Fly Fishing the Stock Market: How to Search for, Catch, and Net the Market's Best Trades

Q & A with Stephen Morris, Author of Fly Fishing the Stock Market

Every aspect of catch-and-release fly fishing can be compared to trading, from stalking the prey to managing the catch and landing the fish, and all the important details in between. What I have learned most by comparing fly fishing with trading relates to "seasons" and "strategies" that exploit each season.

Take fishing for instance. Fly fishermen encounter the constant need to "match the current fly hatch." They do this by closely imitating the fly or insect that fish are feeding on. These hatches are not random--they are cyclical and specific to each season throughout the year. Likewise each cycle of the stock market produces different and specific price patterns. This behavior of prices is repetitive; not random. Trading strategies that are designed to profit from those price tendencies will optimize trading success.

Another parallel is in managing the catch. Most amateur fly fishermen panic when they hook a big fish and over tighten the 'drag' when the fish attempts to escape. This results in a broken line and a hollow story of what could have been. Likewise, novice traders give profitable trades little room to run and either exit too early or too late. Successful traders spend far more time on trade management and exits then they do on entries. They possess a keen sense of awareness as to when to cut and run and when to allow the trade to run. They have rules and strategies that govern when they enter, when they exit, and how much "drag" to apply so that their trades capture the major portion of what the market is willing to offer. Effective drag management, like trade management is what separates the pros from the beginners.

Alexander Elder's popular books provided me with an understanding of the principles of psychology in trading and gave instruction as to how to recognize footprints of fear and mania on technical charts in various time frames. I found that once I was able to grasp that concept and combine it with the use of technical indicators, I began to spot effective trade setups.

Though there are more similarities than differences in our respective trading methods, there are a few key differences. What stands out the most is the use of Classical Charting. He doesn't embrace the subjectivity of such technical patterns like I do. My trade set ups require the presence of specific price action relative to trendlines and moving averages, along with the supporting confirmation of the MACD indicator and Volume. In addition, my trades must possess a Classical Chart pattern such as a double bottom or top, rising or falling wedge, symmetrical or ascending triangle, etc.

I've discovered that when such trade structure is present, consistent success prevails.

Yes, most of my trade strategies take advantage of reversals from consolidation patterns of one sort or another. By far my biggest winning trades are during market bottom patterns when the winter market season transitions to spring. This is the time when prices spring up out of tight consolidation as short sellers panic to cover and bulls step in to bargain buy. This is when I make the most with less.

During the summer market season--characterized by low volatility and narrow, orderly uptrends--I like to trade "sleepy" stocks stuck in consolidation, resting near the rising 50-day EMA. These trades represent the safest bargains in the market because of the safety of the trend. Reversals near this support offer the most consistent winning short term trades. This is the time when I trade larger positions, but expect smaller gains as I am content to take a chunk out of the rising channel.

How to recognize market seasons, their prevailing price patterns and how to synchronize trades and risk management with that important information. Fly fishing demands more than one fly to be used in the same way year round. Likewise, trading demands constant adjustment of strategies and risk management in order to optimally perform in any given cycle or season--especially in today's market. Solving that dilemma was the aim of this book.

When I was a young boy fly fishing the Henry's Fork of the Snake River, I could use two fly patterns, an Adams and a Muskrat nymph, both of which were deadly on any given day. Over the years however, more and more fisherman have taken up the sport, which has put tremendous pressure on this fishery. The fish have adapted by becoming more selective. More delicate and sophisticated fly patterns have had to be produced to continue to fool the fish. Now, it is not enough to match the hatch. You must also master the presentation through deceptive precision, delivered on a finer tippet, requiring a feather touch. Failure to accurately execute in each of these areas narrows the chances of success.

That same demand for precision exists in the stock market today. Gone are the days when you could plunk a handsome sum into any blue chip, wait 10 years, and cash in your fortune. Now, volume and volatility have dramatically increased. Your chances of success have diminished unless you have a well thought-out, tried-and-true trading system-reliable and repeatable on a consistent basis in any market season. The trading system that I outline in the book shows the reader, step by step, how to do exactly that in a synchronous fashion.