to buy, as that short term trend comes into alignment and shows that first little push higher.
– I don’t wanna buy the breakout of the prior peak. I wanna buy the new momentum on the shorter term timeframe. That way I can buy more shares with the same amount of risk, and I can make sure that I can maximize my gains as much as possible.
6. Could you also tell me a bit about the AVWAP and the 5MA that you use to really certify a trend and how that helps you manage risk?
– For instance, the 5-day moving average is something that I talk about all the time. That’s been my really mainstay in terms of what I believe is best representation of the intermediate term trend. So I’ve been using that for the last 20 years as my primary piece of what is the trend on the intermediate term timeframe. I have a very simple rule that even if the stocks on an uptrend above the 50D, 100D and the 200 day moving average, If it’s below the declining 5DMA, I don’t want to buy it, It’s in pullback mode. But if that five day moving average starts to flatten out and price crosses above and below it a little bit, then it’s made a short term stage 1 accumulation.
– As the stock makes a higher high above that flat to rising 5DMA. It tells me now that the intermediate term trend is higher, it’s in alignment with the bigger timeframe, and ideally it’s just gotten above the AVWAP from the prior peak, and it’s held the AVWAP from the recent low – that just gives me a lot of confidence that I am involved right at the right time.
– I’m not waiting for a new high, I’m buying fresh momentum on the shorter-term timeframe. I’m not waiting for volume to confirm it. Only price pays.
– I’m looking at the fact that a lot of people reanalyze volume, that they’re looking for big volume breakouts. It doesn’t have to be a big volume breakout. Most of the time what happens is the volume peaks, and this isn’t something I made up, it’s either volume expands in the direction of the trend, peaks at turning points and diminishes on the retracement. So, I used to miss trades waiting for volume, thinking, well, there’s not enough volume there and I’ve got to wait for the volume to come in to confirm this move. I would then chase the stock, 3, 4 or 5% higher, so I started thinking, well, why am I waiting for volume when I see this earlier entry? I want to instead sell some into that volume when the crowd is starting to get excited and into a fever pitch.
– Then take a little piece of that off to reduce my risk and see if I can let the winner ride as long as it makes higher highs and higher lows above that AVWAP from the most recent low above the rising five day moving average.
7. How do you determine between knowing when you want to let a position ride for potentially a longer run or selling at predetermined areas such as at multiples of your risk.
– The way I look to sell is pretty simple in that, even in this market, I like to get involved in a stock fairly heavy at entry, the reason for that is because I know if the stock starts moving in my favour that day, I’m almost always going to sell my first 1/3 at a very small profit relative to where I think it can go.
– So let’s say I buy the stock at $30 and I think it can go to $33.5 in the next 3 days. Well, that first day, if it runs to daily R2, which is just a pivot level I will sell a third of it if it gets to that daily R2 at $30.60. So I lock in 60c on that first 1/3, and I’ve reduced my position size. So let’s just say I buy a 1000 shares and then sell 350 shares up 60c per share. What that does is on the balance, it basically reduces my cost on the rest of it and if I get stopped out even at my original stop, I’ll have only two thirds of my position. Having that full risk unit on, but I will have taken relative to that maybe, a half of a risk unit off, and that overall reduces my risk to a fraction of what it was if I hadn’t sold that first third.
– If that stock, let’s say it pulled back from $33.5, I bought it at $30 and I sell my first piece of $30.60, let’s say the next day it goes and breaks out past that $33.5, I will always sell a third into that breakout. So I will say, you know what, the crowd is getting involved, the volume is picking up, it’s breaking out, and I’m going to sell some here now, and I’ll keep a third just in case it continues to make higher highs and higher lows on my shorter term timeframe.
– And maybe I’ll end up selling it at $32.45 if it pulls back and hits my stop. Or maybe I’ll sell it in 3 weeks at $38.67 cents, I have no idea. None of us knows what’s going to happen, and I don’t mind sacrificing some of my initial shares because our most important job is to manage risk. And for me, that’s the best way I can do it. Especially again in this market that we have now where things just aren’t following through and it’s saved me a lot.
8. So for that final third that you’d be holding would you be trading it on a shorter timeframe waiting for a lower low to form to stop you out?
– So let’s say you’re looking at a 10 or 15 minute timeframe and the stock makes a run from $30-$31.25, pulls back to $30.80, then it runs passed that $31.25. Well that low at $30.80 is now to me the most recent and relevant higher low. It’s higher than the previous low. So I’ll set my stop under that, generally 2 pennies below it. Then if it goes and breaks out at $33.5, I will sell that 1/3 and if it pulls back to $32.45 and then continues to run I’ll set my stop on that final piece at $32.43 cents, because that’s right under the new higher low that is most important to me.
9. You mentioned how you take oversized positions at areas where your edge is very clear. What does a normal position size look like to you? And when you oversize that?
– It’s different for everyone. For me, it can be as high as 25% of my account, but you know, I’ve been doing this since 1991 full-time. I don’t like to give that answer, but that’s the true answer, because most people will tell you to never put more than 10% of your equity into one stock. But the fact is, I’ve been doing it long enough that I know I’m going to honor my stop. If it gets some strength, initially I’m going to be super aggressive about it. I’m not just buying a large position and hoping for the best. I’m sitting there watching it and making sure that I might sell. You know, let’s say it’s 5,000 shares, I might sell 500 shares up 25 cents, sell another 500 shares up 38 cents.
– If it starts to seem like it’s pulling back a little bit, I might sell 4,000 shares up 12 cents, and then I’m out of the trade, but I don’t want to let my winners turn into a loser. I’m super aggressive about the risk management and if at the end of the day I’ve taken good little profits along the way, maybe I’m going to hold 1500 shares overnight.
– Then, I’m in the stock from a position of strength because I’ve taken some money out of it and a lot of my theoretical risk is gone. And again, it always comes down to that, maybe it hit the AVWAP from the prior peak and maybe I’ll sell some there just in case it is resistance if I have more shares than I’m comfortable with, I don’t want to wait for it to become resistance.
– I say, I’m going to sell some there just because I can, and this might become resistance. If it doesn’t and it continues higher, I really do not care. Most people say, don’t I feel stupid for selling there? No, because I have a smart process. It’s not about the emotional attachment to the outcome and maximizing each and every penny out of a trade, but instead to say, this is my process for reducing risk and If I leave some money on the table, I really do not care.
10. Do you manage risk strictly on an individual trade basis or is there an element of portfolio-based risk management where if you have a few trades working you may warrant taking on additional risk?
– Each trade individually, always each trade on its own merits. I don’t do any of oh the dollars doing this, so gold should do that, that should affect this. I don’t do any of that stuff, it’s each trade on its own merits.
– As far as adding to the position, it’s generally not something that I do again, my edge and where I really shine is in the entry and getting the entry correct. So I’ve decided that for me it’s best to go in as big as I’m going to go right from the entry and start reducing risk from there. Now, let’s say I buy 5,000 shares of $30 per share and it runs up to $31 per share, and I have taken 2,500 shares off and there’s still 4 hours left in the day and then it pulls back $30.65 and hits the daily AVWAP and starts to bounce from there, I might add back 1500 shares and then as it goes and breaks the high that’s 45c away I might sell a 1000 of those shares and then if it runs up another 1$ or so I’ll sell 1/2 of what I have but if there’s still an hour and a half left in the day and it pulls back 75c and looks like it’s gonna rally, I’ll buy back another thousand shares there.
– So I might trade around a position, but I’m not adding, I’m never getting bigger than I was at the start. A lot of people try to do that and there’s the phrase that confidence grows and shrinks in direct proportion of what the stock price is doing and for most people, that’s the case – and it used to be for me as well as I’d say, hey, this is a winner I got to get more. This is the big one. This is how I’m going to retire. Instead, I noticed when I had that attitude and started to load up, I kept losing bigger amounts of money. So now, I know where my edge is in the entry, so I use that to my advantage and then size down from there make sure that I’m as quickly as possible in a position of strength in that stock, and I’ve reduced or eliminated my theoretical risk.
11. What do you think is your main strength?
– The entry is where I find my primary edge, and then in my risk management.
What would you say helps you manage your emotions most?
– When I look at trades I say this is an A list idea so I’m willing to commit one full risk unit, whatever that is for an individual, a B list idea would be a half of a risk unit and a C list idea would be maybe 25 or 30 basis points of that risk unit. But it’s about position sizing and the confidence. It’s my confidence in what I see in the trade. The fear of missing out really is something I’ve kind of neutralized in my brain, it hasn’t been an easy thing, but I just don’t look at a stock and go, wow, I wish I had that stock. It’s like, well, I missed that move, so what? Maybe it pulls back and I get an opportunity, or maybe I just missed it. And so what? There’s a hundred more stocks that’ll be moving today. I got to be alert to the next opportunity.
– If you’re chasing these stocks that have already moved, you’re always going to be chasing your tail, missing out, buying near peaks. So for me it’s just a matter of, I learned things the hard way, I used to chase stocks like anyone does. I used to add to positions thinking that was going to be the big one. But over time it just kind of comes to you. Either that or you don’t survive in the business. Truthfully, you can’t continue to take losses, you’re just going to get blown out. It’s as simple as that.
12. Did you have a specific aha moment in your career, or would you say it’s just the years of experience all culminating together?
– I probably can’t point to any one aha moment, but there’s probably been dozens of them along the way:
Don’t chase stocks
Don’t buy stocks in downtrends
Don’t average down
– Those sort of things. They just kind of become ingrained. After you’ve made the mistakes so many times that it just you start to look at it and with a different lens, your perception changes and it just becomes part of your new reality to look at it and go – I don’t care, it can go without me, for example – I don’t have to make money in Tesla, there’s thousands of other stocks. I don’t feel like I have to be in Tesla or Nvidia because everyone else is talking about them. To me, there are overcrowded trades. I just don’t care what the crowd is doing. I can only control what I do, and if I start to give into what everyone else is talking about and the lies they spread on social media and buy into that, then I’m screwed.
Would there be anything you’d suggest to new readers besides blocking out the noise and focusing on their process?
– For my process it was something that came with time, so I answer that for me, that, again, I’ve been doing this since 1991. A newer trader has to learn from somewhere though. I’m telling people here’s how I do it, here’s how I’ve been doing it, here’s how I manage risk. I wrote this book to help you become more proficient and make more money and manage risk and that’s how I want to leave my mark and help people in that regard.