"Successful Traders Understand Flow" - Chris Weston | Trader Interview

you know them you're trading the market you're trading price and you know you're not trading your P&L which is just what everyone's taught you know move your stock to break even why welcome back everyone sitting out today in Melbourne with Chris Weston how's it going tryst pretty well pretty well thank you welcome pleasure you here and we are at the office of pepper stone first time coming here that's right we were just at summer so it's it's gonna go we're gonna get ramped it up into a little bit we added a bigger office so it's gonna be a lot more exciting times there Inc I feel like it'd be good if you and really cool burger I like it anyway so down down Colin streets and that sounds a certain time which is quite nice but that sir quite a rarity for us here in Melbourne yeah freezing cold and raining that I've seen that thing that for sure so we are seeing here you're a trader and you do something that I'm not really founder with which is kind of trading with macros so worry about that but first of all you're better bargain but yourself still people who you are and a bit of background but what you do when were you working yeah so on Chris Weston oh I'm more head the research team here at capstone I come from a background of trading and research so the poorest part of my day is really trying to switch out between a strategist and a trader because they're very very distinct things I don't say one of them is a great thing I think that the commonality between the between the two is is the ability to try and assess probability you know markets are a bunch of random events effectively and random probabilities and and that's what we're trying to do the good part being a Stratos is we can devise playbooks around you know key events and work out what the probability of a certain thing could happen and we go back to clients and sailor you know we've got the Fed meeting coming up you know we based on previous communication we expect to see this this is how markets may react that dollars can do this fixed income is going to do their secretary markets are going to do this trading it is obviously very very different you know their commonality is that you you have a set of probabilities and you can work with that anyone who thinks they know the actual truth is you know they're obviously lying but they've got some inside information so the hardest palomar does is is trying to differentiate myself between being a research strategist so I suppose actually then trading reacting to price you know not necessarily just proper but actually reacting real-time to price moves you know whenever you get an analyst on TV or something said oh I'm buying the gyro at this level and you know gotta stop loss that's not actually how it works in reality you can say you can give levels but it's actually how price reacts around levels that when you're actually trading that's what you're doing in reality but I come from a background of probably more on the sell side banking I started my career in London working as an equity trader for Credit Suisse I moved over to Morgan Stanley where I was another it continued to be on the equity desk there as a young lad and I think that sort of brought me on because I was quite happy to be bullied and people you know take another part and you know played the whipping boy effectively but then I've got into I worked for Merrill Lynch and I was got into working on the fixed income disc and working within money markets and commercial papers before they blow up pre GFC and that meant getting quite a lot exposure to FX trading as well so more on the sort of hedging side of things hedging a book rather than straight-out speculating which is kind of what we do at the moment and I guess when most of your viewers will be doing that at the moment but it gave me some really good sense about global money flows it gave me a sense of who are working with the fixed-income financial fund managers hell you know how they saw risks in markets how they assess risk and how they they've managed those risks effectively because that's what their job wherever wherever are you working at an investment bank whatever you doing on the equity book we'd be working on the fixed income book you know the thing they're doing is managing risk and that's the thing that that doesn't doesn't leave your situation with your the greenest of effects for retail traders or whether you're you know biggest institutional fund you or your prompt job mr. maze is to assess and manage risk I mean obviously your promise job is to grow capital and they're in the trading account that's what we all do that's what we're all trying to do but you've got to manage the risk accordingly as well get that correct position sizing and that's something that doesn't change regardless of whether you're working at Goldman Sachs or PIMCO or whether you're you know when if you're one of your viewers I work closely of you so there's no difference between that is how you go about managing that risk and I think probably the advantage that you have working for a big institution that you have you know very very sophisticated tools for managing risk so our job as retail traders is to join you know boo best we can to manage your risk and give a system that can manage risk accordingly to that situation so that's where I come from I own you know traded fixed income various all kinds of fixed income products derivative products spot FX forward effects and you know then I was after coming over here I work for another retail derivative house called IG and before moving over here so you know if I worked pretty much pretty much most products to be honest say it's given me a good insight into capital flows and how to take advantage and what's the best product to take advantage of a certain thematic awesome on here about your beginnings as a trader because it's like I said one thing to kind of strategize and plan and think about ideas but some of the things trades so how was it start for you as a trader well I started as I saw study on the equity desk and working with a bunch of guys and seeing how how they went about managing their book and I think back in back in those days there was a lot of market makers and I still do that quite quite happily in the in the UK they don't really do so much here in Australia but there was a lot of market makers on the sort of mid cap side of things and the primary situation which I think is is not as understood amongst retail traders is flow yeah understanding fly you've got a market maker sitting there going are we we think there's been a huge pile to go through the market we think that's dumb now it's a great company I think the price is full or you know the market makers sitting there going oh you know we've got it's been a big seller in the market we've identified this huge seller it's been trying to get out this stock for a long period of time we think that's done now we've got this to offer you and if you've got a great relationship with your market maker you're basically gonna go buy this and he's offering you different situations but it's about understanding flow and it's about the flow of markets and there's no difference in FX markets it's no different in fixed income Marcus we were getting really good insight into flow we were working with that and that's what really the thing I take out now is a guy who trades my trade rates FX and global equity markets and while I don't trade individual equities anymore well I did take out that and the third thing was was understanding that the dynamics of flow and how money is moving around and how people are chasing returns and and how that flow is dictated to by things like liquidity and and changes in the quiddity measure because because liquidity is that the oxygen of markets right and and fun flow will be reflective of that as well so that's what we will look for in the fun flow day to a lot of retail traders a look at things like that commitment of traders reports and see how Futures Trading is doing I will look at the options market quite closely and I'm very you know people out there to look at this as well things like risk reversals so you know if I'm looking at all $2 one-week risk reversals they are a reflection of the demand for volatility relative to call volatility and it's the skew of the differential effectively so when you're seeing you know this the the skewer negative to for example an Aussie dollar one week you know that the demand for one week puts is significantly heavier than the demand for call so you can see that the sentiment this is a very liquid instrument rather than what you see with the commitment of traders report which obviously comes out on the way on the Friday effective of what futures traders were doing on the Tuesday so it's kind of a little bit style but this gives me a good insight into a really liquid real time vision of how people at demand going through there and how those stances on the market as well so we can use these little tools just to understand flow sentiment positioning and again it all just leads to that big common denominator which of course is probability and trading mm-hmm now it was a big thing and you mentioned floor the earth looping is something because I feel easier to understand when you work for a bank or an institution well you think that retail traders can understand flow easily or find out how to flow is in the market why it's very difficult to be honest because it depends on the on the market let me stop it it depends on the market you want to try it right so predominantly pebble stone as a shock will deal mostly in FX yeah and of course FX is know to say market so getting hold of flow data it's very difficult they were in the grand scheme of the world where a small planet you know the big house is a sort of a chair and Citigroup and they'll see a reasonable junk of the global flow going through it but getting access so that's very difficult that's why working within a bank you'll hear about these flow ports and these guys will come out with reports for clients and say oh we've seen huge buying in Eurodollar but it's not just about where the euro dollar flows are going it's about who's actually moving that money around I mean that's what I think it's quite difficult to trade effects and understand why money is moving around I mean it's not just me going out and buying the Euro because I think it's oversold and you know the European economy is going to actually do a lot better than people think I don't think that many buns are saying what you've got is you've got so many moving parts you've got you know reserve managers buying and selling currency on behalf of central banks Dana money market operation they're speculating they're just moving money and recycling money then you've got you know you've got real money accounts insurance accounts and various players and they might be looking to hedge exposures and then you've got hedge funds who are speculating and you know saying that the euro is gonna go up for whatever reason and it's all just into one melting pot of flow data and that's why technical analysis is so important for me because it a granade all of this all the variants of players every single boy and sell order that's gone through the mark at any one time it Angra gates it into one situation that's why I always tell new clients and so the first thing you can do is go and understand price action first thing you going to understand technical analysis because I can guarantee you if you're looking at fundamentals you're probably looking at the wrong damn thing in the first place so let the market aggregate that into one price and understand what the technicals are telling you you know why is it going up what does it it was it saying about sentiment was it's just a position readjustment is it is the market giving you a clear message and try and understand the language to the technicals are speaking the price action speaking because when you're looking at flow you've got to remember all the different players that are moving money around at any one stage and that's what the investment banks will do when they're passing these reports around they're saying oh you know you've got big boulders coming from leveraged accounts you know the expected care so you borrow and to get bigger positions your hedge funds for example or yeah we've got real money accounts do the big buyers most from Japanese and and to them and that stuff's really invaluable but to the average retail guy on the street you're not gonna get to get hold of that information I think there are probably websites that will display that but they need to get it from broker reports in the first place in which case is probably two days old so it can be quite difficult to do it yeah and this kind of nuts clear what you gonna do exactly with that information so you mentioned protection and I feel like other people want to look at protection but either they don't know how or they look at it like too narrow or too broad so how would you look at it protection in your case well price action is the truest leaning indicator on a child and I say a lot of people here watching this would be using MACD or a stochastic or an RSI I mean that just follows price there's a reflection of price and and the purest of all naked Chartists effectively people just hone in a price action will sell it you don't need all these indicators you don't need a niche you make a cloud you could the child tell the price action of the chart setup will tell you everything that that you can see you can see that it's had a big round yeah I could tell you where the RSI is going to be straight off the back it obviously these things are great for confirmations and when the things stop rolling over you get an increased probability that the moves happened but the price action is is yeah we probably start with using and getting an understanding of Candlestick analysis and what what it is is obviously it's a road map of supply and demand in the mark at any one time it egregore everything that's going on all the boulders all the solders and it tells you a message it tells you a message about who's in control of price at any one time if you're looking for trends if you're looking for breakouts it's not just about how a journey goes from A to B it's the quality of the journey and price action give you an understanding of that journey that you're seeing there as well so yeah I mean if you're getting into trading the first thing I would suggest is you know getting an understanding about price action analysis maybe technical analysis what is the market actually telling you and that will be part of your ongoing process that you need to do obviously you know identifying trades is one thing and a lot of people say that's probably the easy part but tough a part of course is you know what you're doing when you're in a trade how you can you know extract the most juice out of each trade how you can cut out of that trade before you know at the right time without it getting too much of a problem how much risk you're taking on correct position sizing in those bits so you know hope candlestick and is great for identifying opportunity and understand the message the markets telling you but it could also be a fantastic opportunity to tell you in the markets saying get out of the trade as well so it's not just about yeah getting in it's also about getting out and that can be the hardest point and everyone's so focused when they start getting into a position of making money but yeah ultimately as part of that risk management the market gives you a pretty clear message that you're wrong except it had the ego to accept and get the hell out of the position as well and that's the position that it takes a long time to change that so yeah when I'm looking at it part of the mindset that I thought I would go into a trade is is the idea of of trying to add to a position you know it's a start off small of the market saying you know your analysis is working and I we use a fundamental backdrop to to assess what I think's happening with the world and that can take a long time to develop and takes a lot of time to study as well which is kind of like it's difficult if you're a plumber and you've got you know you're working off-site or you're a farmer and you're in a field you don't have time to to necessarily do that but all ever an understanding about what is what is a market is really sensitive to you know is it economic data for trends is it political trends what sort of economic data is going to change that macro theme is it the low growth environment is it too much tightening of policy which is it low employment what is it going to be and then get the technical setup and price action around that as well but you know I think if you can go into a trade and and and say well let's start with with a small enough position relative to the account size and if the markets saying that your analysis is working perhaps you could look to build them to that trade obviously that changes the mindset around from one of I've got to take my profits on making money let's get out the trade to one of actually this is working let's see if we can build on that trade you know something's working in your life you tend to do more of it if it's not working you tend to see less of it right yes it's a thing that you don't see enough of in trading people well they're all reward things that don't work which is kind of crazy right but it's nice to do the opposite of that is one of the hardest things you'll ever do in trading yeah and I think that makes a lot of sense for most people is gonna be hard to implement maybe at the beginning when they don't know like what's gonna work and when to ask the trade then they can kind of fall well I mean the thing is it every single educator that you have out there which I all you've got like profits run you've got a couple years early and and and if it was that easy and we'd all be you know we'd all every single retail try to be making an absolute matzo but it's it's one of the hardest things to do you know the ability to you know to surrender a profit to be proven right and then and suddenly you know you you've gone from what was a winning trade and you Lars coming off it's coming off and put it close it just to be a profitable trade when in fact you know the actual you might work of daily charts the candle hasn't changed or for our charts the candle hasn't given you that the exit signal and you just watching my piano and watching my P&L and the P&L tells you start panicking and of course emotion takes over and makes us start doing crazy things which is not part of the process so yeah I think if you can go in there going I'm doing well it's instant eventually just crystallizing that profit maybe I can look to add to the trade and it changes your mindset but again that's incredibly hard to do so that's the thing that every new trader and and most intermediate traders and I see a lot of professional traders will find hard it is is that that cliche that you hear time and time and time and again that you've gotta let your profits run and you've gotta cut your losses I think cutting your losses is quite easy to do once you've actually become disciplined letting your profits run I think it's quite hard one so you get all these people coming out and saying are you winners take care of themselves well I think that's actually not true I think you being able to extract more out of your trade is actually so difficult to date cutting out the losses for me is Aoyama it's not doing what I want to do get out the trade and and move on to something else but if one says all your winners take care of themselves I think that's actually very very difficult to do is to continue to let your profits run because you know psychology of your brain is telling you you've got to be successful you've got to be a winner you've got to be a winner oh it's coming down and I'm losing money and then yeah you look back over a couple hours later and the trades back up in the profit again mush and I should just get hold of it yeah so yeah the psychology is if trading is you know is incredible there's a lot of people out there who sort of look at the focus on that side of things very well but you know for me it's part of a process and again you know how how you go about how you go about doing that it's up to you and your in strategy mm-hmm I think you mentioned big dick over here which is the fact that you should get off the trade based on the count six not the P&L most of all did the opposite Dave look at the P&L and then get out but I think that's a really good thicker way people can can apply so looking at the the market to determine worth to get in or or get out of the trade yeah I mean good you said all the time I mean even pro traders will do you know they tried their P&L they don't trade the market and that's one of the hardest points is you know you I mean you take a step back and you say to a client what is your what is your exit strategy you know you've been in this loss nail for a while are you going to continue to let it run though I'm gonna take profit so I'm going to take profits when it's break-even or close the trade when it's break-even and I'm like what's the significance of the break-even level I think yeah what does that mean and then what happens if you were to make a profit you may be stopped to break-even that you're just trading your P&L you're not doing anything with the market you're just focusing on that P&L line is there any reason to move move to trade high all the stop-loss higher as the market yeah move significantly enough for and you're just just psychologically because you're you're you you want to move it to break even what's the significance of breakeven it's just that psychological thing that you can't make a loss and that's what the people are so scared of so you know them you're trading the market you're trading price and you know you're not trading your P&L which is just what everyone's taught you know move your stop to break-even psychologically being based on logic stuff in the market that's opposed to kind of you your emotional reaction or you desire to move you suffer oblique even yeah absolutely I'm silly laughing yet you gotta work on that situation when I first when I first get into a trade the thing that I look at um more than more than other people and I hear this comes down to the ability to I've got things like Bloomberg and and those things is is how much risk am I going to take on in a position in the first place so the first thing that a lot of people we use is realized volatility they'll use historic volatility so they're looking at things like the Average True Range and looking at the average range or the True Range over a set period it could be five days this is one a lot of people we use they might use things like Bollinger Bands to understand realize volatility you know the spread of dispersions from from the 20-day of the mean and get it understand of that where vowels been in that in that situation and if you've got your ITR you know five-day a TRX a eighty points or whatever you get maybe stop at least eighty points away so that you know or whatever you could be one and a half times ITR of it for me that's looking in the rearview mirror I look to leave you I like to use the options market to give me a guide for the future so I'll go out being in my week my Sunday I'll sit there and I'll have a look at all the event risk for the week you know who's speaking what's the significance of their speeches how does it feed into market pricing around interest rates are they rich or they have they've got some way to go what could that mean for the Australian dollar for example that we use that as well market we've got to split we've got inflation numbers coming out of the US how important are they as as a thematic in the market you know at moment inflation is not really the big problem I mean the problem is is actual growth numbers so we're looking at the the growth numbers here in Australia at this juncture where we're quite concerned about this feedback loop between the fallen asset prices housing prices and the fall that we've been seeing in the equity market in q4 in the drawdown and the impact that's having on households the psyche of households and their propensity to spend money because of its impact if we've got this kind of feedback loop so what we're not too concerned about labor market dynamics we're concerned about we're really concerned about things like business confidence Westpac consumer confidence numbers house prices and this feedback loop between T rating economics duty to determine a deteriorating real asset prices and the impact that's having on you know the the perception of well from what happens with discretionary spending so when I'm looking ahead at the week and I'm looking at data I know that the key formatic that the Australian dollar has been very sensitive to the right markets been very sensitive all these indicators here there's other tier one things like employment which everyone's like it's just the firstly the mack daddy of economic but this isn't part of the macro theme in the moment unemployment's not the concern so we're not even really too learned about that but I'll have a look over the week and and and I can make my own assumptions or I can let the market do it for me and the good thing about implied volatility and I can do overnight or one week or one month is that the options market will say we've assessed everything here and this is we've this if we think is going to be the change in volatility as a result of these parts and now what we can do is we can actually use that implied volatility we can put it through the black Scholes formula or we can just put it through Bloomberg and it tells you the employed move so the good thing about using employed volatilities is the market the big boys have done the big assessment of all the event risks that's coming up and there will give you an implied move over a one-day period a seven-day period or whatever time frame you in so I tend to trade off for our daily charts I tend to be in the market for anywhere between a day up to probably a week which is a decent time in the FX market I don't I don't scalp market so I'm in the market for yes I say for between a day and seven days so what I'll do is I'll tend to say okay fine I'm going to use seven day implied voltage is had the market's assessment of all these various factors it's forward-looking as opposed to realized and backward looking which is what everyone uses and therefore it's more significant to me so I'm saying the employed move in Aussie dollar based on on the implied volatility using the black Scholes formula is 67 points so that's the the expected move over a seven day period okay there's a little bit of time premium in there as well but the market saying we expect a 67 point move now of course that can be wrong and people then you know do get options traders who buy and sell volatility through straddles and strangles and various factors like that but I know pretty much all you know it is rarely to beyond the mind so I'm gonna bomb going to have a stoploss you know into the book we use of an 80 or go never stop loss above 67 points now of course that's going into it now I know kind of how much risk I'm taking on the position I can then obviously look at the the actual size and the amount I want to risk so the employee volatility has given me an expected move over a specific period it's forward-looking the markets told me they've assessed all the event risk for me and I can tell you work out how much risk I want to take on therefore I can achieve my position sizing that's kind of how I manage risk and that's how I think about risk is using employed volatility and the employed move than you know realized while the tillage stuff that's happened and it's kind of in the rearview mirror of course that stuff in the rearview mirrors it's still relevant and people use it very successfully so you know if you're using that don't put off if you've got a successful strategy don't change that of growth but that's how I think about it I'm looking I'm letting the market assess assess event risk and what they think that's gonna happen as a result of that as well now gifting or was really dressed for a macro and all the news and thing you had like natural it's something you develop over time because they had to make its work in the add to research macro well part of it is because we got a lot clients actually want to know what's happened you know even people who run expert advisors and EA's and and and have a purely systematic strategy will say to me you know what's gonna happen this week and and yeah so even if you're running an EA one of the one of the reasons why EAS don't work is because the EA is set to do a certain function it's not it's not artificial intelligence it's not it doesn't change its function and it's your job to say well this this this algorithm is set to do this and you work out whether the LPA has a positive expectancy whether it has a you know it has a statistical edge that should you know when you're writing these programs it does it have a statistical edge not just in one market but over multiple cycles and potentially over multiple asset classes as well that's that your test for robustness but the reason it works very well in one market cycle so you might work you might have an EA that works very well in high volatility markets might be a swing model for example but if you if I can come out and say to you well if we have a look over this week we're expecting a very very tight range in fact employed volatility is very very low and therefore if you're running an EI which works very well in these conditions perhaps turn it off so the reason a lot of clients who running EAS don't you know aren't successful is because they're a a is not set is not suitable for that market condition you know they might have something that that works very well in a low-volatility environment and suddenly we see event risks coming up which they hadn't actually computerized or thought of and then suddenly this massive ramp up involved in a fist you know they've blown up their account they Rios been trading well of Allah but it doesn't necessarily suit that backdrop so you know I'm not going to claim to be able to reiease and encode but what I will claim is that if you're running an EA and and or systematic strategy of some description understanding or at least having an understanding about how how the operating environment by which the EAS is working because you know sometimes it will if you're trying to maximize profit being able to know when to turn it off and turn it on because someone's telling you that this is the environment it's going to work and I say that's that's perfect for my ear so Bank I want to put it on potentially increase position sizing because I'm more confident that this is the right environment for my ear so that's kind of what we've got a lot of clients here who will trade EA's and we're trying to give them an understanding about the operating environment by which their AAA is is trading in so they can work out whether they've got confidence to hold it in that position or whether they want to just turn it off for a period of time because there's I say AGA is set to do a function it's certain function it works best in that certain type of market environment so understanding the fundamentals that the things are they can enjoy volatility and market changes price range expansion I think it's really important yeah I think it's kind of work people should also team up with their brokers because they could do all the work themselves or they could kind of look at the brokers what they research what they come up with and what they see in the market and then work with that so it's something you see that people should benefit from kind of looking back at the brokers see how the research things and applying it yeah I mean some brokers are better than others right but no I write so I write it daily a sort of daily musing which actually on a Monday we'll look at implied volatility in markets the expected moves and expected ranges over each currency pair and any things like gold and various factors so yeah you're more than welcome to get in touch of you if you want to be on that list there's no sales pitch anything like that but it's yeah I mean it's good for people to you know even if you're the most staunch you know systematic trader and you have no real interest in understanding what the Fed are saying you're saying angrily care prices price and price is reacting to what this does and my my hey we'll trade that situation but for me it's you know I can still come out and say well it you know this the the market if you're looking at cable for example right now is you know the implied volatility is very very high if you've got any you're basically fighting headlines that's all you're doing so can you or ei react to headlines as quickly as the news recognizing algorithms who in an out bang bang bang because you know when employed volatility in cable is is you know sky-high so 16% on a week basis that you know you could have a 200 point move very very quickly just on the headline and that's what the problem when currencies are political or driven by political news you know the fundamentals get thrown out the window if you're scalping you don't your job is necessary I think I think it is to look at what the event you look at the calendar what is the event risk and I don't necessarily want to be trading around that though in those periods of time especially ones that I know will potentially create volatility and create range expansion so yeah it comes down to doing your homework and and knowing what what events are doing but yeah if you can come out and you're broke you can tell you these are the operating environment for what you're doing and then you can sort of cherry-pick these are the markets which I don't call I don't want to be involved in something that it's gonna be behead holdin to powder to headline some people love that right yeah you know if you look at our flow over the last six months in sterling on cable and sterling crosses it's been a mixture of people just go out I just love that I just love volatility I love ranges I love the fact that it moves so aggressively and then other people sort of get learn a hard way and realize that I sure AM I'm fighting up against a whole beast of algorithms who can who can react way way quicker than I can and actually maybe it's better for me to be back in may euro dollar which doesn't get any kind of move at all it's just range trading and that might be much better for you at the moment or see dollar which tends to have a smaller movement cable as well so you know these are the sort of things that we look at is and of course so that's that's a largely a reflection of your personality and your lifestyle and you know people like fast cars tend to like volatility that kind of stuff you name the cliche but that's kind of what you say you say so that's why it's important you know having an understanding about the so the currency or focusing specifically on the currency market but having understanding of the dynamics and the characteristics of the market as well I think is really important you know if I look at indices people love trading the dax the German DAX as opposed to the asx200 because it just has that sort of that nice amount of volatility you know that sort of it has a 2% move quite easily whereas the is X on a big day have 1% move you know it's not as aggressive as some of some of the so some of the Chinese market moves or the Nicko I can move 3% quite easily so yeah we tend to see people loving trading the back so all that or SP for example they're the two big indices that people love to do why because of the characteristics of that market that people find really attractive it's got great liquidity you know trades well off levels and you know trades well and trades nicely but it has that right that sweet spot of volatility and if you look at the S&P I mean for me personally as a trader in what I do I like the I like the employable eternity in the S&P which we commonly know as the VIX index to be in between that sort of eighteen to twenty-two percent if it's around there you know it's got some life there's some life in the market and it's moving around and it's doing what it needs to do but it's not too crazy you know that's you know when you're getting in a sort of 30% is because market will have a free 4% sell-off because Stephen minuchin said this well you gotta be awake to react to that sort of stuff you've got to be pretty much glued to your screen 24 hours to be able to react to headlines and then that's what I don't like is is when markets are just beholden to headlines but why are they beholden to headlines you ask yourself that question is because they've got a theme very much in the headlines whether it's trade whether it's markets running too hot because of too concerned about higher interest rates and from the Fed there is a an overriding formatic that's taking for it could be politics like we're seeing in the UK what does it brexit mean is there a chance of a hard brexit or a no bricks it or whatever it's going to be there is a the market gets say it gets fixated on a thematic and those firm attics can obviously be almost binary fur for an economy and it's how currency will trade into those into those things they and as we get closer to the deadline so if we think about a market cycle over three cycles you know you get a major event like brexit mm-hmm you know the UK whoever it's going to leave the EU on the deadline of 29th March we have a we have a deadline we have a deadline in the 29th of March it's how markets trade into this and the series of it's the series of moves that happen into this the different meetings different votes and as we get closer to this you'll see that the pound gets more and more volatile as we get to this key decision then you've actually got the boat itself that deadline and what you'll tend to see is is I just wouldn't even go near it myself because that's when you get liquidity issues you know the quiddity providers pull pull their bids and you get these kind of erratic moves and you know then you get stops and limits and everything going off and everything just goes crazy and that's kind of when you just don't want to be trading at all and this you know you've got that that risk for it and then you've got the aftermath once the market kind of knows what's happened and then you've got you know every for reality and everyone sort of forms an opinion and it generally also that leads to one and then flea markets trend TV I'll look to like to look at markets in three stages one is we tend to have a key fear to be trade we know there's a deadline we could be a Fed meeting there could be a major change of policy announced we have a deadline we have a meeting how markets trade into that the market moves what happens around that time which is kind of when you don't want to be involved in my opinion because it's just you know ratty craziness that's going on liquidity is a major issue and then it's the aftermath and I think that's kind of where we are so yeah when when you've got a market that is fixated on the theme of date or whatever and it's how mark you know that's when headlines become an issue because it's how that headline changes that middle date yeah and that's when you know it's be a closer you know you'll see things really react and that's this was that's very hard to trade those kind of situations and because you've got to predict the headlines and then you've got you know you've got react fast to headlines yeah that's why it can be difficult to know that you trade different ways before and after the event or it's like the same thing it's a trade no I'll be nighttime at all I mean trading trading but you'll find I think the stage three is probably that the the easiest because you get less headlong into the market knows the fact it's kind of like a herd mentality you'll get some big dog who comes out and tells you that this is what it means and then you get people like me saying oh this is what it means and it's kind of saying everyone sort of forms an opinion and you generally after a while you sort of market to converge everyone creates consensus and that's when trends develop you know trends develop cause everyone's doing the same thing right and that's kind of what we've heard when there's such a big moving event when everyone gets together and starts thinking as one you get harmony and you get trends and then you get order book dynamics playing for it where people go oh this is going up I'm gonna stop selling and you know that's when the audible dynamics come through and everyone's buying and very few people selling and people are prepared to pay high prices so you know people markets don't go up just because there's a buyer and a seller people are also prepared by high price just to get up there say but they're going into into the major event you know you hear this this sort of term which is banded around all the time which is market heights I hate uncertainty yeah well it's the uncertainty of knowing what this event is going to look like so if I take brexit say yeah we expected to have a positive resolution that's why pounds rally from 124 up to 130 others we get a headline here that says ah you know this one suggests uncertainty you get the pound coming off pretty sharply because you've also got to remember like and this is one thing that we did at the banks is how do you effectively price risk and what we know is that over the years is that markets have shown us that were all really really poor pricing political risk you know go back to the UK referendum in 2016 yeah we saw massive volatility playing through in European and UK acid its massive volatility you go back to the trunk election in 2016 you know we'd all gone into their thinking most people thought that the Hillary was gonna win a lot of people for Donald Trump is going to win but I mean how many people came out and said that you know we'd see you know the S&P futures you know trade up 25 percent or so over the next few days all we saw you at once Donald Trump's took to the stage that we'd suddenly see you know S&P the you know the US Treasuries yeah set off quite so as aggressively as you were supposed to see a collapse in world markets didn't so plenty of people who have predicted that Donald Trump would win but no one had actually priced that actually it's going to hit the world with a massive fiscal stimulus so time and monetary policy was very easy and jay-z and economics is that that's kind of like never happened so yeah markets reacted how do we price political risk I mean you go back to 2012 when we had all the European debt crisis I mean what we ended up seeing was a lot of the investment banks would actually hire politicians because I just didn't have a clue what the connection between politics economics and financial markets and so that's that's for me is I've got out and got an education around how politics interacts with financial markets because politics if you're looking at the hierarchy of volatility inspiring events politics is arguably the highest of all the law because we're really bad of pricing political outcomes and if we get the correct critical political outcome it's like watch is it is the is the reality that what we will be anticipated and we're just not very good at that and we're greater understanding our economic data relates into you know changes it fed the Fed level and and all the Federal Reserve and you know if data continues deteriorating we're going to price in rate Kaltura pricing and rate cuts for 2020 just QE become an issue or reality and then ultimately if we're gonna get QE what does it mean for markets what do we want to go and sell the dollar doing and Boise stocks do we want to go buy gold what is it gonna be so that's kind of what I'm doing is there's a macro thinker I'm thinking you know if this trend in economic data continues to deteriorate you know what's going to be that what's gonna be the ramification is it is it going to be that the Fed will probably look to cut rates in 2020 or late 2019 we're seeing the market pricing that in in the euro dollar and Fed Funds future those 18 19 basis points of cuts being priced into the market is telling you on balance we expect the Fed to cut now there's never been a situation where yeah the market the Federal pause and then start cutting without there being a recession afterwards so then we think to ourselves well rate cuts actually do probably very little it will bring us Treasury yields lower which would probably be quite good for the equity market but what stage will the markets subsequently go out and stop pricing in QE quantitative easing and that's what I'm sort of looking for you know is what is the triggers to do it what are the things they're going to get us well that's going to be the data that's gonna the Fed of looking at much more closely and therefore when I'm looking ahead of the week at the different economic data I know each individual data point has it feeding with that back row thematic and then we go back to those three stages of the market that we talked about what is that thing that we're looking for how the markets trade into it has it trade around that event and so each of those different parts of the the three stages of an economic cycle or a trading cycle has different characteristics this pop here as I say is like uber uber volatile you know everything's crazy nothing really makes sense it's a stage free that I tend to like I like waiting for the fact and each of them has different characteristics like HEV each market has their own individual characteristics as well and what market you trade and the session you trade in will reflect you you know the sort of things that you're into and your personality traits and various factors as well I mean you know I'm a big believer in in understanding what works for you so you know this is kind of when you come into the latter stages of my trading process which is actually analyzing what the hell you're doing this is the reason why so many people fail and and you know you go to like any hedge fund and you have a trading coach you'll sit down with you and actually say this is what you're doing right this is what you're doing wrong and and we need to do that if we don't have a trading coach and everyone should have a trading coach speak to Mandy but yeah to actually be able to sit down in a spreadsheet and say well I'm doing really well I'm trading these markets this is kind of what I'm trading and and work out route to the degree of you know I'm I've put every trade down why should she tell I'm making a lot of trades really good trades in the u.s. in that US European time zone mm-hmm because the volatility is there and it suits my trading strategy suits my style but I'm actually doing really badly in Asia don't trade in Asia it's pretty simple right yeah so the problem is is that people don't actually sit down and review what they're doing well and what they're doing badly and that's why you know it's not there's plenty of literature there's plenty of people on YouTube who say that you have to review what you're doing and then you have to you absolutely have to review what you're doing where you're going right what's working for you how you felt at that time but for me I mean I I know that I tend to do most of my trading in that sort of European to US trade mm-hmm it causes the assets that I'm trading will react more strongly to the data that comes out around that time most if you're trading euro dollar you're gonna probably see high volatility in that European to us time zone for obvious reasons that's when German data comes out or your italian data comes out or the US data comes out right so you're gonna see greater volatility and euro dollar in that time it might trade in a very tight range during Asia because it's just reacting and there's no real catalyst so you gotta know the sessions that your annuity to do and again a trading journal is something that helps you improve you have to find out what you're doing right and the reason or I think not enough people make enough money is because some people are stupid and I mean that we respect but also people you don't have to be clever to make money trading you just got a you've got a you've got to work at finding out what you're doing right and then work on your process and and and and when you don't do that you're gonna you're gonna lose money you're gonna your accounts not gonna make money you're gonna blow up I think you just you got to work out what you're doing right and if you're losing money find out why are you losing money so I just keep doing the same thing find out what are you doing write it down yeah I'm trading in the Asian time zone I'm I've done nine trades in the last two months in Asia and I've got nine wrong okay what was that I've done trade in Asia anymore maybe yeah is it the characteristics of the currency or the index that doesn't work in that time zone maybe it works better in it's a European market tends to have bigger moves in European times and so yeah I think actually sitting down and finding out what you're doing right and what you're doing wrong the sessions you're doing it how you fail to the title those kind of things and and and study study your behavior I think it's really really really important and that's why I think it's the number other things so this this idea of what we call continuous improvement it's something what all the big players do is something a lot the retail guys don't do enough of and and if you want to be part of that small minority of people a small small group of people that make continuous profits you'll find that these people are studying themselves and recording every trade and and and then reviewing it making time to review what they're doing that to me is not appreciated enough and I think if you can do that you will you will see an uplift in you in your P&L for sure yeah speaking of that I'm really cursed about I think a big part of success lies in like what you do daily like your routines and things to do on a daily basis so for you what does that look like a day in your life like are there routines to do all the time I think are really important or it's like I don't know keeping keeping my wife happy now yeah obviously Shea that trading was a reflection if your lifestyle is it's obviously a hundred percent true oh I have a and and my circumstances so I've got I've got two kids and I come into work early and I've got a job which involves analyzing markets so I'm very lucky that I get to study markets or do I have access to some pretty amazing tools you know Bloomberg for example and if you know how to use it can be it can be really good for you I mean obviously if you keep your prices simple and try not to overdo it so that's that's a consideration but when you know what you're doing and what are you looking for I think it's really important so I'm very lucky in that sense I have a couple of kids and you know have a job which involves analyzing markets I'm in pretty early to do that but yeah I'm just looking for opportunity and I'm analyzing what's what's going on were the key firm Attucks how these markets play into those key firm attics what a market sensitive to so I would take for example the Australian dollar you know we've been seeing that for a large period of time very very sensitive to any moves that are happening in emerging markets so it had a very very strong correlation with bang saying or I had a very strong correlation with the CSI 300 the Chinese mainland ending index and we were really saying to clients that I think that people are just using the other nosy dollar as a prize as a cheap proxy for trading emerging markets which makes sense a 35% of our exports go to China China's slowing down stimulating with liquidity and various factors so people have just been using your z dollar as a cheap way rather than using the offshore yuan CNH Detroit but we were saying where she valued the Australian economy is deteriorating in them and we are seeing the rates markets dying price cuts we've now got a full rate cut being priced in over the next 12 months so when does the Australian dollar become much more concerned about domestic factors and rather offshore factors and we've now got that stage so that's what we're looking for we're looking at correlations in markets and and what actually make something move and that's part of my job is to come in and actually find out from a fundamental perspective what is actually making something move so we use a lot of regression statistics a lot of correlation analysis to actually say to ourselves well you know what is what is actually making the euro dollar move on our what is making dollar yen move what is making the dax move all these kind of factors what is actually if I can understand what's causing the move then I could understand looking forward what's likely to continue changing it now correlations come and go and of course they do and it's our job to anticipate them as a fundamental analyst but this is what a comment and a lot of the retail guys who try purely on fundamentals I'm actually looking at the right thing and so for example and you know we're not I've been looking at the Aussie dollar as a proxy of the Hang Seng and I could see that at that time it like a six month regression using the Hang Seng as your independent variable had a point eight point zero eight zero point eight times correlation which is 80% of the variability can be explained so it's very very high as I said that we were waiting for domestic factors to change things around and what we were looking for then was was a yield spread so that the yield advantage that you see in the US Treasuries are over Aussie bonds and when we're actually going to see those dynamics widen in favor of US Treasuries and if that the yield is relatively higher in US Treasuries relative to Australian bonds then you see valuation support for the for the US dollar over the Aussie dollar and if we were overlapping that we can we can see that there's now a much stronger correlation between that so I'm looking at rate differentials and I've got models that show you yield more differentials and again so now we've got we've got sort of proof that Australian dollar is looking much more inwardly rather than you know outwardly as a vehicle for people to use and then I turn around to clients and say well what are you actually buying the Aussie dollar for wise is you know it's reflective of higher or on all prices if you look at correlation return the Aussie dollar inline all prices there's no correlation in fur there's a negative correlation so you're actually buying it for the completely the wrong reasons you know so to actually you know overlap charts and actually see what's what's making something what's making it tick and if you can understand that you know you can make an assumption about what it's it's sensitive to going forward so even if you're the most you know technical trader you know having that having a look at the calendar and saying well we've got this this and this the market yeah these are event risks for again it comes down to what am i doing I'm managing risk this is this is a risk for my situation do I do I want to reduce my position going into those situations or do I want to hold my position going into that so that's something that we'll look at as well is if we know there's a volatility event this week and it's outside of our control because it could go either way it's a volatility event you know we make the decision of cutting back some of their exposure into that event as well so again this is where fundamentals can play quite a key role in my trading so you come in the morning you do your analysis and then you do a combination this and that and so what full of that when you're there to take a train anything you do any routines you have or well know so we're you know I also say the first thing is you know so we've identified a trade we like the trade and then we look at implied volatility well look at implied volatility to give me a sense of you know where am i how much risk I can take how how far away my stop-loss is if I know how far much risk is then I can understand my position size how much exposure I want to have in the market so obviously if my stop-loss is further away then I'm taking more risk on I'm gonna take my position size down accordingly then I'm not going to go now I don't trade with target so I don't trade with limits as I said I'll let the market tell me when to get out so I might I might only get a small risk reward but I'm going into it would be idea that you know what if this if this really starts working out then I'm going to be I'm gonna probably actually try and look to build on this this initial position here as well that's that's the mentality I'm going on I want the market to say Chris you're right build on this position and and you know I think I'd like to believe that if I'm wrong I'll happily cast out the trade before it hits my stop at the market tells me there but I've got my stop-loss in place to protect me should something bad happen obviously can get slippage but so that's my situation I'm in the trade me obviously executed the trade ya know are for my sins I will continue to watch what's happening in markets and and I'll react should there be some headlines which I think are specific enough for me to suggest that there could be a change but price will probably reflect that straight away before I can even think about that so so I'm watching the position I'm in the position and you know I think if the facts change I'll change and they'll get out of the position but I'm hoping to you know with the logic that I'm hoping to add to the position that's the mentality that I'm going in I'm saying you know I want this to go through I mean I think if I was gonna run my own fund it would be probably more on the sort of macro discretionary side and a lot of those guys will you know you're what you will see with the sort of big CTO macro discretionary accounts is you'll you'll see you know probably sort of one percenters two percenters here and you know your your losses will be you know half a percent or whatever it's going to be but your properties have something around to the 45% win-loss ratio but then what you'll have is you'll have you know two or three eight to ten percentage mm-hmm and that's kind of what you'll you'll see you know in in sort of a CTA sort of macro discretionary type thing and and that's what we're looking for we are looking for that that big change in market dynamics which is going to cause a sort of an 8% 10% moving currencies pre leveraged that that's what you need to be involved with so the guys who actually the big sort of macro funds who who will do well will be on the right that probably two to three to at least to ten percent eight to ten percent as pre leverage and that's what they're looking for and that's kind of what I want if I can identify animo big change in macro firm ethics on it to be involved in that and when it happens you know you need to be adding to that position so that to get as much out of that trade as possible how does that actually happen well I think you're looking at currencies and and and the way that you were you know you always hear people saying by the week you sell well the strongest sell the weakest to scream nice to start but what we look for is two things relative differences at an economic level and changes that can continue and the second one being changes in echo in Central Bank divergence so if the Federal Reserve for example their data starts becoming a little bit better and we start seeing a change where they start saying oh you know we're going to continue balance sheet normalization we're probably going to move away from this extended pause period to know where we might we were confident to raise rates twice you know that's that's gonna see a change of market pricing whereas in Australia we still see economic fragility kicking in and rates potentially being cut not by 25 basis points but by 50 basis points and then you ask yourself well what will actually a rate cut do in Australia very little so then we start saying to ourselves do we need fiscal policy perhaps will that be a naughty positive but maybe we need to see the RBI use its balance sheet maybe we need to start seeing quantitative easing so what we then got is we've got this huge divergence in central bank policy it's that central bank divergence which creates yield spreads widening in it's what creates trends and FX markets when you see that when you see that this is going this way the central bank's going this way and this one's going that way that's what causes major moves and that's what we're looking for is a macro guy I'm trying to look for major shifts where one's doing that and one's doing that and the market hasn't correctly priced though and if I can see that and then the technicals start working as well that's when I start getting involved in the trade that's kind of what I'm looking for and that big thing that's when you're gonna get an eight percent IRR that's when you're gonna get a 10 percent IRR is when you see these these sort of Tiptronic going through in in in two countries economics because the case what currencies are right there there are there are a relative a relative play on one against another so what we're looking for is is the economic is the economics to change and the central bank policy to diverge so sufficiently so radically that you're gonna see you know everyone jumping on board that trade that's going to create trends and that's when you start seeing an eight to ten percent IRR of course you may miss the bottom you might miss the very top but you want to get the body of that as we stop Elliott Wave no other kind of stuff but for me it's about identifying that early when the market starts to warm to that idea I need to be in it and if the market says yeah this is really becoming a theme I want to add to that try that's kind of what I'm looking for that's that's the Holy Grail for mirs trading is these massive shifts these divergence in policy what happen really really well in sort of between 2012 2016 you know that's when we start talking about currency wars and you know one currency getting too hot so another currents that central bank has to talk it down and you know that kind of bits and pieces why did they have you know what occurred see wars exist it's because you have these major changes and a central bank dial level which means one person's currency becomes too hot we need to our me as a as a macro trader needs to identify those those things so that's where my fundamental comes in my technicals come in because you know I've seen the market telling me that this is becoming a theme and it's actually like becoming a market for Mattie and then we start working our way through their trade I mean if you really want to extract peer now and after that position you get up the trade with markers are too rich you know you for is come through and it's over then you get profit taking and you know when to get back in right that's that's kind of my processes is trying to work you know what is the what is going to create these divergence and when do we need to get in the trade and that's when the technicals and the price action will tell me that we're ready to do that so how can people find you they'll connect with you or each other after this interview well are you can reach out to me on on Twitter I post a lot of updates and ideas and views I'm on Twitter Chris Western underscore PS is my handle you can sign up to my daily my Bailey musings and and and I write it daily it's called the daily fix and we're trying to again just write play books on events and what we really what I'm seeing in markets and yeah we're trying to combine the fundamentals and technicals and yeah so there's guys out there clients who just have no interest in fundamentals who are just like I've got no interest in reading this and I'm fine with I've got no problem but I think it's also interesting if you if you are running a yeah a systematic strategy for an AAA or so that there is you still need I think you can you can really harness the strength and the power of ebony a that through and using and utilizing it at the right time and that's why I think fundamentals do have a place that's a fundamentals are incredibly hard to get ROI at I mean they really are it takes a long long time to get there and that's why I say just what is the message that the market is telling you what is it telling you from from price action and and so but at the same time the first thing I'll do it fundamentals is is understanding that it bruited formatic that's taking place you know was it trade is it brexit is it too hot to cold economies or whatever and what's that mean for monetary policy and what data data sets are specifically important to that that trend and if you can work out that then you will understand the sensitivity of a data point to a currency or to an index or to the Wrights market or whatever you're trading gold oil or whatever it's going to be so that's what I look for you know even if you're technical trade looking out the calendar and saying we've got these events coming through and they're not working out whether they are actually a volatility event or not is really important so you know you it just leads back to this point that we talk from time and time again about you know whether you're you know myself as a retail trader yourself as a retail trader or or you're working at a big bank your job is to manage risk and it's how you go about managing risk the first one we can do is is assess the event risk and whether we think it's important to the market and this comes back to my point of looking employed volatility the markets telling you what they think is important and whether they think that a volatility inducing event and you know I like volatility a certain level I don't like it to lower than like it to crazy if it's too crazy it's probably a reflection that you're fighting headlines and those headlines can can move markets 2 to 3% which I don't think anyone wants you know this is when people complain about algos and this kind of stuff I mean I think people have complained about algos I'm not trading markets as they should you know and I mean that with all due respect I mean I'll go to move prices up and move prices down they only really get in trouble when they're moving prices down but yeah I mean it's all comes down to how do you trade and out what sort of volatility structures do you like that for me is get yourself you know go back to the nuts and bolts you need a process and you're judged as a trader on your process you know these people in social media who come out and say I've got the Aussie dollar and then they come back and then they re quote themselves saying yeah I'm great I pick the highs and the lows on the Aussie dollar and I'm the greatest trade and well that's that's absolutely nonsense to me to me that you are judged on how you've gone from the first point of identifying a trade or getting to that point of your setup you know how you've how you've dealt with the risk how you've managed your position sizing how you've executed the trade you know going through - how are you managing that position when you're in the trade - closing that profit or that loss and then reviewing it but finally is the review you know that's when you can come out on social media and say I'm actually really pleased with the way that's gone not just because I've made a profit but because I've actually gone through my structure my process point one point two point three and I've done it as I should do and that's what every single person who's watching this this is recording now they need a process where as a trade as we have a process and you're defined why your process and if you deviate from that process and you make profits we'll think that's great but you should feel much better about yourself as a trader is if you followed it tick by tick by tick by tick by tick and you've made a profit and you've grown the capital in your account because you're not going to win every trade there's no doubt about that I mean my successor record is my win-loss ratio so forty seven percent or so it but yeah I still make money yeah some people have an 80% success record you know it's not it's just how they go about doing situations but you're defined as a trader by your process how you follow that process but and that takes time to get there and feel calm in that process but you can rest assured if you go amongst a decent trading group of people and you say I made a great rate I followed my process and I made a great I'm a prophet then then you'll get more respect from some of them just goes oh yeah we're just bought the Aussie dollar and off make money I mean that to me is anyone can do of course yeah so yeah you need a process if you can stick to that process you can fill you'll notice that you feel confident as a trader you can get that positive expectancy and that's what that that's the Holy Grail that people talk about is this idea of following a process and if you follow a process because you believe in that process yeah and all good traders will have that process well that process looks like we'll be down to you as an individual your own situation your own set of circumstances and you know how much volatility you can it and how you harness that and go about identifying those oh yeah I know that's really probably the most important thing you can have is to try to yeah that's nothing personal puzzling we look for you and use the reference subscribe and see this and read it every week yeah every day it's awesome and I want to thank you Chris yeah thanks guys yeah if you guys already shot the Chris check out the links video will put you to Terry and all as well below and I will catch you guys soon [Music] you [Music]

Channel: Etienne Crete - Desire To TRADE

Views: 202,659

Keywords: desire to trade, forex, forex trader, successful traders, interview with successful forex traders, successful intraday traders interview, successful traders interview, trader interview, forex trader interview, chris weston pepperstone, interview successful trader, successful trader interview, professional forex swing trader, professional trader, trader, professional traders, forex podcast, trading interview, professional trader intreview, professional forex trader interview

Id: t57ebT2Czec

Length: 63min 17sec (3797 seconds)

Published: Sun Feb 24 2019