Hand Traders vs. System Traders · Adam Grimes interview

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tactics that lead winning traders to win so you can level up and become a better Trader here's your host Aaron [Music] ffield [Music] ladies and gents welcome back to chatwi Traders podcast I'm your host Aaron firfield and on this episode I invited Adam Grimes on for a second time he was first on episode 21 you will hear me say episode 20 at the start of the interview but it is actually episode 21 um just wanted to add that small correction in there Adam's been a Trader for more than 20 years he's traded all major asset

classes across various time frames he's traded independently he's traded with a prop firm and he's run other trading Businesses also the main focus of this episode was to explore some of the things which discretionary Traders can adapt from quantitative Traders and vice versa meaning what things can quantitative Traders take from traders who rely on discretion we thought this would be interesting to discuss as Adam himself is someone who sits in the middle of both then in the later part of this this episode Adam lays out a really solid framework for Traders who are Struggling to

make progress which they can follow and begin moving forward also the types of questions you should ask when you don't know what you don't know now just two things to mention real quick I'm doing another chats Traders Meetup uh taking place in Brisbane on the 19th of March it's free of course for all the details and to RSVP please go to chatwi traders.com Brisbane also I asked Adam at the end of this episode if he'd be happy to answer Any questions that you might have after listening to this episode so if you would like to

ask Adam a question just go to chatwi traders.com one15 scroll to the bottom of the page and type your question in the comments area thanks very much guys hope you dig the episode here is Adam Grimes well Adam it's been almost 2 years since you were first on the podcast here how have you been what's been going on anything to report you Know I can't believe it's been that long uh no you know I mean things have continued to develop I'm doing um have several not work related projects you know I'm doing I think it's

important to kind of do some things outside of the markets because we get so tunnel vision so I have some interesting personal projects if you want to chat about those we can I'm writing a new book um just began beginning of this year after massive planning but I'm writing a Book on the overlap between discretionary trading and systematic trading and so you know that's that's obviously going to be relevant to what we're doing here but um no pretty much business as usual how have you been uh yeah I've been doing great I've been doing great

um you know it's it's nice to hear that you've got a new book on the way um and that topic is obviously going to be the main focus for this episode so I'm pretty excited about that I think it's going to be really interesting and really beneficial for a lot of people listening to for those who haven't heard our first interview which I'm pretty sure was episode 20 just paint the picture a little bit give us a little bit of background on your trading background um you know you've been involved in markets for around about

20 years so just give us a high level overview of that of that time and some of the things you've done yeah sure so I've I've been very fortunate and that I've done a lot you know I've seen markets from a lot of different perspectives um it's more than 20 years at some point I guess I'm going to have to say it's almost 25 years but been doing this two decades plus and I started literally with no clue and no legitimate Hope For Success you know I was trading very small accounts massively overleveraged I didn't

even understand the concept of Leverage and risk and I was paying some insane you know literally uh 15 20 times what you'd pay for a commission today uh for a round turn and there's no way I could have been successful but uh you know along the way and with some mentorship and guidance I kind of figured out which way was up and and which way was down I guess and I was um day trading the British pound at the right time and made a little bit of money there and then Spent um spent a few

years quite a few years actually day trading the S&P 500 Index and across I wanted to get a better education so you know I'd been educating myself on these quantitative Concepts as as best I could but I went and did an MBA and did a good deal of PhD coursework with that to understand how people were looking at markets from a quantitative perspective spent a few years on the New York mertile Exchange I've traded for a prop firm in New York Um like I said I've traded for my own account I put together a commodity

pool once I've figured things out um and now I am a managing partner and chief investment officer for Waverly advisors where I write daily market research covering pretty much everything you know I carry the carry the lessons of active trading and my kind of U you know very I guess agnostic maybe maybe word but uh you know I'm very reluctant to believe in anything and I'm able to carry that From a from an active trading perspective into uh also to inform people who trade on much longer time frames so I've along the way I've traded

stocks currencies Futures options uh all time frames from very very short-term scalloping to building portfolios for quarters and years so uh kind of been around the block a few times and I'm not going to ask you too many more questions about that because we covered a lot of this Sort of thing on the first episode so if anyone wants more context around Adam's background I suggest go back and listen to episode 20 that'll just be chat withth traders.com sl20 so the way you're trading these days Adam how would you best describe this so I would

best describe it first of all it hasn't changed in 10 plus years significantly um it's a I I think most people would say it's a technical Perspective uh and it's technical in that I look at only price I don't look at economics you know economic releases don't look at fundamentals try not to consider uh let's say macro and political factors and I'll say try not to but the other piece of this is that my Approach is a blend of heavy quantitative and statistical work with discretionary so as soon as I tell you I'm introducing a

discretionary input somebody who is strictly quantitative Might say well then you don't really fully understand what inputs you're bringing in which you know I I can't I can't disagree with that but U I believe that my process is very technical very focused on price action uh my trading approach and style is very simple and that's taken many many years years to to get to that point of course I started with if I look at some of my old charts I had multiple indicators I was drawing all these levels and trend lines and Just really marking

the charts up because I thought that's how you learned you know you put more stuff on and more things that might have an edge but uh over time I've evolved to a style that really is based on just looking to understand momentum and one of the faces of momentum is volatility or you perhaps I have that backwards but understanding how volatility evolves and basically answering the question of you know so a market makes a big move what do we do do We position for another big move in that same direction do we look for a

reversal or in fact is there no Edge do we do nothing that's kind of the core of the technical trading question right there and that's all I try to do with my trading okay very good now this is going to be the the main focus of the episode you know we we had a brief chat beforehand and we're going to be talking about how you trade obviously you're quite unique in the sense that you kind Of sit in the middle of being a discretionary Trader and being a quantitative Trader so usually Traders are either one

side or the other but you kind of sit in the middle so you know let me just ask this question why do you sit in the middle like why are you a hybrid of both sides because that's where I have found the best Edge and that's where I believe over many time frames objectively there is the best Edge um you know certainly I Think if you're a very high frequency Trader then you're operating at a speed where the human can't really compete so you certainly can make a case for being purely systematic there but uh

there is power in human discretion there there is legitimacy I guess might be the word um in human intuition in this kind of implicit processing and learning that basically you with assuming that you and this is you know a major assumption that you can trade with discipline and Emotional control uh a human acting with some discretion can generally outperform a system okay so you said that for you you found that that's where the best Edge is before we go any further I should probably just get you to clarify or just explain how you think about

an edge like what when you talk about an edge what does that mean I know I asked you this uh first time you came on as well but I think it's really important that we just kind of make things clear It is really important and now somebody can go and put these two sound bites Sound by side and see if I say the same thing I hope I do so you know I I would say the simplest way to understand an edge is we're going to do a lot of Trades and you know that's key

that we're talking over a large sample size and and by the way you know I I try to put things in what I hope is a Simplicity intuitive framework so you know rather than saying Law of large numbers I'll talk about doing a lot of Trades I'm not trying to talk down to anybody I just think that this is the best way to understand some of these Concepts is to make it as natural as we can and if you imagine from those many trades you're going to make two piles of money you're going to make

the pile of money you win and the pile of money you lose because you absolutely there aren't many things I I can tell you with absolute certainty About trading but one of those things is you're going to have losing trades you absolutely are going to have losing trades and if we are trading with an edge then over the course of many many trades that pile of money that we make is bigger than the pile of money that we lose so that's what an edge looks like in in practice now if we want to drill down

a little bit more mathematically I would say that when we identify an edge in the Market and we have we can qualify this we have to be very careful because there are a lot of different ways this can look or different things we could do but it basically means that there's a higher probability of something happening than something else if we don't know that so imagine there is no Edge imagine that the academics who tell us that the markets just move randomly are correct if those people are right then there is Nothing we can do

that's going to make our results anything other than random of course we're going to pay commissions so you know there's going to be and there going to be frictions and financing costs but if if we don't have any Edge then those two piles of money at the end of the day are basically going to be the same more or less the same uh so what we're hoping to do is to be able to find a spot where there is a tilt in the probabilities in the future Of one thing happening over another now what is

one thing over another naively I might say the market might go up or you know with a higher probability than it would go down but in reality it's a little bit fuzzier because the Mark it's it's a little bit more specific because the market needs to go up over a certain time period uh we might see one Edge if we look out let's just say two to three days another a month another six months we might see That the edge or lack of edge is different at those different Horizons in fact we probably would uh

an edge could also be volatility you know we it's very easy to get stuck in the mode where I'm looking for a directional Edge but there's certainly are non-directional edges there are points that tell us when this happens volatility is likely to be higher or lower over sometime window in the future but the key is that we're just able to identify something in the Market that says over a specific period of time in the future the probabilities are likely to be shifted from 50/50 so let's drill down into this further now we've sort of established

exactly what you're referring to when you talk about an edge what can discretionary Traders adapt from quantitative or systematic Traders well so this is the thing you know when when we had our previous chat and yeah and we were talking about how unusual it was to do a Blend of quantitative and discretionary trading I think I came around to well in reality that's what everybody is doing anyway way you know you you have the hardcore system people who think we're exercising no discretion at all well that's not true because you are exercising discretion at every

step you know you're what are you researching or are using a genetic algorithm and you're you know you you've specifically decided you're not going to be feeding at things You're going to let it find things uh how do you determine if the system is quote good enough how do you determine when to turn the box on when to turn it off what size to trade uh when something might be changing and you need to take it out of the market there are these discretionary decisions that go into purely systematic trading to answer your question more

directly there nobody seriously trades from a let me figure out how to say this every discretionary Trader thinks they are doing something that has an edge you know you you may not be doing statistical research you may not be able to point to thousands of examples in the past but you believe when you see this condition set up you believe that this is more likely to happen in the future or you know perhaps you believe you know maybe you think you figured out something that the market is missing but you know that that's still you

think you have figured you have Think you have identified a tilt in the probabilities and what happens with a discretionary Trader an experienced discretionary Trader is eventually you you get some sense of what works and what doesn't and that some sense can be your p&l can tell you very clearly you know when when I did this I was losing a lot of money when I stopped doing that I lost less money so you know you you've learned something about the market and the Traders who stay in the market long enough from a purely discretionary standpoint

um is an awkward way to say it but the purely discretionary traders who stain the market long enough they eventually do their quantitative statistical work through their own trading that's what it means to evolve a trading style now if you don't want to just go through the School of Hard Knox or you don't have the capital to do it or you don't have the decades to do it Or you know for for whatever reason if you're looking for quote a smarter way or another way well then you can do research and you don't have to

learn that that thing that I do you know so every day a stock goes up 5% that's my system I run it and I buy it the next day and gosh I lose a lot of money on that well you you could discover that through research too right you know you you could do a little bit of quantitative research and see okay so I Was actually trading against the probabilities there um you also what other the other thing is a question of mindset you know a lot of discretionary Traders you know I think we all

have had the discussions with people in bars who are telling you how smart they are and how they figured this out and they just bought a boatload of you know horrendously out of the money options on something because they figured something you know they they think they've solved The puzzle and it's a lot about uh you know the certain arrogance you know and we're all guilty of it but there certain analytical arrogance and I think another powerful message of discretionary Trader can take from the quantitative realm is this idea of scientific method or at least

you know if not scientific method then at least scientific approach or framework being and what I what I mean by that is that we ask questions of the Market we come up with ideas and then we go to the data so we you know I it seems like a pretty simple process right you say does this happen and then how do you answer it well you can just go to the data and look and find the patterns and that idea of tying your trading to the underlying you know I would say the underlying truths if

you want to get philosophical but the way the market moves um that idea is powerful and applies to Everybody no matter how you're trading okay so let's pick up on that last point you made there so you said you kind of described it I think as a scientific framework so you said there's questions you you go to the data and you find your answers how can a discretionary Traer do this sort of thing where they ask questions and then they go to the data uh for those answers usually to get those answers you need some

sort of programming Capabilities I presume that most discretionary Traders are not really interested in learning how to program so how can they do this like is there a workaround is there some other solution yeah so the just before I answer that question just the idea of understanding that this is what we are going to do you know this is a significant shift you know a with a lot of the Traders I work with oneon-one Ju Just the idea of saying okay we're we're Going to go to the data and we're going to see what the

data says one of my uh one of my professors I did a lot of my coursework with had a very gentle way of saying you know we would talk through Concepts Financial Concepts what we thought would happen in the market and then he would say let's ask the data so having that framework that mindset that's what we're doing we're going to ask the data that alone is a powerful shifted perspective now how do you do That well so I think hidden in your question is a misconception that I had when I started doing this work

I thought and I think a lot of people Shar this misconception this idea that quantitative analysis is so deep is so complicated and so confusing that it's something that gosh I couldn't possibly do this because I'm not smart enough I don't have the time I don't have the desire to you know whatever we can keep listing reasons uh that that's what a Lot of people think but in reality all you are doing is coming up with a set of conditions and then going back and seeing what happens what has happened historically and you know granted

I'm I'm simplifying a little bit here but I would also argue at its core the discipline is quite simple that that's what we're doing uh you could do this with nothing more first of all there's a lot of free data out there um so you could do this with nothing more than a Free data chart and a pad of paper just you know let's say your idea is I want to buy um what happens if I buy stocks after they go up three days in a row so you could potentially go back and open a

completely free chart and you could just very carefully visually look and see okay 3 days up and then you could record the price and you could record the price you know I I don't know 5 days later something like that you you obviously you need to figure out how exactly You're going to ask the question but the the point is to do this analysis at the beginning requires nothing more advanced than access to data and a pencil and paper now what's the problem with that it's slow and cumbersome and prone to mistakes you you certainly

you you you may see something that looks like 3 days up you may miss it uh you may you so there are a lot of things that we can do wrong when we're doing this kind of intuitive oh Intuitive is not the we're doing this kind of manual work which by the way I think is important to do this manual work if you are even if you are a heavily quantitative character it still makes sense to spend a little bit of time getting your hands dirty in the data and just seeing manipulating touching the data

on a very Elemental level so what's the next step for the discretionary Trader well the next step is Microsoft Excel or some other Spreadsheet program where honestly you know like I think my mother whose computer skill is pretty much equal to Gmail and Facebook I could probably teach her in a week to do basic market analysis in Excel like anybody can learn to do it if if you have the passion and the desire to learn to do it you can spend a few hours and once you figure out how to Google the questions you have

you can get data in a spreadsheet and you could even then just work manually In that spreadsheet you could you know you create you know how it works you create some formulas but this is you don't have to you you don't have to write a big framework in C++ or Python and pull in hundreds of thousands of data points of tick data you could do this very nicely with a daily chart and a relatively simple spreadsheet program so to the people who are you know kind of thinking oh gosh I could never do this I

would count you absolutely can do It it's it's not nearly as hard as you think it might be okay now I think a good question for me to ask at this point is you know for someone very new to this sort of way of approaching things what might be some good questions to ask like you gave there the the example of you know 3 days up in a row what happens after that what are maybe some other things that that people could experiment with um because you know a lot of discretionary Traders are trading Like

chart patterns for example so they might be trading double tops or that sort of thing that thing's quite difficult to sort of quantify in many ways so what is what are some other good questions that they could ask and and how do they sort of deal with that issue that that some of the things that they do trade are a little bit difficult to actually quantify like write down on pipa well so now we're going a little Bit deeper now we're now we're going to the next level and here we touch the real problem with

any we're talking about some kind of back testing the the real problem with any kind of back testing is that we we don't need to just understand what pattern has been there in the past that's relatively easy to do the question is is it reproducible in the future and is it likely to persist in the future and that's you know I think a Lot of people get stuck with Market statistics like you know the people that do tons of Market statistics of course you can calculate anything but the real question is is this likely to

be meaningful is it something that's likely to say something about the market in the future so why why that little diversion well for instance uh you could have there's no reason why you could not test your complicated chart pattern and you know I'll come back around I I don't Think this is a great idea but you you could test your complicated chart pattern just by looking at charts historically and a lot of people do this you know you could let's just say Head and Shoulders since everybody else in the world loves that uh you know

you could say what happens after a head and shoulders pattern and you could apply this sort of scientific approach and as you said you need to define the pattern somehow you need to say okay this is a Head and shoulders this is not and if you think you just have the skill of picking it out on the chart you know I let's live with that for now and then I'm going to make it a little bit difficult a little bit more difficult in a moment but if if you think you can identify the chart in

the past then you can structure the question okay so what happens one week one month yeah again I I don't know how exactly how you want to ask the question but what happens after The head and shoulders pattern occurs and then you could answer that again with our piece of paper or spreadsheet now of course with the pattern recognition the problem is that what we can identify in the middle of the chart is very different than what we can identify at the right Edge we can easily see patterns in the middle that we can't really

see forming in real time so how how do we challenge the person who thinks he can identify a head and Shoulders pattern reliably the answer is to take some kind of system and there are many many systems that will do this where you can page through one bar at a time or even have you know platforms will play the market back as as the action forms and then you can do the same thing so you are you're exercising discretionary pattern recognition and pattern reading but you're no longer doing it in the middle of the chart

which is so artificial you're now doing It one bar at a time and just you know to be clear the way I would do this is you'd watch your market and you say oh here's my head and shoulders on this bar you know the because you you have to have a point where you're going to execute so it can't be fuzzy maybe maybe not you have to have a point where you say okay I would do this trade on this bar and then you track what happens uh I would also be a little bit careful

you probably don't want to you know as soon As I say that you're probably will tend to go into a System trading okay so I would buy Here My Stop would be here my target if I have one is here uh once the trade develops I'm going to move the stop like this or I'm not going to move the stop here's the size I'm going to add if it goes down here you know all of these other questions and as soon as I as soon as I start talking about these questions if you were mapping

out the possibilities you see this just Blossomed into some very complicated convoluted Branch you know like like now I'm no longer asking the simple question what happens after my head and shoulders pattern which is not such a simple question but now I've added all of these other things and assumptions and if we change one of those assumptions my stop is here instead of here then we get a different answer so you create thousands of possible answers I would not do that I would focus when you're trying to Understand the market movement just very simply on

what the market does so you know ju just looking at returns which the word return just means a percent change sometimes people like go you know when you talk about market returns what does it mean it's just a fancy way to say percent change how much the market moves but you would be looking at returns over different time Horizons just so you understand how the pattern moves And the person who you need a fairly large sample size this type of work um let's just say it like it is you know it's kind of if you're

numbers nerd like I am this is it's fun to do this for a while but it does get tedious it gets difficult it sucks because you're just looking at a lot of patterns and writing down a lot of numbers uh it t takes a lot of time but the this is you want to trade right you know trading isn't easy and you don't expect I hope to just go Buy some $499 system and have all of the answers it doesn't work like that it can't work like that so this is part this is one way

it's certainly not the only way but it's one way you could start to understand and learn how the market moves and so the person who first identifies the head and shoulders patterns in the middle of the market should then do the same thing at the right Edge and ideally she would do this with a different data set you know it's I I don't want you really pulling these patterns out of the middle and then just playing the same data back one bar at a time because you've you've learned basically and and you're whether you realize

it or not you're you're going to and you're going to make some decisions so it should be a clean data set this is not even really possible but that I mean that's quite a deep quantitative question but uh you know because things are so tightly correlated and so many Ways but you know ideally what I would like to see if we can deal with these issues is is that the data set where you picked them out at the right Edge looks something like when you picked them out in the middle and both of those show

a similar Edge that would be verification to me that from a subjective standpoint you can identify the patterns we're not ready to trade yet then we need to work on bridging this Gap into actual trading probably with some forward testing some Very small trading then we're then We're Off to the Races but that's one way to do it now as I said I think that approach has a lot of moving Parts I think you know identifying the pattern is not trivial so perhaps the and you're right the the beginning Trader does not know what questions

to ask and I would start by asking questions that you know as as you do this don't don't be afraid of asking stupid questions because as you learn hope we hope you're going to Be able to look back a few weeks a few months certainly a few years years from now and you're that there's an Einstein quote right that he would say to paraphrase he says something like his best hope for the future of humanity is that Humanity would look back on people in the middle of the 20th century with uh pity with with a

gentle pity and that's that you know meaning of course the people have progressed past so many things we struggle with hope that that's Your hope as a traitor that you look back at yourself today from the vantage point of the future and you s oh you know I was asking such cute and wrong-headed questions because I've learned more of the right kinds of questions to ask so at the beginning it's just a matter of understanding the methodology you can you can ask something like uh you know is there any Edge to tra to to buying

today if the close Is above yesterday's high you can look at very simple relationships of bars we have an entirely other layer of information there all these indicators and moving averages and things things that we can start to add and you know people can do a lot of things around there but I probably would start with price in a more you know at least at the beginning with a more pure view on price because if you just start trading or you start analyzing say an RSI or something Without really understanding what it might be telling

you about price I think you're probably missing a few steps so short answer is I would you can ask whatever questions you want uh start with very simple questions and the answer to your questions will probably provoke new questions also let me amend one of my previous answers you asked what could U what could discretionary Traders learn from quantitative Traders well most quantitative systems fall in a Fairly small area you know but basically there are there are things that people do pretty consistently and they do it in different ways whether they're trading mean reversion or

momentum whether you know they're trading on different time frames uh so the discretionary Trader could if if he was interested could read some of the quantitative books and research and you know he can skip over the code and the more mathy parts if you will I don't Think I've ever said that word the more mathy parts and can just look to understand what so you know when they're when they're doing this mean reverting system what element are they queuing into and you know how what what does this quantitative approach say about the truth of how

price moves so I think it's also possible that a discretionary Trader may get some ideas for the right questions to ask from looking at other people's work and reading some other Research Traders just a quick break here to thank our sponsors first up we've got squarespace.com simply put Squarespace is for anyone who wants to create their own website so if that's you and you don't know the first thing about designing a website no stress because designing a website with Squarespace is an intuitive process you can take advantage of award-winning templates tweak them to your own

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get $20 off your first shirt so forget shirts that don't fit get on over to propercloth.com Traders toay and use the coupon code traders to save $20 now just going back to your answer there you briefly mentioned it you mentioned like what sort of answers You're actually looking for so we've discussed quite heavily what sort of questions might be uh good questions to ask in in the initial stages when you're asking these questions what are the answers that you're actually hoping to get for like when you write down on paper you said there you know

the returns when you talk about returns there's obviously some time factor involved as well so what sort of things after you ask these Questions should you have written down on your paper or typed up on your computer or however you're doing this analysis but what do those ansers actually look like does that make sense it does no it does make sense and I know because of the work that you've done I know that you're actually hiding a very deep question and you know you're hiding a very deep question here uh so the answer depends on

on what time frame and what type of question you're asking if We are let let's take the simplest example uh if we're looking at say very short-term intraday system then really we just kind of hope that the market goes up after our La signals and goes down after our sell signals and we do need to make sure that we look at enough different Market environments you know it would be naive if I let's say I create a day trading system and I happen to test it over two weeks of day which is not nearly enough

and I tested on two Weeks in which the market just went up up up every day abnormally and I look at my results and I say oh gosh look look how good the buy signals do here uh sell signals don't work so well so I found a good Buy Signal I'm just going to trade that I'm done well that's not going to work you know that so uh what we need to do is to somehow adjust for the Baseline uh you know what I would call the Baseline which which basically is what happens if we

don't do anything to the Market and maybe the easiest way to understand this is to leave the day trading realm and go to let's say a longer term technical system for stocks so let's say you're look let's say you develop a system just keep it simple where you buy stocks and B based on some set of criteria and you know this is a rule set that we can test and our exit is we're just getting out one year later so if we run this system let's say say you run the system and you come to

me And say Adam I'm so excited I found the system and it makes me 5% a year and I was okay great so now let me ask you another question what would happen if you just did buy and hold and chances are you would go away with that data set and you'd come back and you'd say well crap if I did buy and hold I'd probably make seven or eight% a year and all of a sudden your system that made 5% a year doesn't look so good so and it the reason this is much more

obvious at These longer term time Horizons where you know particularly in stocks over a long period of time we have an upward drift and the intuition here is that if I can make 7% with Buy and Hold I just simply have to do two transactions to access that and you know in the most simple and uh I have I pay no commissions outside of that it takes also none of my time none of my research it's a very simple thing to do so if I'm going to act trade then I need to be Paid for

I deserve to be paid for my efforts to be paid for my time and paid for my risk of being in and out of the market and I'm going to be incurring frictions transactions costs and so I have to with you you know if you came back and said oh you know so the Baseline drift the Buy and Hold return is 7% and here I Found A system that makes on average 12% a year okay now maybe we have something to talk about um by the Way interesting aside it's very very common in this situation

that you might come to me and you might say I found a valid cell signal that only loses 1% a year meaning that if you were short at the stocks they only went up 1% when everything else went up 7% uh and I'm I'm using very madeup round numbers here but the so and this gets us into statistical significance so there are two kinds of significance there at least right there there's statistical Significance and what this means and you know there's no way really to answer this question without doing a little bit of math and

the math is depending on your quantitative background uh the math is either trivial or not completely intuitive but the you know the basic idea with significance testing is you want to look at the difference between two things and you want to say well How likely is it that I just got lucky or that they're really different in other Words you know another way to think about it is how big is the effect and the effect would be your your let's go with our head and shoulders pattern that you know we think when we have the

head and shoulders it does this to the market and if I just did Buy and Hold I would have done this so how big is the difference between those two sets and how variable how much noise uh you know try to avoid using words like standard deviation but how how much variability Is there in the data so How likely is it that there's an actual difference there there are ways that that a pretty complicated question but there are well-established ways that again you know anybody with high school math and the desire to learn can absolutely

learn that and many of you had this in school so as I said it's trivial um however there's still the question of economic significance it is very possible to find things that uh that Short situation where I've seen many many short signals which are statistically significant but they still lose money because you would have been short in a rising market your rising market would have just uh on average a rising market your your your stocks would have gone up a lot less than the Baseline but they still would have gone up meaning if you were

short you would have lost money that is statistically significant but it's obviously not Something we're probably interested in trading as an outright perhaps we you know there could be reasons we might be interested in trading it on relative value you could have some attractive volatility you know there could be reasons we would look at it but as a standalone that's not an attractive system it's a losing system uh there also day Traders will you know like one of the famous problems of day Traders is it's very easy to find systems that do Have an edge

but the edge does not cover your transaction costs or it doesn't cover your transaction cost with any leeway so you know you're and you you potentially can trade something like that but it's just a very very thin tight rope um also you know as an aside be careful if you're doing day trading systems that uh you you're accounting for the bid ask spread because a lot of things that look like edges are really just uh you know bounc bounces between The bid and ask and there something you could not execute at all so that's if

what I just said went completely over your head don't worry about it but if if you are doing day trading research that's certainly something to be very aware of now Adam I might be jumping around a little bit here but I think we both know that there are some discretionary traders that the strategies that they trade if we were to do some like various Forms of quantitative analysis on their actual strategies they wouldn't actually hold up yet those Traders do still tend to make money is that problematic in any way I mean the way I

interpret that is that the edge really lies within the trader well I mean depends what you're trying to do it's and I would argue The Edge does lie within the trader I think that's legitimate I think you are correct um and I think there certainly are traders who trade very very well Like that I think anybody anybody trading you know with with a discretionary input you are part of the edge so what are the drawbacks well one of the drawbacks is and you know this is something that's happened traditionally there have been many many successful

traders who cannot teach and many many successful traders who they don't understand why they make money you know let me give you a completely absurd example but you know there were Traders Back in the back in the days of the pit there were traders who had lucky ties and they wore these ties for years and years even after they shredded and started falling apart so they're just wearing some little stub of a tie and it becomes a superstitious thing now the guy probably knows if if you if you really sat down and had a heart

tohe heart he probably knows that his uh you know his his trading prowess is not tied to the magic tie but There you you can just take that a few steps and you can see there are people who are using things that don't have an edge that yet they can make money but they don't understand why they make money so they think it's because of the magic moving average or the magic indicator or the Magic news you know what whatever squawkbox whatever they're listening to and they have some skill that they don't understand this is

impossible and by the way we you see the Same thing trading is not unique uh you see the same thing in in music I I was a professional musician before I was a Trader we didn't talk about that background but you certainly see many musicians who can't teach simply because they don't understand how they do or why they do what how why they're able to do what they do uh so so they might teach in all sincerity they might really care they might be the most engaged teacher in the world but if they don't have

the Tools to truly understand how they do what they do they can't teach it they can't transmit it and that certainly has been an issue with trading uh one of the other issues one of the you know you just asked me a broad question is it problematic it's problematic because if you are the part if you are part of your Edge then anything that happens to you can affect the edge you know some of the traditional things if a Trader runs into financial trouble let's say a real Estate problem or a tax problem or an

illness in the family or they're going through a divorce Traders will typically lose money through those times and the reason perhaps is because their emotional element you know their emotional makeup is so compromised that they're not able to apply this powerful discretion AR analysis that they've learned to do over the years and so they lose their ability to read the market if you if if you are part of your Edge then Perhaps your Edge is a little bit more vulnerable now you know so this is one of the arguments for trading in a more systematic

approach but I you know I think it's important to be aware that this is this is a potential problem but it is it does not necessarily invalidate the disc discretionary approach is just something to be aware of let's switch tables now um you know the question I asked you earlier what can discretionary Traders uh adapt from quantitative Traders you know I think we spent a bit of time on this let's turn things around so what in your opinion can quantitative Traders or or systematic Traders call them what you will um adapt from discretionary Traders well

it depends on what kind of quantitative Trader you are are there certainly are quantitative traders who who trade the types of systems that should remain purely purely you know whatever word you Want to apply algorithmic I guess purely rules-based and they exercise no discretion in the execution um those Traders certainly exist I would however say that some of those Traders probably should be a little bit more open to the I hesitate to use the word creative but uh let's go ahead and use the word creative to to the creative aspect of doing research because as

a quantitative Trader you're going to need to generate and refine Ideas and as you monitor your system performance you're going to find the edges come and go and things will need to be tweaked you know I shouldn't say absolutely but almost certainly you're going to find this and so I think being open to some of the quantitative people I have known have been quantitative to let's say almost to a fault they're very rigid they think there's only a you know very numerical way to see things and I think some of these people could Probably open

themselves to Insight maybe that's the phrase uh and what does that look like well you know I mean as a former composer of music I can talk a lot about creativity and how you take ideas and turn ideas and look at ideas in different ways but you know I think at at least that person should try to find some new ways to look at the data and it it could literally be as simple as if you normally sit at your desk then uh you know take a print out out and and Go for a walk

and be careful crossing the street you know but just just somehow shift your work environment enough that you look at things differently um have some specific brainstorming sessions be very very very sensitive to the message of subconscious intuition if you find yourself dreaming about something or thinking about something or obsessing about some small element uh you know go into it deeper uh you know perhaps consider I'm a big Believer and doing different kinds of meditation and breath work and things like that uh you know there certainly is uh there certainly is plenty of room for

that different ways to open yourself to different kinds of intuition and insight and I think if nothing else the very strict and you know not to pick on Engineers but a lot of these people come from engineering backgrounds uh a lot of these people in my experience could benefit from a just you know a different Perspective and I mean that in in the most literal sense just looking at the data a different way from a different angle just a different perspective right and not sure how to best ask this question but I feel as though

I feel as though discretionary trading probably plays a lot more on human behavior in markets uh more so than quantitative trading maybe that's not a fair comment to make but I think you kind of know where I'm going with this like how do You factor in human behavior into like quantitative analysis well you have you personally have done some system development I know and I would argue the patterns you look at the patterns the market generates are always you've done it already whether you realize it or not the patterns you've analyzed are shaped by human

behavior because this is that this is what moves prices the you know the reality is we might wish we lived in a sterile academic white lab coat Environment where you know consider the efficient market perspective the market generates data or you know PE data is generated it comes into the market it's immediately and correctly processed and people immediately make the correct decisions and execute those decisions with no time lag the world doesn't work like that and we know that so what what is far what is far more likely to happen is that every decision made

in the market incl because We're human includes both an element of analysis and an element of emotion and there are times when these play you know there are times when I would say markets are very rational there are times when I would say markets are very emotional and if you have identified a pattern because you know as a quantitative Trader that's what you do you identify a pattern and then you know you're you're very familiar with the process I with the process I outlined earlier where you Look to understand what happens after that pattern that

pattern and what happens after that pattern is shaped by human emotion and then you know so you might ask the the question The Next Step removed well you know what if everybody starts to trade more algorithmically what if the market becomes more and more algorithmic well those algorithms still encode human behavior in the rule set of the algorithm so there's still human emotion and behavior and there's still You know in the limit there's still people turning off boxes when things get really crazy or there you know there's still when markets go outside parameters the way

things trade change so there are um you know there are all of these elements baked in and I would argue that it's always there that any kind of trading is already accessing human behavior focusing on human behavior earlier you made the comment that there's an argument that if you Apply discretion to your quantitative research that it kind of throws off the accuracy of that research so you know just in regard to your own trading how do you deal with that well so one of the keys I think is you need to Define very clearly what

is discretionary and what is not in other words you know what is an appropriate realm for discretion and what is not so position sizing for me is not discretionary I I can't say oh I have a High confidence in this trade because well first of all that would be illogical because I know at best I have a very small tilt so there there's no point where I can say I must be right about this you know I I don't really know uh so I'm not I I can't go in quadruple size on a trade because

I think the chart patterns really pretty I'm I can't do that uh but there are so you know for Me the discretionary element is within some you you set quantitative parameters for you know say stop placement stop could be here could be here I'll put it here based on subjective factors and there's still the question you know if my trading is pattern recog nition based so there's still the question of you know is this a valid pattern should I enter here and there certainly are points where uh you know somebody could come back to me

and say I've had many Many people do this was this not the same pattern were you not looking at it and you know for for whatever reason is a discretionary input I decided not to take the trade at that time um so you know there the question of you know enter or not enter and it can be because of you know correlation with other markets or other types of risk but uh it's it really is a matter being a discretionary Trader does not mean you can just do what whatever the hell you Want you know

I think I I think some people from you know particularly from a quantitative background who are suspicious of discretionary trading that's what they think that we mean you know you oh you you just do whatever you want and I think people who approach discretionary trading like that probably don't trade very long because the reality is you can't do whatever you want the market will encourage you to do the wrong things at the wrong time you Make up you make a pile of bad decisions and end up doing exactly the wrong thing at exactly the wrong

time enough times and you're out of business so it it really is a matter and you know look I think we we just had an almost Hour podcast where nobody said discipline how often does that happen right I think I think this is the discipline word you know this is this is part of the discipline of discretionary trading is being very clear on where and how you Will use discretion it's not a free-for-all I really like that answer I really do like that answer I think um I think that was Will said um this question

might help I think to kind of bring this whole topic together you mentioned to me uh when we had a call uh before this that you're about to start trading some markets and and doing some things that you've not previously traded did before I think uh one of those one of the things you mentioned was Commodity spreads so I'm just interested to know how are you actually approaching this like when you decide to trade a new market and explore something new what's the starting point for you and how do you kind of approach that that

whole process from like deciding this is something you're going to explore to actually getting to the point where you're actively trading it well I mean so you the there Are basic reasons you know I would almost say financial reasons why you why some markets might be more attractive than others for instance um you know beginning Traders jumping into Futures it's a little bit difficult to deal with the leverage you basically have to take a lot of risk on a single trade let's say let's say swing trading future so you're you're holding for a few weeks

uh that's that might be a difficult way for a new Trader to start because you're Going to be literally risking thousands of dollars on a trade um so you know there are economic realities that could tell us that some markets are more attractive than others of course depending where you are in the world you have easier or harder access to different markets so some of these decisions are kind of made for us uh there are also questions of of trading style and this is something that's a little bit hard to you know not a little

Bit hard it's extremely hard to know at first um you know like everybody in the world wants to day trade and they want to day trade currencies because the leverage or stock index future so everybody kind of wants to right away do the most difficult thing where there might not even be that much of an edge and they think they're going to quadruple their money in a month because of what some website said they could do and so you know at the beginning we all Kind of start there you know in some variation that most

of us do with you know I certainly did with with with no clue whatsoever but you know there are things like more quantitative types tend to be drawn to options or bonds um the question of if you have actual legitimate expertise in an area like you know I know people who trade medical and pharmaceutical stocks with medical backgrounds that makes sense um you know there's also a false sense of this too Sometimes like I thought when I started trading you know I I grew up in a farm community I have a pretty good idea of

how things go into the ground come out of the ground what what what eats what and what's used for what and you know how you process these things and I did a little bit more research and then I thought I was really educated and so you know I thought I I thought I had some special knowledge and skill and agricultural Futures that turned out to Not be true you know I think there are a lot of people who for instance may think they have some fantastic skill in trading stocks that are really active in the

news and you know it's it's like maybe they do maybe they don't but you can answer that question with your you know with an objective look at your trading results uh so people are drawn to markets for different reasons some good some bad uh you do need to consider the practicalities of whether you should Be trading a market and then I think you you know to to some extent I'm going to say something that is probably a meaningless statement but uh in every Market there are a lot of things that are the same and there

a lot of there there are are fewer things that are very very different and you know we need to understand what is the same you know like if you um you know if things go up things go down things trade you you need to understand the kind of basic like Entry level you know when's my market open when's it closed how do I execute what kind of account do I set up uh so you you certainly should have that kind of knowledge before you execute but you know then you need to know things like the

uh you know a stock Trader sometimes is very surprised when he goes to trade options and he pulls up an option that is priced at 350 on his screen and he sees that it's bid at 365 offered at 430 and you he's like I've never seen That in a stock and oh by the way this thing hasn't traded in the past 10 minutes and so it's understanding you know what what might be different both from the mechanical standpoint like that but also how does the thing move differently um and you know there are objective differences

in different assets for instance on a daily time frame stocks mean revert more than Commodities this is why you don't really hear people talk about Trend following In stocks unless they're really stretching the concept and by the way generally not taking shorts U you know it's but but people certainly do Trend following Commodities and you can execute some type of trend following currency CES where if you you know you see a lot of people who trade mean reversion in individual stocks but you don't really do the same thing in currencies because it's the market there's

some difference in the way the Market moves and you figure this out when you you know there are a lot of ways you can figure it out but uh you know hopefully you figure it out by doing some research to understand how the market moves and then you craft your trading approach and you go through this process of creating a trading system back testing forward test in it and then you start trading with a small size it's uh you know it's literally not rocket science It's uh a fairly basic and repeatable template but I do

think another caution here is that many people develop skill in one market and my experience has been every time I've gone into a new market there's been an adjustment period and you know I hope you can hear when I I say adjustment period that that's actually code for losing so there there there's a period where you go into a new market and you you are you are not going to take your skills from another Market Or another time frame necessarily and just start making money right away you're going to go through a significant adjustment period

so you got to figure out how to structure your life in business so you can live through that without too much damage just before we get off this topic you know what we've been talking about for most of the episode this far you know we've been talking about some of the things that quantitative and Systematic Traders can take from discretionary Traders and vice versa um you know the goal is not to try and uh push a Trader and one in one way or the other it's just to talk about you know some of the things

which um can be helpful across the board so is there anything which you would like to add to the the things we've discussed already is there any anything that you might like to add is if I missed a question that you think is important uh regarding This topic no I you I think you've done a I think you've asked the right questions here and you know like if we were sitting in a bar we could have a 12-h hour conversation about these topics but uh i' I think we hit the essential points and you know

maybe kind of to recap that it's hard to know what to say right because you don't know who the audience is uh everybody listening is listening from a different perspective But if you're listening to this thinking I could never do this research stuff uh you know I want to say to you very very clearly you can it's it's not nearly as hard as you think um I I mean my formal education I was a musician I had I had I think one Math course in college and it was basically where we talked about how math

concepts made us feel I I I had I had no math I had no training and I I but but because I had an interest in learning to do this I actually developed Some respectable quantitative skills uh just because I had to have them I you know I knew that I needed this to understand the data and you can do it too uh we hear a lot about how trading is hard uh there are a lot of ways to make trading harder but um I I think that one of the ways to make it easier

is to clearly lay out a plan of attack and what you need to know and what skills you need to develop because you know I mean the maybe a topic for a Future podcast is this isn't really about knowledge you know we have knowledge we have things that we know about markets or things we think we know but then the skill of trading and the skill of applying these is not it's it's extremely important it's not just what you know uh but if you don't have the knowledge then it's hard to develop the skills because

you don't know what you need to be doing in the first place so you know that's to the Discretionary Trader who thinks he can't do this and to the quantitative Trader who thinks that uh any discretionary stuff is just BS to use a kind word for it uh you know I I I would say I think you're probably wrong I I think you were cutting yourself off from a potentially powerful way of knowing yes there are many cognitive biases there are many mistakes there are many emotional mistakes if you think you have run to systematic

trading because you did not Have the emotional control to trade as a discretionary Trader God be with you good luck that's probably not going to work and and you know this is something we hear from a lot of people but the uh you you are going to have to have you are going to have to have emotional control you are going to have discipline and uh having a systematic approach is not a substitute for that it may make some things worse it may make something it may make a lot of things better but You are

still going to face many of the emotional issues of trading perhaps magnified because guess what now you're one or two you know the thing about the discretionary Trader I have control I can go get out of my positions tomorrow you have you know one one of the dark secrets of quantitative trading is you you're a little bit out of control your control is two or three steps away and sure you could intervene and close everything but you don't have you some People actually experience a magnifying of emotions with quantitative trading which seems counterintuitive but it

it's actually quite common so just you know if you are coming from a very rigid quantitative perspective uh I would argue that an intuitive discretionary perspective is not completely other is not completely different than your way of analyzing it's just another perspective it's another way to focus The you know pretty profound cognitive power that's between your ears on the market problem now Adam you're a member of the chatwi Traders Facebook group and I posted in the group yesterday I I mentioned that I was going to be having you on the podcast again and if anyone

had any questions I would try and squeeze them in if we had time so um I know we've run for over hour already but I think um I think we've both got a bit of time so I'm going to ask a couple Questions that came from out of the group and just for anyone listening if you do want to join uh the group of course it's totally free uh just go to chat with Traders /f faceb that'll redirect you to the actual group page you just hit the join button and I'll accept you so uh

pretty straightforward um one of the first questions that came through and I thought this was quite a good question um and very relevant to uh you Considering how you trade what are your thoughts on trading many asset classes versus just trading let's say equities only um just as an example because often Traders and you know some of the traders who have had on the podcast here really advise against this and they sort of tell you just to focus or or not tell you they they talk about how they do what they do is they just

focus on one asset class and that's particularly advice given to beginner Traders as well less experienced Traders what are your thoughts on trading many asset classes versus just focusing on one I'm curious are those traders who give that advice are they generally day Traders or would you say it covers a range of time frames uh well the one tra that comes to mind um probably because it was just uh recently uh would probably be George uh Ry Trader he was on episode I think it was 110 um so he's an equities Trader he Trades in

the um Australian markets but yeah he's he's not a day trader as such he's more of like a swing a swing Trader I guess you could call him um and I don't mean to single him out I'm just bringing that no no yeah I just kind of threw the question out so I think from a you know from a day trading perspective you could easily make the case the answer to this question is it depends so I'll put the answer up front uh from a day trading perspective yeah you know You want to dig deeply

into Market you want to get familiar with its quirks with its time of day influences with what happens with other markets and uh you know how influences might flow back and forth and to do that you know to begin to develop let's say you're an active day trader uh you probably would need to spend I don't know six months at least before you start to develop some real knowledge of a particular Market uh it is very very difficult depending on The type of day trader you are to follow more than one market so there certainly

is a justification for special specialization there there also is a justification for specialization based on the information you use for instance if I were an equities Trader who traded off of you know let's just say uh earnings releases or off of changes to language in earnings releases or SEC reports or something like that uh obviously I have and and and then say I'm That Kind of Trader and you drop me in Commodities I got nothing you know because I I I have no information or you know if I'm a commodity Trader who trades on crop

reports and then you put me in the currency Market I don't I don't know what I'm looking at I don't know what to do uh so there are there are possibilities for having legitimate edges based on certain types of information that are asset class specific now if neither of those things Is true if you don't need to focus on one um then you or you're not using specialized information so let's say you're more of what we would call a typical technical Trader I think you still need to be aware so you know here is one

of the lies I think of traditional technical analysis is we are told you can apply the same systems the same tools the same chart patterns the same indicators to any Market or any time frame have you ever heard that of Course right yes and you know so I can tell you I can show you then well I can create a very simple quantitative test let's just say uh buying a breakout of 20-day highs and if we apply that in Commodities you would see buying 20 days high 20-day highs shorting 20-day lows would make you a

little bit of money all other things being equal uh and then if we apply the same system in stocks it would lose US money so then I would say well I think what we've seen here from a Very simple test is an expression of this idea that commodities tend to Trend a little bit better so if this is true why would we expect that we could just apply something blindly without even knowing what's on the chart now I think there's some truth I I I I don't think you know the idea that you can cover

up the what what's on the chart and cover up the the the price scale so I don't know if we're looking at soybeans or wheed or or whatever I I think you Probably could make a lot of good trading decisions based on that but I do find at least personally because I'm aware of the quantative difference with the power of mean reversion you know the balance of let's say the balance of mean reversion momentum because that's how I think of it you know from a quantitative perspective you have these two forces mean reversion of momentum

which typically tend to be in Balance when they're I'm telling you something that I Believe you know this is not something that I know is know to be true but I think when they're in balance that price probably moves pretty randomly I think this is why why a lot of research projects that look at Price movement say price random walks when those forces are in Balance they do when we're able to identify points where one force is likely to you know this goes back to an edge one force is likely to Prevail in the future

then we will find that price Movement Is Not So Random and because I'm aware that this balance of mean reversion of momentum is different in different markets I will do types of Trades I think it's subtle but I think it's uh I'll do types of Trades and currencies or Commodities that I would not do in stocks and vice versa also in stocks I am very aware that I may think I'm the smartest stock Trader in the world and by the way I'm very aware that I'm not but you know I might think that I do

the best stock selection possible but I know I can belong the six best stocks in the market and if something happens that cracks the market tomorrow I'm going to lose on anywhere from four to six of those and you know in fact the it's just so tightly correlated and that's not really a concern that we have with most other things but you know we certainly need to be aware of concentrated currency exposure or you Know if you have on a long trade and crude uh in crude arbab and heat you don't really have on three

positions there but you know then you have one one in N Natty at natural gas then you know maybe you do have another position there you know you need to understand the correlations and how things move together so I think you I think you need a level of understanding that goes beyond the simple chart pattern now I don't mean To I want to be very careful about this because I think sometimes people talk about trading Concepts like they're so complicated you could never learn this and uh you know like one of with the traders that

I work with you know we work on very simple Concepts and and all of this stuff is like like you know this Insight that I've just talked about I think somebody trading an asset class for for a year or two will get a very good sense of this and I think if you if You trade it and do the research you can have a pretty good understanding so you know for me there there's a certain diversification and I can point to many many times when my stock trading has sucked but I've made enough money and

currencies to make up for it uh you know another way to think about that is I had great trades and currencies and lost it all in stocks but you know at at at the end of the day uh e even though you would think trading Commodities they're relatively uncorrelated as an asset class you do see some kinds of wins and losses that that come into phase with each other and generally not always but generally speaking if you're going between these asset classes you may be able to smooth out your Equity curve so you know the

answer is it it depends that that's my answer but I think uh is there room for somebody to specialize just trading one particular stock ticker absolutely is The room for somebody to just trade a single currency or just swing trade uh wheat or so you know absolutely there are people who do that and do that well so uh truly it depends okay I think it is probably a fair suggestion for you know less experienced and Traders who are very new to this to just kind of narrow their Universe though would you agree in that I

think so narrow and simplify um yes espe and you know thank you for pointing that out uh you know I Think it would be irresponsible to think you're going to trade everything all at once um but I I think pick someplace to focus focus on it a few years when you have a little bit of proficiency which you know honestly depending where you are in the learning curve that may not mean you're profitable let's be clear the learning curve is usually several years in fact I've never seen it be significantly less um you know so

once you developed some skill and then then You want to investigate another asset class I think that's fine but what a lot of people do is they'll kind of be like the um you know like like the bee that's bouncing from flower to flower to flower just you know and if you do that with trading systems and approaches you never give yourself time not only you never give yourself time to really learn but you also never give yourself time for all of these things what was the first thing I said I think was that all

of This stuff only works if we do a lot of Trades if we collect a lot of data and if you develop a trading system and you know you go and you do five trades and you're not happy with the five trades and you trash it and move on to another trading system that's probably not a not the way you're going to build a career so you definitely need to spend enough time in one place that the law of large number starts to work for you or against you let's be honest uh but you You

start to see some clarity and you start to develop some skill absolutely absolutely this question also came in uh this the question is what advice do you have for struggling traders who have lost several accounts I mean it's a very basic question I think it's probably a good question to ask um I usually try to stare away from using the word advice but what are your maybe um some tips that you could uh give for for someone who's just genuinely struggling like They've just been trying to make something work and they're trading for a few

years or a couple years and just kind of feel as though they're not really making any progam they've lost several accounts what do you think they maybe need to do well okay so let me let let me outline the structure that I use when I coach and Mentor Traders because I I think you know first of all working with a coach or Mentor is one possibility but many People can do this work for themselves you don't necessarily have to work with somebody so this is not this is not an ad this is a structure that

I think anybody can use so the first thing I do with a the struggling Trader is I sto the bleeding and you know I can't tell you over the years how many I I can't how many people have come to me and said I'm losing money that's the first thing they'll tell me I'm losing money I'm struggling I've blown out several Accounts I I'm learning this trading system and can you help me increase my size now you you as I tell you that you probably can't even believe that I've been asked that but I've been

asked that many times me me many many times people people don't understand you know it's like for some reason increasing size will solve my problems uh you know or they trade for prop firms that want them to increase size even though they're losing and mean of course we understand Everything that might be going on there uh so the first thing you do is you stop the bleeding and what this means is you stop trading if you if you you cannot learn to trade without trading this is true and I know many of you are already

you know kind of kind of pulling on the leash and saying you know but I I got to be in there I I got to be in it to win it I got I got to I got have some skin in the game you've you've done that you've lost you you you've you've been Bloodied by the market so you've you've had that experience we're going to come back to that but the first thing we do is you stop trading and you stop the bleading the second thing you do is and by the way that's very

important that's the first thing you do the second thing you do is let's look at your trading plan oh you're what you know so now a lot of these struggling Traders have this kind of oh look on their face my my what uh yes you know your your Very well written out precise trading plan that tells me what you will and will not do in the market and how you will do it and how you will evaluate your results and how you will change your plan and how you know how you will grow as a

Trader and what your plan is over you know but but both on the individual trade level What markets will you trade what gets you in and out of a market and also you know how are you going to grow this business how you Going to know if it's working all those questions let's see that document and and here you can hear the thunderous silence so most people who are struggling do not have a plan that's you know that that's my point I'm hope that I hope I'm making somewhat humorously here so you write a trading

plan and there again there's no one right way to do that but uh you know I have some ways that I structured trading plans and from there you now you have a trading plan That says what you are and are not going to do in the market that's step two we stop the bleeding you created a plan step three is you back test and stop rolling your eyes you know I can already hear everybody rolling their eyes back tests are worthless yes I think back tests are almost worthless but here's a way we're going to

make it useful and you know depending on how your how your plan is structured perhaps it's a plan that we can test algorithmically perhaps We can program it uh we have some tools to do that or you know uh equally powerful is we go bar by bar and if we go by bar by bar we're going to talk about you know looking at different assets you know let let's not look at Just Energy stocks from 2008 to 2010 uh you we're going to look at different assets we're going to look at different time frames uh

but I shouldn't say time frames we're going to look at different Market regimes let's say that so we're Going to look at periods when the market was flat when the market was up when the market was down volatility increasing decreasing we've need to make sure that all of this is captured in the back test and you're going to come back to me after a period of a couple weeks of you know couple weeks to perhaps many weeks of very rigorous work and you're going to say I have this back test and we're going to look

at the numbers of the back Test and one thing that I can tell you with uh you know and you know with with a high degree of certainty is if your back test doesn't look good it's not going to look better if you start trading it now also you you may have a back test that shows me that you're going to start trading the system and buy every building in Manhattan in 2 years and you know I would caution you let let's wait and see because you know the the point is your results are not

Going to look as good as the back test but we have the back test so now we have some idea we think of the potential in the system what have we done we've stopped the bleeding we've created a system uh a trading a trading rule set and we have back tested it the next step and there are only really two more steps the next step is back test can be crap for a lot of reasons and one of the reasons is that we've created something in a back test that we cannot replicate A classic example

would be let's say that you have a back test where you're buying at the moving average uh what people don't realize is that the moving average what people might not realize at first is the moving average moves as the bar is forming so we're going to have a number of situations where uh let's say the bar opens and the moving average is below the bar and then let's say it never goes down from the open it just goes straight up but it goes up enough That by the close the moving average is pulled above the

open into the range of the bar can you visualize that most you know if you haven't thought about it it might be a little bit of a difficult concept but I guarantee you stuff like that happens and if you tell me you buy it that moving average um there's no way you could have executed that in real time that's one example but this type of let's call it time machine trading where we're bleeding information from the Future somehow happens in a lot of different ways in the back test and our solution for this is we

forward test it so still using no money you take a period of time and depending on the system this sometimes can take a long time so you know this is a commitment but you want to learn to trade right that you know I'm not going to give you something you can do in two or three days there's there's nothing I can do to change you to to change your results in Two or three days you're going to have to go through this process of doing this work and so the next part of this is you

are basically think of it like this you're back testing but you're doing it in real time so you know really it's a forward test so you're doing theoretical executions and yes there's no emotion involved and your actual executions at each stage will probably see a little bit of degrading of the edge so in other words your forward test is probably not Going to look as good as the back test the next stage is we start trading it with real money first of all on Vanishing small size if you if you come to me with a

million-dollar trading account and we get to this stage if you're a stock Trader you're literally trading no more than 100 shares perhap ideally I would prefer you to trade one or two shares but there can be some execution issues there uh so you're still trading vanishingly small Size absolutely no emotional involvement from the p&l you know if you uh if you buy the stock and it goes to zero you're you you you lose $50 where you know your actual probable risk on the trade is more like a few cents so you're not making any money

you're not losing any money yes you're paying commissions that's tuition we're not concerned about commissions you so we're looking at the results you know backing commissions out but what I want to see here and you know I think you're starting to see the threat we've we've stopped the bleeding we've created a trading plan or refined the one you have we've seen what kind of edge it has in a back test we've seen in the forward test that that edge can be identified in real time that's what you've proven there and now we're actually trading with

very very small size and now what you're proving to me is that we can actually execute those points and we go through the process of Collecting data and then the key idea with all of this which you know probably I should have put up front but the the way I think about this is you must earn the right to trade bigger you have to earn that right it's yes it's your money it's your risk but how do you earn that right well you earn that right now we shift into uh a very behavioral mode and

we're basically evaluating each trade with how well did you follow the rules how well did you follow the system That's all that matters if the system is somehow jacked up then you know we've got to go back and change the system and that happens you know this is I'm drawing a straight line here a lot of times much more of a Meandering path where we go back and you know change then do another back you know so there we can have many branches here but once you once you have something that looks good good back

test good forward test good very very small size then you prove To me or rather you prove to yourself that you can execute with perfect discipline and then you earn the right to trade a little bit bigger and once now you're trading a little bit more meaningful size but still probably under your target size you do this for a while with perfect discipline and by the way if if you don't think you have the patience or the discipline to get through this process then maybe you don't have the discipline to be a Trader Because a

lot of trading kind of sucks that's what they don't tell you you know a lot of it is a real grind and you know so at each stage here you're showing you can execute with discipline this is where psychology you know I haven't actually here we just had an hour and a half interview and I haven't said the p word I don't think I've said Psych ology up to this point but psychology plays A Part through all of this but you know now the at each phase in the process the Reason I built this out

in these silos is then somebody else will probably rip the structure off I guess whatever uh you know the the the the reason I built this out into these silos is because different aspects are important at different section at different areas and here we're looking at execution skills and here's where we also really start to focus on the psychology of execution versus a psychology of research and psychology of developing an edge which Is a separate thing uh you know psychology is not quite as simple as just following the rules but uh at the end of

the day that's that's the process so you know you can work through that with somebody you can work through that with a group of somebody um I'm also a big believer in working in a team uh trading is it but you need to be careful about that this does not mean working in a trading room where you're sharing your calls and ideas with 20 other people uh You know I mean working with somebody where you know I hesitate to use the word but you work with very intimately uh even to the to the standpoint ideally

of where you would share p&l and you know I'll tell you what this does is so many Traders find themselves just doing stupid yeah just just to say it like it is uh how many people take boredom trades or they you know get out of Trades early or they take trades you know whatever you You' you've heard the List of things you've probably done them uh we all have uh but you're much less likely to do something stupid if you know it hurts somebody else too if if you know that the money is not going

to only come out of my trading account but it's going to come out of our trading account and you know perhaps it's the fact that you're going to have to justify that position to somebody or you know perhaps it's just the fact that knowing that your actions have an impact On another human being's Financial wealth or Financial Health um that that's a surprisingly powerful way to fix some of these behavioral problems so you know you you can you can bring somebody else into it uh or you can just go back and listen to that basic

structure that I outlined and put yourself through it and be your own coach be your you know be be be your own source of discipline but just make yourself at every stage make yourself Earn the right to go on and by the way this is a journey this is months this this is not something we do in days I don't even think it's something that can be done in weeks this is something that is done over many many months because within this structure what this actually is is a structure a template to guide your growth

as a Trader but it's still that it's still you growing and developing as a Trader and that just takes Time awesome man I appreciate you really breaking that down step by step I think that was that was really good and I'd encourage anyone who is struggling who can um relate to the question I asked at the beginning to play that over and over a few times and actually write some notes down I think um that could be really helpful for you to follow that process and I think we may have touched on psychology very briefly

when we talked about it's a misconception that Going to a completely systematic approach is um going to get you around all psychology challenges which it's obviously not just still in line with uh with with this topic here about you know being a struggling Trader another question came in which which is in line with that I'm just going to read out the the full comment as I think it sort of Paints the picture a little better adds a bit of context so uh bear with me here breaking through to profitability is in Part an exercise in

discovering what you don't know discovering the unknown unknowns if you will Traders ultimately need the answers to questions they've yet to ask and professional Traders can help shine light on those areas after all professional Traders have crossed the chasm I think I said that right between confusion and profitability and the views from each side are very different so I'd suggest asking Adam the following what are the top three Questions or top few questions if you will Top few questions aspiring Traders should be asking but never do or often don't that's a good question and you

know it's a little personal aside uh I saw your post late at night uh there was a huge storm here so I was up late couldn't sleep with the noise and I I saw the Facebook post I saw that somebody had actually asked a very specific list of questions and when I read those questions I thought my gosh You know those are the wrong questions and then this this actually goes back to what I said in our previous conversation where you know you've really developed the skill of interviewing and asking the right questions because as

soon as I got to the bottom of that I saw you basically said the same thing you said these are not helpful questions you should be asking and I thought at the time you know the question that guy really should be asking is what question Should I ask and then this particular question that you just read came in which is exactly that uh you know I think the in a situation if if you just go to somebody and you say well what question should I be asking that's you that kind of open-ended question can speak

of laziness but I don't think that is at all the case here I think this is actually exactly the right way to structure and think about the question because you don't know you don't know What you don't know uh I think at the beginning the questions that a Trader should think about have to do with having a realistic understanding of expectations because a lot of people start trading thinking they're going to Triple quadruple their money over some you know very small account over some year uh how what are realistic expectations uh what's a typical learning

curve uh you know what this the question of how how should I learn to trade because I think there there's a lot of misguided thought about this you know we have this idea that the harder we work the better so people come up with these crazy rigorous ideas of sitting at a desk for hours and hours and hours and that you have to put in your 10,000 hours which is a that that's a entirely separate discussion uh there's no 10,000 hours this say that never was a thing um people have all of these misguided ideas

I think that one Of the right questions is how can I best learn to trade how can I best develop the skills of trading and then there are things that you can only answer for yourself you know in terms of risk tolerance how is this going to fit into your life how long if I tell you it's going to take you five years to learn to trade are you up for that five years of pretty consistent losses um you know if you know that's the reality then you know maybe you'll think about how to Structure

your trading so you uh can lose as little as possible but you know if if you believe that's going to happen are you going to do this are are you basically up for that those are the kinds of questions that I would ask as a beginning Trader and then kind of the next step is um what is your your Edge what is your trading Edge how do you know that's an edge and how do you know that edge is likely to be enduring and that question is not so easily answered But if you can't answer

that if I say what's your Edge and you don't know how to answer that you don't have any business risking money in the market until you know see somebody that's gone through that process I just outlined would have a good answer to that this is my Edge and here's how here's why I think here's how I know that's my Edge um if you don't have an answer for that question you don't have any business trading I really liked that point you Made about if this takes you 5 years to learn to to get to a

point where you are profitable if that that that amount of time does Take 5 years are you going to do this still I think that's a really good question to ask yourself and I've said something along the same lines to people who have you know I get a lot of emails and that sort of thing from people listening to the podcast and you know I think that's really something you do need to think think about and answer You know if this is going to take you 5 years to become profitable not saying that it it

definitely is but if that was the case would you still pursue this I'll be more pessimistic than you and I'll say it probably is going to take you five years and and and whatever what whatever you know fortunate things that happen to you inside of 5 years whatever money you make is is not likely to be sticky you know I've seen lots of people who have thought they've learned to Trade in a year and a half or two years or people who get lucky in the first six months and I yeah I guess never say

never but I I've never seen anybody who really develops enduring skill that early uh most of those people you know I think one of the worst things can happen to a developing Trader is you get lucky and make money at the beginning that that's a hard thing to overcome uh you know I'd much rather see the market kick you around and punish you and see the The trader the trader who you know perhaps uh seems backwards but the trader who has had nothing but losses you know essentially nothing but losses and has struggled and just

been so beaten up at the beginning I think that Trader has a better foundation for Success than somebody who you know doubled their money buying options with their first trade yeah and that's one of the things which has been really openening from doing this podcast having Spoken with so many Traders and hearing so many stories about how they took years and years to actually see any signs of success has been really interesting to hear about and sort of pints a realistic picture as well that's one of the things that you know back to the uh

you know what Insight the quantitative types you know if if if this was truly as purely quantitative of a game as we think it should be sometimes I don't think that learning Curve would be like that you know I I think this would be a problem that people could solve in more of a step-by-step fashion and there'd be no reason for this long learning curve but typically even for quantitative Traders with strong quantitative backgrounds there is a massive learning curve when it comes to actually executing in the market so perhaps that points us to U

you know maybe we're still not asking exactly the right questions about how to Learn to trade and what's actually behind the skill yeah let's save the rest of that for another podcast sounds good let's close us out and Adam where's the best place listeners can go to find out more about you sure uh so follow me on Twitter at adamh Grimes I basically everything I put out I kind of put out there on Twitter uh you can go to my website adamh grimes.com that will take you to my blog uh I also have a completely

free and there's no premium Area no upsale but I have a fairly massive trading course with 30 some hours of video that is uh you know I've had many Traders this has been out there a few years but I've had many Traders say that you know they this has been the thing that has taken them from uh struggling to profitability and you like I said it's it's a great resource I hope it's a great resource but it's a resource that has helped people um and it is absolutely completely free you can Find that again my

blog www.hm.com uh you also can check out my firm way L advisors.com that is everything's linked from my blog but I do write a daily research piece that depending on how you trade and what kind of Trader you are that might be something that uh you know could be could be very useful for you uh I cover all the assets that I trade so I cover uh you know currencies Commodities stocks we cover volatility time frames From intraday to longer term our focus is on you know probably what I say intermediate term a few days

to a few weeks so you know check that out there there's a you know free trial love to have you take a look at it cool yeah and I have also heard nothing but great things about uh your free course as well it often comes up in discussion in the Facebook group people talking about how it you know they have got a lot of value from it so uh I'll make sure to include Links to all of this in the show notes also your podcast are you starting that back up I know last time you

were on you were doing it fairly frequently it sort of um faded out a little bit is that coming back it it is you know I and you and I talked about this a couple days ago uh I really respect what you've done here with building uh momentum and a brand and and you know you've certainly built a very successful podcast I was basically less Than thrilled with mine though I was getting a a lot of very positive feedback uh and I took some time off that turned into some more time off to kind of

figure out how to recalibrate and retune that uh and I'm looking actually that very likely I'll have a new episode out by the time you publish this so the short answer is yes ah cool cool and that's the podcast is called Market life correct Market life yes and that also is linked for my blog so if You go to adamh grimes.com I've kind of created that as a you know it's kind of a hub for everything so you'll find the podcast there too it's also on iTunes and you know every place else sure and uh

right at the beginning you mentioned that you have a new book on the way as well how's that coming along you have any idea for when we can maybe expect that uh keep keep in touch with my blog and Twitter and I'll let you know as it comes along uh it's you know for me the Process of writing a book when when it's when everything is right and and this is an entirely separate discussion it's rather it's rather easy H but it I just don't quite have all the pieces fitting together yet so uh I'm

struggling a little a little bit with the craftsmanship worksmanship aspect of it um but you know again working hard on it and hopefully I'll turn the corner what once I once I start to make good progress on it it should come together Pretty quickly okay so it's still a work in progress we we'll keep an eye out for it um Adam one last question I I think that there's going to be some listeners who have listened through this podcast and they're probably going to have some questions regarding some of the topics uh which we've gone

into and discussed would you be open to answering uh some questions in the comments area of this interview on the website absolutely uh you know and I may Steal some of the questions for blog posts because I me I think the good stuff on my blog were has been provoked let's I guess I should say inspired right inspired is a better word than provoked but this been provoked by U smart questions from traders who uh you know either have a different perspective Ive or you know no more than I do so uh yes I I

certainly I'll address comments and you know I may I may build some of them out into bigger picture answers so Please I I I value the interaction and questions from listeners and readers very much so please ask why oh excellent I appreciate you offering to do that so guys listening if you do have a question for Adam go to chatwi traders.com 1115 for this is episode 150 scroll to the bottom of the page you'll see the comments area write your questions in the comments I'll keep a close eye on it and let Adam know of

any questions that come through so that he Can um do his best to answer questions and share Insight where he can so Adam again thank you very much for coming on the podcast man um and giving what's almost two hours of your time um to to share your Insight with listeners it's been a lot of fun thank you very much thank you very much take care you've reached the end of this episode of chat with Traders but rest assured there are more episodes loaded with real Market insight and zero hype on the way soon so

To stay updated with each great new release subscribe to the podcast and iTunes and we'd love it if you'd leave a rating and review we'll catch you next time on chat with [Music] Traders