The Systematic Investor Series #85 feat. Nick Radge – April 26th, 2020

you're about to join Jerry Parker Moritz Ebert and Neal's Castro parson on their raw and honest journey into the world of systemic investing and learn about the most dependable and consistent yet often overlooked investment strategy welcome to the systemic investor podcast series more at Sipan and I Niels Castle asana back with this week's edition of this systemic investor series which is our weekly ongoing raw exploration of the world the rules based investing and of course where we also try and take some of your questions but today is very special we have a super great guest Nick Raj Nick may be known to you as the Chartist and is someone that we have wanted to come on the show for a while so we're very excited about today's conversation so let me start by saying welcome to you Nick how are you doing down there I am doing great Nick good evening to you thanks for coming on the show a long time in the making really looking forward to that and good afternoon to you Neil's as well yeah good afternoon and yeah I mean as I mentioned we have lots of things we want to talk to you about Nick but as usual we will start with a short rundown on what's happened in the last week or so in our portfolios in our markets just to kick things off I also want to just say that if you do I find the sound quality a little bit different than normally we are still experiencing some internet speed issues here in Switzerland due to this corona virus at the moment now just as a quick rundown I'm in a course this week the impossible happened on Monday we had WTI crude form a delivery crashing to a negative 37 point six three dollars a barrel compared to the trading day before where I think it finished around $18 positive so funny thing about you know capital markets of course is that they consistently provide us with these first time in history outcomes what's interesting about that is actually also what the Emme group the exchange had to say about these things and tera dha'fi from the cme group was quoted for saying nobody should be under the perception that commodity futures can't go below zero we've seen other commodities go below zero in the past we have to do things to allow the market to go to the price that it is reflecting the fundamentals of the product the futures markets work to perfection small retail investors need to make sure they understand the rules and I do think a lot of investors were kind of shocked with what happened to the price development of oil I mean negative oil prices what what could be next but I think the good news is that not only did the futures markets work to perfection as the CME Group without saying also think actually trend-following worked pretty well and I'd like to just spend a minute or so explaining that so firstly I don't think any established trend follows would even be involved with the may contract two days before expiry that's just simply too risky and so most trend followers would have rolled their positions many days ago before the may contract stopped or would stop trading and and and also I would say you know I'm sure we're gonna come to that I'm sure it's the same for you more it's I mean on our side we were not involved in the may contract at all but the other thing I just want to say and I think this is really important is that trend following strategies you know there are designed on the premise that knowing what you don't know so inherently that quite robust even when we have to deal with these first time in history events and I think 2020 as a year so far at least is a good example of that so Moritz I'm excited to hear how your week panned out through all of this panda fairly well I'm sure we'll touch on crude again on a multiple many occasions later on in this conversation but so just you know to give you the rundown about my trading week it was remarkably smooth I was saying to you prior to going life that I had you know four days out of five being positive and kind of consistently positive that it was just you know nicely moving up even though we had you know the big move in the crude markets on on Monday so close to plus two percent for this week I'm now one point six one month to date four and a half percent up year today biggest winners this week again short crude not the may contract but soon you know short Paizo short brazilian realice standing out short coffee and really you know not that many bad positions bad in quotes meaning you know causing some losses but you know short cotton short corn short hawks those markets produced a bunch of losses for me but nothing too major so fairly steady positive week yeah I mean it seems like we despite doing things very differently in the terrain following space were certainly tracking each other pretty well also a nice solid week for us also very uneventful in many ways gains mainly come from short energies of course currency did ok Middle States fine equities and fixed some work fixed income were pretty flat actually and our biggest loser was in fact the lien hawks but it's still one of the best markets in the portfolio so far this year so with that set let's turn to the more interesting part of today's conversation namely unique so I think as always I mean it's always good to get a little bit of context to to the conversation and I think and one of the best ways of doing that it's just to learn a little bit more about your story so as we take our conversations in different direction people will perhaps understand better you know why we're doing so so I mean I would I know you've been in the business and started trading pretty much the same time as I did so I'd love to hear your your yeah your journey really sure yeah well I started trading in 1985 I left school in 84 didn't go to university and I had no interest in trading whatsoever and I just happened to jagged your at a stock broking company that had a futures will actually had a fixed income desk and they used futures they weren't a floor member of the Sydney futures exchange they were an associate member and they obviously used the futures to hedge their fixed income exposed with that kind of stuff so it was my job just to do the paperwork for that and I happen to be on the trading floor and basically I was just pushing paper and one day I happened to walk past the Private Client desk this was a stock broking firm and there was a guy plotting the 5 and 10 day moving average crossover on the old chart paper and I said what are you doing he is well I'm trading this is that this is a trend following strategy and when the 5 crosses the 10 I buy and when it crosses below I sell and he was trading the share price index futures were saying as your S&P 500 futures that you'd know that and so I thought wow I could see the trends there they were Bank just could see it working this it was just so obvious and that's where it all began right there I went into the office manager of wily old guy I was was I 95 I was 18 I was earning 12 grand a year and back then that share price index futures was $100 a tick today it's $25 T and I said I can't trade these futures and he's just shaking his head game what are you talking about no but he did let me he said well what you have to do is fill out a ticket and you bring it in here and I'll sign it and then you can ring it down to the trading floor and place your order so there I was trading share price index futures on a 5 in 10 day moving average that was it there was no position size and there was that wasn't after for that that came 7 years later at that kind of stuff so needless to say 1987 came around and I wasn't trading that because I would have been on the right side of the market trading that I was doing something a little bit more stupid as a 20 year old would do and needless to say I blew up everything in my I had to buy all me out so I learned it the hard way and but that's where it all that's where it all started yeah I mean I love these stories it's it is sometimes and certainly was for me as well it's kind of this kind of love at first sight once you once you realize what what this is all about it's it's hard too hard to turn back now I mean I'm also interested in a little bit maybe the the continuation of that journey to where you are today and then we're gonna maybe go back and ask why you took certain choices also you know what what do you see in terms of opportunities for for the way you trade today and and why you've made those choices so I'd love to hear a little bit more about the story if you don't mind sure so basically I took a couple of years off after that and just sort of steady the ship and I was working down on the trading floor of the Sydney futures exchange I was filling paper and that's when I was first exposed to a lot of the big CEOs you know show all these a lot of the turtle guys back there obviously I was in the bank bill Pitt and we had a big operation there was four of us in the pit filling paper so we got a lot of the the trend-following business come in and it intrigued me because you wouldn't hear from these guys and all of a sudden they've come in and absolutely hit the market and so that tweaked my interest and the other thing that tweaked my interest into the trading arena back then was my mentor at the time she was the desk manager of the international trading desk she got given a copy of Jack Swagger's book market Wizards and I just consumed that you know that really got me going into that kind of stuff and I guess you know it becomes a passion I think there's a lot of people that read trading books and you know treat them like little trophies put them on the shelf and say I've read that tick I've read that tick but they're not really reading between the lines they're not taking it in and they're not feeling that patch I think I was lucky I don't know why but I think that's what got me I became passionate about it my mentor at the time we we had a very very profitable business in fact when I started there was six of us in the business and when I left there was 77 and I was the first person to ever leave and I went overseas she said to me that you know if you want to you want to have a go in this business you got to go overseas because Australia's just such a small place so I shipped off to London and I worked on the trading floor of HSBC over there they had a thousand person dealing room and that was at the time where you know we had some big moves in the markets and dealing with some pretty big and was amazing just walking into that deal it was like wow you know this is just huge we had Soros was very active back then and all this kind of stuff so it was pretty impressive and then I went to Singapore for a couple of years just after nick leeson did his damage over there so you know a guy coming from London with a name of Nick into Singapore wasn't wasn't particularly the done thing at the time it took eight weeks actually for the authorities there to sort me out so I had two years there and that's when I decided to pack that side of it up and come back to Australia and start my own CTA which I did in 1998 so exactly what you guys did today back then in the 90s the Sydney futures exchanged had a membership actually a CTA membership and I took up one of those and started trend-following using a completely systematic approach exactly the same as what you guys do today mine was probably a little bit faster than what yours yours would be um but that was really what it was like back then and we traded I think from memory about 52 markets we had a cracking first year we had 20% first year out of that out of the Hat and we got some interest from overseas and we started raising a lot of money from expats and high net worth individuals out of I my business partner and I both worked in Asia he'd worked at Hong Kong for quite a number of years so we had contacts over there and yeah we we got into the routine of attending the conferences in I think I told you this mer it's down there and in Florida doing all that other stuff yeah so that all came to an end in 2001 actually so might as well I guess we learn running our futures trading business with funds under management and the buying and selling is a very small part of the business you know the compliance looking out for the clients raising funds running a business is the majority of us in my partner he was a he was an old-school prop trader he just wanted a bomb and sell them and do nothing else and so we parted ways in 2001 and at the same time the Australian regulator brought in a lot of new rules and made it very very difficult very complex I'm a compliance perspective so we thought the best thing to do was shut it all down which we did probably the worst business decision I've ever made in my life because of such a great business but it opened another door we have raised a lot of money from one of the big banks here in Australia and the guy that was managing us from that being said to me well why don't you bring your clients and your model over here and run it out of the bank for a 50/50 split and so I did that and that was obviously a good thing but you know 'pn dad or that I'd kind of thought about and it opened the door that I could manage money trading stocks what what's important to understand here is you can't have a license if you have no experience in that particular side of the business so even though our traded futures for you know 15 years up until that point of time because I've never worked in the stock side of things or the equity side of things I couldn't actually go and manage money trading equities you have to work three of the last five years in the business to actually get a license so this entry into this Bank gave me the opportunity to get that experience so I spent four years at this particular Bank running my models and was very successful at doing that and I switched from running futures into running equities models my logic was if I could manage fifty million dollars trading futures I could probably manage several hundred million dollars trading equities and that's where that new journey began so 15 16 17 years trading futures or sudden I started trading the exact same model but in equities and I still trade that same model today I mean that's fascinating on a couple of things but I just want to say to unique that actually yeah if you have anything to square out with Nick lease and you'd let me - let us know now because he's gonna be on the show in about a month so you know guys next week it's next week very short notice but Nick fantastic so that's a funny story that you mentioned that yeah well I I wish I could tell you some funny stories so one of the clients we had on Sinex took the other side - Nick license trades and in one particular year that finally year they called him from my memory anyway Goldfinger he was a bank arbitrage trader he was arming the Nikkei futures from SIMEX in Osaka and he made 98 percent of the bank's profits that year himself from that arbitrage yeah yeah that's that was my understanding and we had a we had a staff member dedicated to him with a whole trading session on ceramics just to look after his orders just to runnings art because obviously our cycles computer at the time SIMEX was a floor traded so you know it was still the open outcry but yes some great stories I heard about all that stuff else going on absolutely I can't wait to hear the the true story so to speak so but back to your story which is fascinating as well and I I kind of understand obviously now your your journey and why you ended up doing stocks only and I've you know for my part I have many many questions relating to to that and I'm sure more it has as well looking back just maybe to kick it off a little bit looking back in trend following is something that I think a lot of people believe that if they read one of those books they can just go and simply apply it to any market but personally I think I think that one of the secrets to getting trend-following to work well for you is actually the diversification you get from the kind of broader futures portfolio that you were trading initially and so I'm actually curious to how you've made the you say use the same model so you transferred to equities so I'm curious to know what you think the reason is that you've been able to successfully make that transition because to me that is not that's not you know kind of a straightforward logic especially also when I see at our own performance how we certainly in the indices we don't trade single stocks but in the indices where one particular sector doesn't have to be particularly successful for a long period of time and then it comes back and it you know so I'm curious about that actually sure so I should clarify there when we're trading trends in equities we're only trading on the long side my clients and I guess you know I'm just in a different part of the world where you guys are at my clients are mainly looking after their retirement accounts so they're middle-aged professionals they are early retirees they've been around the block a few times they understand the problems with buying hold and they don't want to be a part of that world they don't want to pay a financial planner one or two basis points to stick him in a 60/40 portfolio and just ride it out they want to be on the right side of the market they want to be defensive during sustained bear markets like now which we are where a hundred percent cash what like we were in 2008 during the GFC we were a hundred percent cash they want to understand the evidence behind what we're doing you know they want to understand why does this work that's the question why does this thing called trend-following on stocks actually work and that is one of the easiest things to explain to them you know I use the analogy of being a hitchhiker you stand on the right side of the highway you don't know what car is gonna stop but you know if you stand there long enough one will stop you jump on that ride and when that ride ends you hop off and it's it's as simple as that basically the other thing is for them you know it's very very easy to implement minimal workload you don't have to read balance sheets you don't have the in have to understand what the company does you know when you submit your tax returns at the end of the year to the tax office you're not telling them what you did you just tell them where you're bought where you're sold and that's really all it comes down to so our target market is a little bit different I guess to yours we're not attempting to be a diversified kind of strategy per se across asset classes or anything like that we're just simply trying to beat buy and hold and we do that successfully well I think we do that successfully since 2006 which is when this particular portfolio part of became public you know we're going to analyze return a 14 and a half percent versus the index of 4.2% the index I benchmark benchmark against is how to return at 1.4 percent per year so we do that and our drawdown was drawdown in that period of time since 2006 SP 19.2% versus the index in what 51 percent or something during 2008 so from a pure risk adjusted return basis you know we're doing reasonably well and we're achieving our goals for those people that are interested in doing what we do it doesn't appeal to everybody but all those people that you know one exposure to equities but don't want to do buy and hold you know it's it's a good solution for them I know Marge you must be bursting with questions so I'm just jumping in before that first comes out but so the long only side I mean I think that makes a lot of sense because we know that also within the diversified portfolio most of the profits come from the long side that I fully understand but did your choice of only trading equities on the long side simply come from the fact that it's just too complicated to do the short or had you already in your analysis realized that okay actually if I do the short as well my returns are most likely not going to be as as great so a few things to to understand there is first of all when we started doing this trading on the short side really wasn't an option for the very vast majority of people today you know that's that's a common theme the other thing to understand as well is that in Australia during the GFC short selling was totally banned right across the board so what's the point on having a strategy that's that's required for those periods of times and you can't use it and we like to keep things simple you know we've one of my philosophies is if you keep things as simple as possible clients are going to more than likely implement them as soon as you add complexity to the equation they jump out the window there's a note and I don't understand what's going on here so I'm just not going to do it I would rather do something that sub-optimal but gets the job done reasonably well then make it optimal and confusing for someone and because they're just not going to do it I would rather than do it sub-optimally they'll still get a result that's better than they're not doing at all so things like position size and we keep that forever is simple we don't go short we just go to cash people won't get cash they can sit here and in 2008 this was quite a fascinating exercise because it was the first time that people where I was managing the money were exposed to this to start with there was a lot of pushback it's like hold on we're sitting in cash why are we paying you and it's like well because that's the decision the model has made and you're paying me to trade that model by the end of 2008 early 2009 they got that they understood that because they'd never seen it before and they could stand back and say wow that was the best thing to do and it was the best thing to do to fold financially obviously that's the obvious thing but psychologically psychologically people were able to pull a trigger and get along again in March 2009 which is what we did those bar holders or whatever who capitulated down the lows psychologically they were devastated they couldn't pull the trigger again is still today I come across people that won't go near the stock market because they lost so much money back in the GFC you never want to be in that position so we put ourselves in a position to limit the downside I go into cash but also having it simple and being psychological strength to be able to participate again when the good times come along I guess the major difference is you know the stock market does touchwood in most circumstances have an upward bias over the longer term so all things being equal and mind you maybe things of chairing days or today but all things being equal that that should continue into the future avoiding the trading paralysis that you just alluded to I think this is one of the most important things that you have to have as part of your kind of like trading behavior right if you're going into a 30 40 percent drawdown and you have absolutely no plan and no guide about how to behave then odds are that you're not going to come out of that because you're going to throw in the towel you also just be an emotional wreck yeah and I I know quite a few people who have had that experience and they no longer want to have to do anything with the stock market and I think it's just bollocks and that's a problem I think and so you know did it again speaks to the quality of having a plan and having a system and even like you say Nick even a sub optimal system is a system and if it beats buy and hold then that's a valuable system in my opinion and I think the key to success I really think the difference between professional traders and those that are struggling to get on the feed it's just the long-term application of a simple strategy that's that's what it comes down to you know one of the things I've done with my clients has send them the performance tables of done of a car of all these traders they've been around for 20 30 40 years and save them look a place their trades every day every week every month every year year after year after year after year they keep doing it and that's that's the discipline obviously and the dedication to it and I think people need to grasp it they're just a lot of people are looking for a quick run you know two months three months I have people who start my strategy and after two months again now this doesn't work it's like well okay you know it's not a Holy Grail which is why I called my book unholy grounds is a bit of tongue-in-cheek but the point is it's the long term application of just a simple strategy and most people do not have that long term ability to do that you know they're too much of a hurry these days maybe they've always been like that but if you can find a strategy that suits your personality and that's important because that means you'll be able to execute it and if that's the case then you should be able to apply it for the long term absolutely agree you know if you are a person that doesn't want to trade place trades every day then there's no point you trading a strategy that is short-term or trading intraday because you're not going to be doing it right so you have to find something that is longer-term and less involved than maybe trades only on a weekly basis where you can you know take some time or the weekend to run signals and then place them on Monday morning and then just do something else yeah but this is important and I think another thing is never take any of those losses that come from a single trade that you put on personally it's just one trade out of thousands if you really want to do this it's one trade out of tens of thousands maybe that you're going to be doing over a trading career and that one trade that fails and maybe it's a trait that fails miserably with a major loss even though that shouldn't but you know sometimes it can happen just forget about it I kind of like say like just he raised it from memory right take the lessons that you can learn from the mistakes so that you don't repeat it if you can't spot them but other than that it's one trade out of the sample size let's move on right because you don't gain anything by becoming kind of like painting everything black and worrying too much about one batch right that's the cost of doing that business it's doing bad trades that's just what it is and I think the other thing to also recognize is that if you do this long enough you're going to get slap across the face that's what mr. mustard does they deliver these I'm telling experiences to just keep you keep you on your backside and say I'm the boss just stick to your rules and we'll be fine together but if you want to do if you want to get aggressive like I was in 1987 know what an aggressive folks just like stupid but if you want to go and play silly games well you're gonna pay the price everyone pays the price it's going to happen and I've had slaps across the face and sometimes you sometimes you can stand here and think what am i doing what is going on here but you keep pushing forward and you push through it and away you go you know fourth quarter 2018 horrendous absolutely horrendous that reversal in tech stocks you know really really did some damage and that comes along but you know what you have to suck it up you have to keep pushing forward and very importantly you have to learn from that lesson what it can I learn from that not tell you what I learned from that lesson was diluting my signals basically that's what I had to do and that's that's a key piece of research that I've been working on for the last year is I was too reliant on a single signal and as a result the timing of that signal was poor wasn't poor that was the signal I should had more signals in there which I've now initiated across my various portfolios to do that so that removes that timing signal a signal timing risk if you like so there's a lesson to be learned it's not done in a hammer hang up my boots and be out of here this stuff you know it's read that's right you've just got to say right what can I learn from this and and and keep moving forward and there's always lessons to be learned right I mean those markets because they change all the time and it just never is the exact same thing that repeats they always always throws a new curveball that we can learn something from I mean the you know the reduction of timing luck it's one of the things that we're doing and we've had Cory hoffstein on our podcast who I think has written a great paper about this it's not too complicated to understand it's simply spreading out your signals and taking signals at different points in time as opposed to just you know one single point in time or two single points in time where just as you say Nick you have an exposure to things such as the fourth quarter of 2018 where there's a massive v-shape reversal if you get caught on the wrong side of that then you're in a bad position but if you spread it out of the say four or five or six signals then you'll get a little bit of the bad stuff but you also get a little bit of the good stuff and this makes it much more easier to follow yes and this year has been a great example of that you know correct we got quite lucky I think the main u.s. portfolio is down 2.8% for the year we run a percent cash and I'm happy to be that way you know it's a good position to be in considering what's going on although this bounce back has been quite unbelievable but yeah you've got to learn from these things and you know we've spent a lot of time researching different strategies and you know I'll take off my trend following out here for one second only but you know we trade also mean reversion strategies and even volatility day trade strategy simply because they actually do very well in times like this when our trend models are in cash those shorter term models are actually doing quite well I think the volatility strategies are up 14 point since so far this year because that thrives on this kind of volatility so you know it's another type of diversification albeit not trained for I had to question on that one is just when you said you made some changes that you wanted to reduce kind of the reliance on one single signal did you just change the timeframe meaning using the same signal on multiple timeframes did you actually add more different types of signal so that would be one question and then the other thing would just be whether these different systems you have say for example can you only trade value out of stocks and in cash or do you combine them or how does that work is it one big system or are they individual components that you know you don't mix and match or how does how does that work sure so first question two different things that I've done there so for example in the US markets we trade in our relative momentum strategy I tried a couple of them over there and one we focus on the tech stocks specifically now that is a what was a monthly strategy so what we took we took that and we half the portfolio stays on the monthly timing and then the other half goes to weekly I then made a slight change to the strategy so all our strategies we would classify them as dual momentum they all use a regime filter so what I actually did just to make it a little bit different is I have the regime filter on the weekly signal just to give something a little bit different there as well but the performance you know difference for example I think moves down by about one basis point and the drawdown moves down by about half a basis point but the whole idea was to just get those different signals so that's one of them my Australian portfolio I had to do two things I I was getting nervous because of the size of the account anyway so what I decided to do is divided the accountant to and trade a completely different system so the strategy that's being running since the 90s that is now only got fifty percent allocation and I've introduced a second strategy which I developed back in 2012 but I've never traded during extended period of time but I've now allocated the other 50% to that strategy and that's a weekly strategy and that is your very classic trend following breakout style strategy as well and I trade that on a much broader universe than the other chore strategy so slightly different universe slightly different signal and different time as well weekly burst the daily so you know just mixing it up as much as I can I guess some of your listeners may say ah sounds like a little work but it's it's it's actually not it's all automated it doesn't take very long at all and you know it does make a big difference so that's what we did with those particular signals when you say it doesn't take very long when I was it took me quite some time and a long time to get to the point where it doesn't take any long years right exactly so now it's like a click of a button but to make to get to the point where it is a click of a button that is a longer period of time so if people really want to have a go at that it's not it's not a five-minute thing where you're coming out of this and you know what it is that you need to do yeah this is a process for everything in life that wasn't correct you you want to become I am a leading surgeon well it's not a flick of a button it's a lot of just a lot of time so when I give the delivery are the profession you just got to spend the time and put it in and come out the other side professional athletes are exactly the same you know you're trying for 10 years for that two minutes of glory the Olympics or something like that it wasn't an overnight success that's right does that also account for politicians that if they've been a politician for 40 years this period they should be really good at it come on don't drag me down that rabbit hole [Laughter] maybe one thing Nick I wanted to ask him for the benefit of listeners is and for the sake of explanation you are I think not actually trading the portfolios for your clients they are trading their own portfolios in their own name so what you're doing is you're providing them with trading signals and in a certain format that's easy to read or you know easy through then execute or upload even into a system but but they they are do-it-yourself clients who receive signals from your business which is called the Chartist that's correct so I stopped managing money in 2016 the compliance environment over here is it's quite hellish very very expensive and it's it's really going for the big boys now you know so we run the signals and people are able to subscribe to those signals and we post our own data there as well so you know it gives a lot of confidence to our clients that we're trying to trading with them and they can see our results they can see my positions the idea is that they don't try and replicate exactly what I'm doing but obviously that's what they're doing but the whole you know for example this downturn we've just had which I guess we can compare to 1987 because of the speed and depth of it we had one client I won't say complaint but one client saying and he started in January I mean hello how's your timing like right there that I think he was down 14 percent and he wasn't particularly happy about it so what I've managed to do is over the years I hope is to educate our clients of what it takes what it needs what you need to do and I'm assuming my clients are trading my signals maybe they aren't and that's why I got no pie but I think because we've educated them so well over the years and they know that I'm neck deep in it with them that there's no point them sending me an email and having a having a complaint because what are they you know it's like hey talk to me about it I know exactly what's going on for sowing positions on so you know that's a good thing but yes that's the way I run my business now and I'm pretty happy to do that we still have to be licensed by the regulators but because of the nature of that business the licensing requirements are not as strict as if I was actually managing money so to give you an idea just uh give you a basic idea for example the indemnity insurance that I pay or the style of business I do now is about twelve thousand dollars a year or managing money that would hop to about forty or fifty thousand dollars so it's a big expense no definitely I mean it's very interesting to listen to and and and and this whole idea about telling people what to do because we know as you know human beings even if we're told what to do we don't always do it yeah and and so I think you're absolutely right I mean I think the education and the constant reminder of the importance that one of the things that I feel that we as a manager get paid get paid for I mean it's the discipline and it's the you know holding people's hands quote unquote by doing all the trades through the difficult times I mean I think I don't think you can really overestimate how hard it is I think for people who don't do this full-time to to keep doing the trades yeah because all a lot of a certain in our industry I'll certainly on our side I mean a lot of the trades you do as a trend follower they don't make necessarily intuitively sense when you're asked to buy the high after you just missed you know a big up move missed in in quotation signs so so it's yeah I'm it's interesting and it's it's interesting to hear that you can get people to to actually do it because it's so important yeah and the other interesting thing and we're seeing it now we saw it again in 2008 we doubled our business in 2008 a lot of people realize they've just been lucky and they got knocked down pretty badly a few pegs and realized that well if we want to keep doing this we've got to do it properly so we doubled our business in 2008 and we've been inundated again just in the last month of the same kind of thing but coming back to what you were saying we we introduced a mentoring product in 2016 when I stopped managing money and the reason being is exactly what you were talking about it's all good and well following someone else's signals and you have to have complete confidence and a lot of people especially new people may not have that confidence so the question is how do I get that confidence well yeah we could look at a track record for however many years and ours goes back to 2006 and you guys you go back to 1974 or whatever and in theory that should instill some kind of confidence but in some cases it still doesn't you know and I can show people that performance here it is oh yeah I don't know so we introduced a mentoring course in 2016 and the theory or the logic behind it was if we can teach people how to code and then they themselves and design code build back test stress test their own model if they can do that and it stands up to the stress testing and they've done it themselves then in theory they should they have the trailer a lot easier because they built it to their own specifications they should be able to trade it a lot easier into the future and that's been very very popular and again it's about building a strategy to suit your personality that's really what it comes down to so you know that's that's been a pretty popular kind of decision for people to do and we've got a lot of people there especially now because they've got a lot of time on their hands they have no coding experience whatsoever but we walk them through this process and they can build trend-following models or whatever kind of models they want to build but we hold their hand all the way through and guide them through so that's been the interesting experience admittedly most of the people are very high net-worth individuals because they don't trust anyone else with their own money they want to be able to do it themselves so it's an interesting exercise yeah I mean what you say about confidence is definitely very interesting and relevant I certainly sometimes still get when people see the chart of what a thousand dollars you know is worth today invested in 1974 when we started I think it's more than a million dollars it's worth today and they still asked me so do you think trend following works and I'm thinking I think it is I think it does but there we are trend following can't not work I mean really that's the crux it can't not work markets have to trend to suggest that markets can't trend would suggest there one there's a fair value being found by every single participant in the market and to there is no human emotion and we know for a fact that human emotion drives those trade ins all the time and humans are never going to change so you know trends have always existed they can't not exist and therefore trend following as a strategy just has to keep working you know it's it's a it's a cool determinant of generating a positive expectancy yeah correct and also very protective for your capital as we have seen just now you know it tends to be that you know when stuff happens in the markets and it's really starting to move that maybe not immediately but after a while you're on the right side of those moves and that is a very very protective feature of trend following because of the you know the long only buy and hold buy and hope of the crowd and it's also simplistic in nature a very basic level I mean you know you look at the talking head so we in we're gonna go into stagflation or we go into deflation and we're gonna do this some no one has not yes no one has an idea all these experts these PhDs of economics they've all disagreeing and thankfully I don't have to think about that on the stuff that's right all of these crises we go through none of them see them coming but they all know what the solution is and this is the are on your right there right now market timers can time the market that this is the sector you've gotta be now [Music] ninka had maybe a bit more of a technical operational question with them with your signals you you know you're generating the signals to to your customers to the subscribers and have you ever found that you know because I don't know if you know how much money they're trading given that the signals are now out there in the open domain and you can have a number of customers do they have market impact or does it you know slip away does it cause problems is there too much money trading those type of things and do you therefore need to evolve your systems and change them over time or is it still in a you know in you know in a capacity where it's not a problem yeah it's a great question and it's a common question we get from new members the answer is is reasonably simple first of all we offer a variety of different strategies so it's not like one of these tip sheets where this is our 5 G pick for the next two years and every single member of jumps on board you know that's not the way it works we've got a number of different strategies and not everyone trades every strategy so it might be that they trade the Australian trend following strategy it could be they trade the u.s. mean reversion strategy or one of the u.s. momentum strategies so quite immediately the there's dilution of how much capital is coming into each signal right there in the Australian market our trend following strategy certainly the you know the most popular strategy and what happens there is our signals come out and we then split them up into different risk categories so for example we have a conservative portfolio that trades just the top 100 stocks it's like trading the S&P 100 if you like or the Nasdaq 100 if you like then we've got small cap industrials we only trade in the top 500 stocks we don't go beyond that and we do have liquidity constraints in there so we're not trading stocks that aren't doing a certain amount of volume to start with so the portfolio itself is then diluted because not everybody is going to trade the small cap industrials or they're not going to trade that for example I don't trade the large cap that top 100 stocks I don't trade those personally so that again adds a another element of dilution of the signal and then the last thing is we don't use any intraday stops we only enter market on opening in Australia we have a different kind of a mechanism we have what's called an opening option so same here oh ok right so that is the most liquid part of the day that in the clothes so we use the open and again part of that was twofold when we first start the strategy stop losses weren't readily available for a lot of brokers here in Australia in fact some brokers charged you the user stopped us believe it or not crazy and second of all we wanted customers to have a large window of time to actually place their orders and they can all get the same fill because of an opening option price so they've got between from 4:00 p.m. through till 10:00 a.m. the next morning to place that order so there's no need for them to be text messaged or anything like that they've got ample time to place that order and everyone gets the same fill in the most liquid point of the day so we don't and and lastly look we are not a big time operation out here in Australia we run a small family business Trish my wife she knows all the customers personally we don't advertise it's all word of mouth so we're not we're not trying to build you know we're not trying to build a big business or anything like that we've become very good friends with a lot of our clients fishing is more important to me than building an empire so you know that's that's what I'm about great you actually also answered a lot of the questions that I had in general just about you know how it actually works and how do you get around some of these operational issues I thought that was that was super cool and and a good way of doing it so to speak and I can you do the same kind of style in other in the u.s. portfolio is to just the Australian portfolio where you can do it like that and get it all done on the open which is obviously the fairest way for everyone yeah exactly right so the u.s. won and everything is is simple to execute market on open and that goes with exiting and entering positions we just do market on open and everyone gets the same price and it's it's easy for sort out we don't use any stop losses because you don't have that you know you know have that risk of slippage if everyone's competing especially in Australia market since 2008 the Australian stock markets become incredibly illiquid and you know I used to trade a turtle breakout strategy and I had to give that up in 2012 I calculated my slippage was creating 11% or costing me 11 percent per year because the strategy was using intraday stops and that was me myself rather than all the clients as well so yeah we're very we're very careful on how we participate that we did have a situation we have a situation I think it was back around 2009 2010 when one of our short-term models was creating incredibly large slippage every time we put a signal out these stocks would just move huge and I couldn't figure out what was going on and I had written an article and then for some reason I googled the title of that article and this article was only available to clients inside the website and I googled the heading of that article and up came the article word-for-word at a stock broking firm and it turned out that one of my clients who was a fly-in fly-out worker in the mines here in Australia couldn't log into the website one day so he rung his broker gave the broker his username and login and the broker logged in and saw Oh this all looks pretty good I might get all my clients into this so for the next two weeks this broker was logging in and putting all these buy and sell orders out to all his clients and causing absolute chaos and it was only because I found out that he had published this article in his name that we found out where the leak was and we were able to shut it down very quickly so I think if it does get out there in that respect that you could have a problem but you know we're very secure what we do but you know those things happen well you've just mentioned about the slippage I mean it's is actually one of the things that I noticed as well and in addition to the slippage Germany at least ranks in my experience trading you know across a couple of markets still unfortunately and nastily as one of the countries maybe next to Australia with the highest Commission per share when you trade stocks and I guess it's because there's a dominance of those old boy brokers they've never kind of like changed and they're like keeping that market to themselves but you know we can trade for a buck on Interactive Brokers any US stock that you want in whatever size and when I want to do it here it's a minimum of 35 euros and when I put in an order for the Australian market I'm not sure if you're Josh the same rates down there but you know it's kind of like in the same ballpark yeah and this is ridiculously expensive right so it's you know just just by the nature of that cost because cost is an element of our business a very important one I'm not surprised that the liquidity is dying down yeah I'm not going there you're absolutely right so these trend following strategies that our trade they only do 35 round terms of year so there's not a lot of there's not a lot of commission drag but you're absolutely right Australian commissions range anywhere from $6 which is Interactive Brokers per trade although out to about when this is online trading up to about $30 now the broker the charge is $30 they have 40% of the market share simply because of their name nothing more and because very vast majority people going through them somewhat ignorant as to what else is available you know when I tell people you can trade for a buck in the US market they're absolutely dumbfounded but just have didn't they're just I thought it was free nowadays are free started trading in the you free and risk-free know so I don't do any short-term trading in Australia it's just purely trend-following in Australia longer-term you know my average whole period is about nine months and trade frequency as I said about thirty five round turns a year per portfolio so it's not a great deal of drag I think off the top of my head the Commission drag for my Australian portfolio is about point four of a percent per year so it's not a great deal that's fine but all my US trading short Turner or my short-term trading yes Interactive Brokers into the US dollar a trade or the tiered rate depending on where you're at but certainly a lot cheaper you mentioned liquidity earlier and and and how liquidity has dried up I mean has that continued is generally cash equities not a very liquid market to trade anymore and and why do you why do you think that might be because of course we were reminded I think in the last four or five weeks about once again the importance of liquidity and of course this is where and we often see at least so far that futures markets stand up pretty well but I don't have any experience with cash market so be interested to hear your thoughts about that look I'm not sure I'm the guy to ask specifically you know the the algorithms out here have really boomed in the last you know five six seven years they're very very finicky you know you see the volume come in and disappear immediately I'm not saying they're trying to spoof or anything like that but there's obviously stuff going on the other side I know back when I was on the trading floor something like seventy percent of the spy traded volume was from arbitrage traders I don't know how much that is today a lot of those businesses really I think sort of don't have the margins that they used to back in the day there I think they raise the tight margins now and I guess the other 64 million dollar question is passive investing you know it's it's it's a big thing here in Australia I don't think you'd be hard-pressed to find a financial planner that would put you into anything more than a 60/40 portfolio you know it's it's it's pretty generic is it so passive investing I think has a lot to answer for as well but I can't offer an explanation specific to one liquidity is is less than what it was prior to 2008 hmm I know you mentioned in our a couple of emails exchanges before our conversation that and you thought there were some similarities as far as I recall to 1987 can you elaborate a little bit on that what you see going on I just think the the swiftness of the fall I think it took everybody's by surprise you know 1987 was obviously program trading that caused that but I think here we've had significant competition very very quickly very aggressively mind you the the bounce-back has been quite phenomenal as well and I think you know the 60 year what are we six seventy percent I think we've bounced back in the Nasdaq now 50 percent in the SP the Australian markets you know falling behind it's the only I put out 35 or 40 percent off the lows but now their stops they're hitting new highs now some of those tech tech leaders it's quite remarkable obviously the sugar hit from the central banks has been quite phenomenal I think not only the size of their stimulus but also the swiftness that they've put it in they have certainly sent the message to the market that they will do anything now I think that's the markets been happy with that so far but when the data starts to roll through which it is slowly coming through now we've got earnings next week when that really starts to flow through I think the markets going to be asking the central banks are you still gonna be here for us yes or no and if they think no well we could go back and test those lows again this is the biggest bounce bear market and I'm assuming it's bear market bounce not a new v-shaped blow up into a new high but this is the biggest bear market bounce since 1929 we had a 46% bounce I think the first corrective bounce after the first plunge and then we slid I think considerably lower from there but who knows you know this is not a repeat of what we saw in fourth quarter of to 2018 that was a that was more of a rotation rather than you know a shop so I can't help but think that a retest of the lows is probable but I think it depends on how the market views the support from the central banks and the government's you know I think that's gonna be the big thing we're seeing pretty poor breath at the moment in the US markets you know the ESP 500 has regained its 50-day moving average but only 25 percent of the stocks have regained their 50-day moving average so there's not a great deal of breath going on there at the moment which doesn't bode well too you know stronger market they could catch up obviously we could see some consolidation here and we could see remarks from the central base saying yet we'll keep doing what we're doing and if that's the case then I guess we go higher but some I just can't help but think mind you that's why I don't do fundamentals because I'm not particularly good at it but I can't think that we couldn't test those lows again so it's quite remarkable I mean I was obviously the the weekly jobless claims are quite easy to follow unit two we're up like 26 million of new unemployed people in the last five weeks that in itself is extraordinary and and and and as you say some some mark some indices obviously driven by very few stocks but some indices are not that far off their all-time highs which were at an extreme level to begin with and then I saw in Europe there's and report out from the consulting firm McKinsey saying that you could expect up to fifty nine million unemployed in Europe from the coronavirus and I'm thinking that's a lot of people and doesn't look like that's fully priced into the markets at all but I mean as you say the beauty of what we do is that we don't have to worry about these things and I think again and and this is what I was just saying in in in my introduction when when we had this debate about oil that even something that you can certainly say it's never been in our data it's never happened before as far as I'm aware at least with the oil market going negative but it's not something that that trend following has to kind of worry about because that's the nature of following just price that's the only truth really that we have left in in you know in the markets is just what is the price right now and and how can we use that constructively to to react so to speak so yeah I think Gerry made a good comment last week all the way prior actually he said you know it just goes to show that anything anything beyond your wildest expectations can and will occur even if you do a 100 year back test or a 500 year back test they're gonna get something that's never ever happened before and you know that all move is quite remarkable and I think for the general public I don't think the general public really understands some of the moves in these markets you know the currencies the bonds just stuff you never really hear about they're just phenomenal moves going on the volatility is crazy and and I would say on top of that I mean at in late February when we saw oil move down by 30 percent at the open we thought wow that is big but actually when the may contract went negative it actually dropped percentage-wise something like two hundred and forty-eight percent in a day and so the whole concept of something losing more than one hundred percent in value is is pretty novel but now we we've seen it and yeah and I'm sure we won't this won't be the the last time we're gonna be surprised in in in twenty twenty about things that we didn't think could happen you like the Fed buying junk bonds and look like like Jerry says and you know I think we all agree there's always that new curve ball and hallways that new surprise that comes to us and but what happened on Monday with the negative oil price that was just you know I was actually on the phone speaking to a colleague at the point it happened so I had a Bloomberg screen open I have live data and I was watching that contract and it was at like six bucks and then it traded down to five traded down to four to three then back up again asking like okay so there's the zero and it's getting close and then boom boom boom it went to like 50 Cent's tested the zero when negative by cent went back above zero again and then I was like during that 30-minute or 45 minute phone call it had this just falling off a cliff behavior that moved from zero to minus 5 to minus 10 once we've hit minus 10 it was kind of like the next stop is minus 20 minus 30 minus 37 and a massive speed right the absolute massive speed out of interest I had a look at a couple of the broker platforms they immediately stopped quoting you couldn't trade that contract anymore right and so it is what I want to say this is one of the events that is and they're they're a couple but this is one that I will not forget this is something to remember you know I mean you can you can see Tesla go all the way up to 900 bucks maybe in a couple of years I'll forget about that because okay it happened it's a crazy move but this market going negative within like a 15 minute time span losing 40 bucks is that's one for the history books I actually being in a different time zone I woke up with about 30 minutes to go for the market and open my Bloomberg I was still in bed open the Bloomberg and I looked at the oil prices so oh my Bloomberg's buggin there's something wrong it took about two hours actually figure out all that's actually wrong yeah so the maybe maybe listeners they're interested in that but you know they they're obviously there's been a lot of talking about who caused it who was on the leg who was who was causing that drop because it happened on the Monday and the may contract expired on the Tuesday so you're one day ahead of last trade day and so you know most say retail trading platforms wouldn't allow their retail accounts to hold the contract for that long so it kind of like forcing you out the first notice date for crude is two days after the last trades that that would have been three days away a lot of the retail platforms kind of like falls you out so probably not a lot of retail money in that right and then the institutional players they in my experience don't tend to hold for that long because the exchange increases position limits as you approach expiry and they become more and more cumbersome so they tend to roll earlier speaking for ourselves we are CTAs we roll earlier we're interested in getting a liquid roll and we're not rolling on the last trading day or the second last trading day is just not our business to be there and I don't think it's the banks and their index business that's like you know GSC I and that stuff because they have roll schedules which you know happened way earlier in the month and so one of the hypotheses was that it must be speculative more pet fun type of money assuming that there's still a little bit of storage capacity in Cushing Oklahoma left it's not yet full tank tops right and they see that spread between May and June and trading at minus 12 bucks which was a historic low and they will just go let's buy May and sell June it's just one month we'll be able to get some storage on Monday morning we'll pick up the phone pay through the nose somebody will give us a little bit of storage in Cushing Oklahoma and we'll just ARP that thing and make 12 bucks you know minus the cost that it will cost a store and sure the thing for only one month right so you pick up the phone on Monday morning and you figure out that no all the storage even though there were not a tank tops but all the starch has been reserved it's been called for the week prior you cannot get it right so then you sit there with your may contract long and it's delivered well it stops trading tomorrow and you get first known as two days later and what do you do if you have no place to put it you're a forced seller and it you know to me it's I'm not sure if that is correct in any way but it would explain or support at least that so quick deterioration of price from like zero to minus 40 which was pure capitulation I mean this was just gapping lower I mean it was just that their holes in the chart right it's kind of I'm sure yeah I think Interactive Brokers took an 88 million dollar hit oh yeah they did so you know one roof is one of many clients sounds like it I haven't heard of anything else but but in general noise I mean I think yeah I mean of course I mean it's hedge funds can easily be blamed for these things but I would imagine that these people are kind of specialized commodity or specialized energy type traders who you know they're not the typical hedge fund if at all I mean I would say they're yeah and achieves exactly yeah I mean who knows it's it's speculation but you know on the back of that as always what drove me a little bit nuts this week is excuse my French but all the BS that comes out of that like you know banks saying oh well you know we have those long only turtleroo Total Return tracking certificates that track the price of oil and they roll the front month contract and so all of a sudden they are saying look the the cons that the concept of a fully collateralized futures position has just been thrown out of the window because the thing can go negative right you can owe more money than you've put in and then one of the response was well this is exactly why we why we don't roll on second-to-last trade day we roll on the third that's like what I mean really I mean is this the first law of rolling contracts this can only go negative on the second and and last trade and not of the third as like I mean all that crazy stuff coming out of that thing it's baloney but this is why some of these frankly ETF products are you know toxic really I mean was it XIV was also an ETF type product right I mean it's that just bundles things in and the people who buy them I think it's probably too difficult for for for them to really understand what goes on inside so when you have a situation like this it's unfortunately a lot of retail money that comes out short on these on these products and and by the way I'm sitting here with a couple of questions I mean Brian and Michael are sending questions about oil I know we kind of talked about and most of these situations you know no no but no no I mean I think we actually have I just wanted to acknowledge Brian and Michael for sending in questions about all I think we've talked about most of it you know because it does pertain to the fact you know can you envisage the situation where you can't get out of a contract but of course as you alluded to more it's I mean as a CTA we we don't go so close to to expiry I mean we roll our contracts way in advance because we don't want to be in a situation does that guarantee that you can't get in a sticky situation of course not because there is something called limit up and limit down in commodity so from time to time we do get caught in not being able to trade in and out of our positions and but again that's part of this risk management and I think that's also part of what unique have alluded to too you know running a business nowadays is not just about buying and selling it's all the other stuff it's all the other things that comes with it and and and kind of the risk management side of things such as building contingencies and and and monitoring systems for just the markets you trade in terms of liquidity and open interest and all of that stuff I mean it's it's highly complex which is which is why I often don't recommend people to do trend-following themselves because I actually think it's a little bit more there's a little bit more to it even though it might sound self-serving because you know I work for a manager but no it's actually because I do think nowadays and with the markets being what they are and and and 24/7 almost or 24:5 almost it you know you need to really have your eye on the ball especially if you use leverage I mean leverages adds another complexity to it so one needs to be careful we have another question we can go through a couple of questions here let's see what they say so here's a question from another Michael he talks about the difference between risk and volatility if volatility is not the way you measure risk or your risk budget how do you measure it he says I have three basic ideas I would love to really hear you elaborate on these one you mentioned the risk based on the recent performance of your system instead of volatility or B for your risk number you only measure volatility in the opposite direction of your position if you're long you only measure short wall and three your risk number is a function of both volatility as well as correlation meaning if several markets starts to move together in lockstep you treat that as one risk position March what are your kind of I know this is a topic we've touched on before risk and volatility and we often say that it's not the same so I'm sure that that's something Mike or Michael has it's referring to so I'd love to hear your views again Moritz and then I'd love to hear your views make about just this concept which I think a lot of people struggle with to understand why we may say that it's not the same thing so well thanks Michael first off I think all of that ties in a bit to what it is that I'm doing correlation ties in and volatility ties in and distance to stop ties in and average true range us and all of that is you know part of my risk management and money management framework I mean volatility is something that has not necessarily a direction right more volatility shows movement up or down it doesn't necessarily mean that that is a risk it just you know shows you that things are moving price is moving and returns are moving risk to me is something else than that I don't necessarily mind the volatility because I can respond to volatility in the way that I size my position and you know where I play stops the risk to me is the loss of capital or even worth the permanent loss of capital and I'm putting in circuit breakers kind of if you will in the way that I design my systems so that that doesn't happen I'm very happy and very prepared not happy but very prepared to lose capital on certain trades right but it is within the framework that controls that so that I'm not risking too much I'm not risking too much on a certain position I'm not risking too much on a certain you know sector of positions if you will which is where correlation Pro plays a role think about crude oil and heating oil things like that highly correlated markets but then I just let the volatility do what it wants to do I would love to also ask you Nick a little bit about kind of the same theme because of course when you don't use stops and we know that certainly if you trade a basket of equities if there is a crisis correlations tend to go very close to one so how do you think about that in your risk management and how do you do risk management in in in general so you you're absolutely right obviously holding portfolio of stocks highly serially correlated so if you do get a shock most box will tend to follow each other exactly what we've just seen our answer so the way our models work they use obviously a standard kind of trailing stop but when we do things a little bit differently is when the broader market trend suggests that we're going into a bear market of some type or is bearish our stops or ratchet up so we don't close the door immediately on positions we've found through research that market leaders when a market is having a dip market leaders tend to consolidate rather than dip and we want to stay with those whilst they consolidate because they'll be the first to push higher when the time comes when the broader market turns around so we don't close the door entirely on the positions we we leave the door open a little bit give them a little bit room to move but not as much as what we would if the broader market was trending higher and at that point no more buy signals will come out so you know if we're only 70 percent long then we will not get any longer until that broader market turns up there's clear evidence that having a regime filter significantly enhances the risk adjusted return yes you can find stocks that go up during a bear market but with a vast majority that's not the case and we best stand out of those completely and vice versa you know in bull markets you can find stocks that are going down but the probabilities of success trading against the broader market trend and diluting someone so you know in this particular instance we started moving to cash automatically during February it wasn't a prediction that the market was going to fold or collapse like it did it's just the broader trends started rolling over our stops tightened up ratcheted up and we slowly went to cash one after the other I think we were completely in cash by that the second of March or so so you know it doesn't it comes with a little bit of damage I think the current drawdown at the moment it's about twelve point nine percent on that portfolio so you know we're in cash now so the markets can go to hell in a handbasket we're not going to be worried too much about that and if they turn up again we'll just start all over again and start buying in terms of our position sizing look we do not keep it we keep it very very simple and again I come back to this point I made earlier on that if you keep it simple then generally people are going to follow because they understand it so when you don't do any and this may sound somewhat startling to many of your listeners into YouTube but we don't do volatility position sizing because one it's it's complex for most people to grasp and our research suggests that it actually doesn't make a big deal of difference to the bottom line so what we're kind of doing is putting stocks in in categories if you like in baskets and we are allocating fixed capital to to each one of those so for example the large cap stocks the top 100 stocks they're more or less have the same volatility more or less so we will divide our capital into 20 acre pieces and buy allocate 5 percent to each one of those and that's how we do it as I said it may not be the most optimal way to do it but it's a way that people understand and will more likely do than if I say right we're going to calculate the average true range for the last 15 days and so on and so forth and allocate 1.5 percent of total capital and so on so it's a different way of doing it but it's it's an effective way for people to get it done yeah that makes sense know also I mean we often talk about you know good enough is good enough I mean we shouldn't strive for perfection because it and really exist anyway he's so I just want to do one more question because interestingly enough three people called Michael wrote in so just want to make sure that all three get acknowledged here and and so this is the third Michael who asked a very interesting question actually you know when you do break out methodology it's kind of relatively straightforward to calculate and and where you want to have your stop etc etc but he does ask how would we go about sizing a position when using moving averages so I don't know I don't know if I mean I don't think you you you don't use moving averages more it's so and I don't know if that is part of your strategy either Nick but how would one actually yeah but I you know I think it can't be done in a similar way so let me give you an example say you get a signal to buy if spot rates --great at the 50-day or 200-day or whatever moving average you're using right nobody's forcing you to you know keep that position until the spot crosses the moving average again from the topside and trades lower you can create a system that says my signal is to get long if I'm above the 200-day moving average now the question is how do i size it and where do I get out you can't just as well as you know some people do it with their breakout models say okay I'm going to cake lately certain Average True Range that averaged to range has been x over the past say 20 days or 30 or 50 days whatever it is that you're using you know you know know how many you want to risk a certain number of 80 hours and you calculate your position size their way and you have a stop in the market so this is one way of doing it it can't be done right you can also if you don't want to do that if you want to have a system that you know goes in if you're above the 200-day and goes out and maybe even sure if you have below the 200 you can find a position size that is a function of volatility leverage true range at that point in time without a stop so there's many possibilities moving average systems don't dictate that you take a position that is notionally always the same when it goes above and then take that position off when it goes below it can be dynamic and you can adjust it to what it is that you like yeah any thoughts from unicore yeah the the other consideration is you know a lot of the time we talk about entering a position and putting a stop in but you can also exit the position without a stop you can exit the position based on an exit you know and a moving average crossover would be that simply so again and I have run these tests where we allocated five percent to twenty equal positions and run a moving average crossover of the book is sitting over there on the floor I can see it I can go and pick it up and tell you what it is but that way you're actually exiting based on a the crossover itself a signal oh yeah yeah now something like that though in a leveraged market of like futures would probably be deadly but and certainly wouldn't advise but it's a bit different in a cash market where you don't have that situation you know that that's saying that you know that's kind of what we do and we don't have a stop-loss we don't use stock losses as I highlighted before because it causes all sorts of panic and havoc in the market that we don't want to generate ourselves so we use exits and our exits are based on the closing price research shows that exiting when the close is below a certain point actually removes those big spikes down that sometimes you can get on a news event or something like that or stock loss being triggered and you know cascading the market down and then recovering just as quick so that a little bit more of an edge by taking the closing price I'm not necessarily suggesting I agree that amateurs open the market professionals closed the market but the research certainly shows that taking the closing price and you would do that with a moving average as well so there are ways around it some of our shorter term strategies don't use stop losses at all they use exits so when an exit criteria is met you're out that's not a stop loss yeah that makes sense you mentioned books generally speaking actually Michael also in his question sense that he sent in asked whether there are any books in general that we can think of when it comes to maybe the risk management position sizing type issues I'm kind of blanking right now so I don't know if you have any any particular books that you've come across that you yeah I think if I can just jump in there I think van Tharp has written a couple of really fantastic books actually titled that way I think one is called the ultimate guide to position sizing and there's one or two ones in addition to that which which have really helped me along and they're out there for people to buy and I think they're fantastic I was going to say there in fact I think he wrote a wasn't quite a white paper but I remember I bought him gosh 20 20 years ago I think he actually called it a special report on money management and that was probably a precursor to that book that you've mentioned there Moritz and I remember getting it was just a soft copy sort of cobbled together but it had all the answers I'm not sure if it's still available or not in that format but it was called special report on running management good stuff good stuff those were the questions this week let me just quickly run through where we stand performance wise for the month and then we can come up with any final thoughts before we wind down for for this episode the be top 50 index so these are of course always as a Thursday evening I think Friday by the way was a positive day for most CTAs be top 50 index up 0.8 six percent for the month but still down 1.4 three percent for the year we have the shock gem CT index up 1.19 1.19 for the month and up sixty four basis points for the year the trend index doing well up 1.5 five percent for the month of April and up three point eight eight for the year and the sardian short-term traders index a little bit down the seven basis points for the month up pretty much the same as the trend followers three point eight seven percent for the year and finally the bridge alternatives up 1.1 nine percent for the month and up four point four one percent for the month of sorry for the year 2020 any final thought this was a lot of great stuff I think we it was a little bit different because obviously you'd you're sort of trading in a different style then and then we are and so I think that was really interesting and useful any final thoughts from you more is from you Nick anything you want to leave our audience with today one of the things I've been working on and have recently started trading on a smaller test account is something that I got from this podcast and that's looking at different kind of markets so trading trends in equity spreads as an example not mean reverting but actually trading the breakouts in the spreads between uncorrelated stocks so you know we had some positions there over February March that because the stocks are moving together they have the same beta and they have the same beta as the S&P 500 so they are part of moving together but you just it's some amazingly clean trends over time both up and down but you don't have that media market risk you know like we saw in March so all of a sudden you know there's a lot of different synthetic kind of instruments that are out there I guess the downside is the expense of trading it because you don't get a margin offset on the short to the long so you know it's probably not a cheaper way to do it but it's just something that I've been working on it's it's going along very nicely I'm not sure if I'm missing something but yeah just thinking outside the box a little bit differently yeah exactly you know this is how new stuff is found and this would you know if you're doing it on the stocks only you're not across asset classes this it's probably a kind of market neutral trend-following type of thing because you have a long and a short on at the same time and yet trading costs are going to be higher because you're trading both legs but you know if the net performance and the risk adjusted returns are good enough then why not yeah interesting cool good well on that note let's wrap up this week's conversation Nick this was really great thanks for coming on the show it's obviously late where you are on on a Saturday so we really appreciate that and and of course we appreciate your views and and it was really educational I think for for everyone so with that set from Nick Morris and me thanks so much for listening and we look forward to being back with you on the next episode of the systemic investor in the meantime Stacey thanks for listening to the systemic investor podcast series if you enjoy this series go on over to iTunes and leave an honest rating in review and be sure to listen to all the other episodes from top traders unclogs if you have questions about systematic investing send us an email with the word question in the subject line to info at top traders unplug calm and we'll try to get it on the show and remember all the discussion that we have about investment performance is about the past and past performance does not guarantee or even infer anything about future performance also understand that there's a significant risk of financial loss with all investment strategies and you need to request and understand the specific risks from the investment manager about their products before you make investment decisions thanks for spending some of your valuable time with us and we'll see you on the next episode of the systemic investor [Music] you

Channel: Top Traders Unplugged

Views: 763

Rating: 5 out of 5

Keywords: niels kaastrup larsen, moritz seibert, jerry parker, systematic investor, top traders unplugged, investing, hedgefund, trading, trend following, managed futures, risk management, popular traders, investing money, investing for beginners, trading news, investment news, investment advice, trend following updates, news for traders, top investors, investing podcast, nick radge, market crash, oil, volatility, success, trading paralysis, investing strategy, Risk, Australian stocks

Id: i3HI6OJ7b4A

Length: 95min 57sec (5757 seconds)

Published: Mon Apr 27 2020