Jea Yu is cofounder of Undergroundtrader.com, a virtual trading desk and trader education site. Yu is the author of Trading Full Circle, Undergroundtrader.com Guide To Electronic Trading, and Secrets Of The Undergroundtrader, as well as several trading videos: Swing Trading Secrets, Short-Term Profit Hunter, Level II Trading Warfare, and Beating The Bear, published through Wiley Trading and Traders’ Library. His latest book, Way Of The Trade: Tactical Applications Of Underground Trading Methods For Traders And Investors, was released in August 2013 by Bloomberg Press and John Wiley & Sons. Yu has been a contributing writer for Benzinga.com, TradingMarkets.com, Trade2Win.com, and Active Trader magazine. Together with Benzinga.com, he produces The Morning Profit Maker service on Marketfy.com, based on his proprietary patterns.
Stocks & Commodities Editor Jayanthi Gopalakrishnan interviewed Yu on October 8, 2013, about how the markets have changed since he first started trading in the 1990s— from the daytrading bubble of 1999—2001 to the rise of algorithmic and high-frequency trading — and how he has responded to some of the changes in his own trading.
Jea, tell us a little about yourself and how you got interested in the markets.
While in college, during the early 1990s, I had a roommate who had discovered the stock market. He showed me quotes in the newspaper. That’s when I caught the bug. I opened up an account with Charles Schwab & Co.. After college, my buddy became a broker at Smith Barney.
I went the normal route. I did my research, and I would read the stock quotes in the paper, but I always had a tendency to want more current quotes than I could get in the printed newspaper. I would bug my broker about 20 times a day and ask what a stock was trading at!
Most people tell you to focus on the fundamentals of stocks, which is one way of looking at it, but why does a stock price fluctuate from day to day, or from minute to minute? There was always some type of disconnect there for me, and that’s what got me started on my journey.
You can get magnified movements in fairly small periods of time. That is what retail traders can and should exploit.I didn’t have a lot of money back then, so I was playing small stocks and putting together research reports. One of my internships was at Prudential Securities, and I put together a couple of research reports on some of these small stocks. On my first day there, I met with a broker who said he wanted to give me a lot of opportunities. So I showed him my folder and told him that I had five stocks he needed to look at. But he just turned me over to his sales assistant, who gave me a stack of envelopes and a stack of letters, and asked me to lick the envelopes and mail them out. That was the extent of my internship at a brokerage firm.
What happened after that?
I got more interested in price action and realized that price and fundamentals have very little to do with each other on a day-to-day basis. Ultimately, I got into online trading, and came to realize that there were a lot of strange things going on. For example, when an analyst upgrades a stock, you can see the market maker selling into these upgrades. The more I studied — this was as we got closer to the daytrading era — the more I found out about the SOES bandits, block trading, and so on.
I joined a chatroom, and realized that the guy who was running the chatroom was not very bright. I read Level 2 quotes and understood things like ax market makers [the market maker leading the price movement in a stock] and time & sales. I put my notes together in a book and somebody offered me money for my notes. I called it The Underground Level Two Day Trader’s Handbook. The entire playing field was underground; everything was a secret, but you can spot the ax market maker when you see the block trades working the waters.
My notes became popular and I set up a blog called undergroundtrader.com. I’d put my trades on the blog and make comments.
Ultimately, McGraw-Hill discovered my blog and they wanted to do a book. That’s how my first book, The Underground Level II Day Trader’s Handbook, was published.