EP72: Market Trends
Announcer: We love to hold on to this belief that discretion is really important and I think a lot of the times we like to hold on to that is because it gives us that easy out. It gives us that way of explaining our mistakes and it gives us that way of dealing with the disappointments of trading... Two Traders, Darren and Walter, pull back the curtain on profitable trading systems, consistent money management, and profitable psychological triggers. Welcome to the Two Traders Podcast. Welcome to the Two Traders Podcast, Walter here. Hello, Darren. Good evening, Walter. We have this question about losing money and I ll read it for all of our listeners here and we are going to dive into this one today, Darren. This is from a listener: I keep on losing money whenever I trade. I cannot clearly determine the direction of the market trend. It s a big challenge for me. What do you say about this? If I keep losing money then I would do my trend analysis and go the opposite direction if the trend is determining that direction is the problem. That is a pretty simple solution. It would be different though like stop placement or something, right? Yeah. It could be that you are trying to get in with two type of a stop for your particular timeframe and I am a big fan of a wider stop. I think people over complicate the trend because it is very subjective. I mean, are you talking about a trend that is going to go on for a month or you are talking about like the current movement? Trend is such a broad subject and trend trading doesn t necessarily suit the other one. Also, you should say that you don t necessarily have to determine the direction to trade. You can use other triggers to decide which direction you are going to trade. Pretty much everyday, if you are trading intraday, there s going to be opportunities short and long regardless of what the trend is. I think people need to keep things very simple when it comes to trend and also have a really strict expectations about picking the direction of the trend can do for you. It is certainly not a thick sole determining the direction. Trend trading can be very challenging for a lot of people. Page 2
I think most traders are not trend traders. Most traders who have difficulty trying to trade with the trend is because they ve been told in some book or something or some forum that you have to trade with the trend. There are advantages to not trading with the trend. The people who trade counter trend or swing trading, you can do well without it as well. You do not have to follow what the book says. I don t know what is going on with this trader here but that could be the case that you are actually doing this or looking to do this because you believe that is the only way to go. I do not necessarily believe that. One of the advantages, actually, about counter trend trading or trading at the end of the trend is it happens often that the market moves really, really quickly. What can happen and take a long time, sort of slowly unfolding trend that moves up because the trend, typically, you ll get a move with the trend. Let s say you ve got enough trend, it will move up, then it rests for a while, then it ll move up strongly, then it ll rest for awhile, then it ll move up again, sort of a stairsteps. What happens at the end of the trend? Often, it will collapse and go against the trend really quickly and very fast. Sometimes, it ll do that and then it ll consolidate and kind of stuck in a box. The point is that there are strategies that you can employ to trade against the trend and make money. Most traders, I believe, have the psychology that is more conducive to trading, swing trader or against, the trend than trading with the trend. Very few traders actually have the psychological makeup to do well over the long haul at trading with the trend. That is my belief. You can trick yourself in terms of if you want to trade with the trend, you wait for those little tiny baby retracement against the trend and then you get in. It looks like, if you zoom in on the charts, it looks like you are trading a counter trend movers or something because it s like you are taking these little rebound that s going against the trend so, it is the end of that move that you are banking on. You can do that or whatever if you want. The point is, I would say to this trader are you sure you want to trade with the trend? If you are having difficulty determining the direction of the trend, you can do what Darren says and just trade on the other direction. I think, probably, it s something more Page 3
like you could be struggling with the fact that the market s been going up for so long and you keep thinking at the back of your head when is this going to end? Or, your stop loss is so tight it just keeps getting stopped out. Or, you are getting in at the wrong phase of the trend. A lot of traders like to get on the retracement of the trend so when the market goes against the trend, they get in at that point they think is the end of that retracement. Other traders like to see the market make a new high with an uptrend or a new low with the downtrend and that enables them to get in as the market breaking out and going farther. It depends on how you see it but I would question whether or not this trader actually believes that trend trading is the right thing for their psychological makeup. There is a lot of losing in trend trading as well. If you truly are a trend trader, you re going to lose a lot of trades and it is going to be a very small number of big wins. Generally,-- I m generalizing a little bit but -- usually, successful trend traders will have two or three trades that really bring home the money and a lot of loses in between. It is a losing game, trend trading, but those big winners are where you get your profit from, generally. Another way to approach as well is to not think in terms of trends and think in terms of movement. It could be that he is trying to trend trade but then entering at the worst times in the consolidations where you re much more likely to be stopped out. Maybe you are better at looking at it in terms of velocity and movement and wait for the markets to really stop moving and then then look for the entries into that movement, could be another approach. A lot of the stuff I read about trading comes from old stock traders or traders who were trading very big accounts over longer periods. There s less information there about retail traders trend trading. If you ve taken your ideas from something that is not very similar to how you are going to be trading, then you need to take that in context and perhaps tweak things so it suits your style of trading better. That is a great point. One of the things I ve read recently was how s somebody was talking about why people should not trade this way because the funds do not trade that way. My immediate reaction was basically exactly what you said, Darren, which was this trader was saying most of the funds don t do this, and therefore you should not do it either. Page 4
Basically, he was saying you show me private fund that does this and then I ll believe that this is a viable strategy. In other words, it s only the hedge funds that have the viable strategies and that all retail traders should fall in line. I completely disagree with that. I couldn t disagree with them more because if you talk to hedge fund traders, if you talk to bank traders, if you talk to those people who are pros in the industry, first of all you ll be amazed with the differences and approaches. There s a wide range of differences in a way that different organizations trade and different philosophies. The other thing is we have advantages as retail traders that they do not have. There are amazing advantages that you have as a retail trader that they simply do not have. There s a lot of worry -- there wasn t so much of a few years ago but -- nowadays, there s a lot of worry about getting into trouble. For example, with the banks. The banks, it used to be really, really easy for the banks to make money in forex. The reason why is Darren sitting there at a desk at Bank of America. Bank of America gets an order in from Toyota. Toyota s going to and they ve been talking about it all week. Toyota is going to put in a large order for USD. They are going to sell JPY and buy USD. You know that Darren is sitting on the desk so you can run some discretionary trades for Bank of America because you have Bank of America account. You have an amount of money that you can trade for them, you can run that order in front of the Toyota order knowing that the Toyota order is going to move the market a little bit. It s like front running. With stock brokers, you go to jail if you do that but the Banks of Austin done that. Now, what s interesting about this, it is not that easy anymore. Some of the regulators have stepped in and say Hey boys, you cannot really do this anymore, you cannot put in your order in front of the Toyota order. What they do is they get a little bit tricky is they do things like, instead of going with USD/JPY, they might go in with the EUR/JPY or something like that. Knowing that the JPY is going to weaken a little bit, probably against the EUR as well in the distance of the USD. They worked their way around it in different ways but, I guess what I am saying is just because they are doing that, it does not mean that you should do it. How can you do that as a retail trader? Page 5
Is there anyway that you can adapt the similar strategy to that, the one that I just explained about the fictitious Bank of America does? Of course not, you cannot do that just like they cannot use 500 to 1 leverage. They do not have 500 to 1 leverage or whatever it is, a 100 to one, 200 to one, 50 to 1 that you have in your retail trading account so, you have extreme advantages. This is something that we ve talked about in one of the workshops where I said Look because there was a pro trader there and he was a bank trader. I said You tell me if the other bank traders would be amazed at.. cause I m saying that what retail traders do is amazing to what some of these bank traders do. And he said Yeah, absolutely. They would be amazed because the things that retail traders have to come up with to make money are completely foreign to those who are pros in the market. It is a completely different world. The way that people make money in retail trading is completely different to the advantages and the methods that you use in the pro world. I do not think you should look to those... to follow up the one that you were saying, Darren. Iagree. I don t think that you should look to what somebody was doing in the future s market in 1985 or what the hedge funds are doing in 2017. I don t think that is what you should you be doing. I don t think that s the case. You should: one, define who you are as a trader, what you believe in; and two, backtest the crap out of that. Get really comfortable with it, become an expert, get a lot of experience with that approach that you believe in because it fits your beliefs and you are going to stick with it over the long haul. Do not let me or Darren or anybody else tell you that this is what you should be doing and not be doing. What you should be doing is following what makes sense to you and not trying to duplicate what some trader did with the stocks, with penny stocks fifteen years ago or whatever. It is a different world. You need to do what makes sense to you. For a lot of traders, what does that mean? What do I mean? What makes sense to you? You are probably going to be a trend trader like we talked about or, you are going to be a reversion to the mean type of traders. The market has gone so far, it is going to snap back or you are going to be a swing trader as you are looking for those points where the market reverses. Page 6
You can be a movement trader. Darren, I m going to call you a movement trader. You don t have any idea about any pre concept. The point is the market is turning around here. There s a little bit turn on the chart, it may go pretty far so I m going to take the trade here. There s a move, basically. There s a move down or move up so I am going in. It s like swing trading without all the plus, really. Yeah, definitely. It s basically not having a directional bias, just having If the prices are going down, I am going to sell. If the price is going up, I am going to buy. I m only going to manage my buy when price starts going down again and then just wraps some rules around determining what deciphers is going up and deciphers is going down and nothing more than that. Just letting the numbers play out over a long period of time. You have to accept that you are only going to win half of your trades. You ll get back to the coin flip scenario, really. I only win half of my trades but I win slightly more on my trades than I Iose on my loses and I have a high frequency of trades. So I am not sitting out of the market a lot of time which is something else we are told that we must do and the numbers play out over time. That is another approach to dealing with the problem of trading. Yeah. One of the things that is interesting to me, Darren about your style is -- and it ll be cool if you can talk about this -- because you ve had a way of doing this where you are doing the opposite to what you do now. Like, you re doing this in a way where you are looking for a big winner like the trend followers do. At one point, anyway, you are doing it so that in a way you were like Okay, the market looks like it is going this way and I am going to start taking these trades in that direction and try to get the really big result. Knowing that a lot of time it is not going to happen but, eventually, you would hit it and now, it changed to where like you say you re 50-50 or whatever it is -- 51-49, 52-48 whatever. It is where it s, basically, just as many winners as losers. It s just that the winners are a little bit bigger and you ve got the volume of trades under your belt. Can you talk a little bit about how the changes going from a low win rate with it s really big winners to a little bit of a higher win rate, 50-50 sort of results where the winners are slightly bigger and how the psychological things that go with that in terms of trading the low win rate, big winner versus the slightly bigger winner with the higher win rate? Page 7
I was stuck in my positions and holding them so they built like a position trade. The reason I favor that was because it s backtested so well in terms of profit but what I discovered was although I find the process of trading that way fairly easy, I mean all trading strategies have their issues. The problem was with it, if I made a mistake when I had very big position to get to that stage I would have taken a lot of loses. I m in chunk of drawdown already. I have a big position in one direction. If I made a mistake like there was a fundamental announcement or something major, I could then lose all of that position as well. That happened to me early in the year, it has something to do with the EUR. I built a position short over about eight weeks and one news announcement reversed on me. I knew the news announcement was coming up. It was an obvious time to manage my position and I made a mistake. It cost me nearly three months of profit in one afternoon so, that was the issue with that style of trading. Obviously, it can work but that was a problem for me, having that big loss. I adjusted my approach, although the actual core strategy was exactly the same. I am still entering the same way, the setups were the same. I just adjusted the money management. Now, the problem with that is -- my current way of trading, the problem with it is -- that you have to accept that your results are going to have a great deal of variants although if you test it and you do an equity curve for it, it looks really nice and smooth. There s a lot of periods of trading all week and only getting a very small profit or trading all week and having a series of losing weeks then you have some weeks where price really moves and you have some really big winners. That averages that over time and that is really nice. The issue you have going forward is, on the long run, you have to make sure that you stick to the process. You really need to avoid looking at your profit and loss all the time because it is always going to be disappointing. You are going to have great weeks where you ve won 400 pips and then you ll have three weeks where you ve lost 80, 120, lost a 120. Those three weeks, just talking about it now seems Okay, I can deal with that. Page 8
When you are actually in the moment and taking trades every four hours, sort of fifteen trades a week and you are sitting and the clock is ticking by and your profit and loss is just slowly creeping down, it is really hard to stick to your process. You have to keep in mind that backtesting that you did or your previous trade results and, like you are saying earlier, and look at the group of trades and the results of them. When I am 200 pips down like I was last week on Wednesday seems like a big issue when I look that I am 5,000 pips up for the year, then that 200 pips is not a big issue. When I look at my worst trading week result which is minus 400 pips again, it does not look like a big issue. They are, essentially, the same emotional problems but they just play out on a different timeframe. That is interesting. So, when you are talking about the big positions that was stuck and the news results came, so you were slipped? Is that why it didn t worked out because the stops were slipped on that one? Is that what happened? No. Because to be honest, I had too much discretion in my exit plan and that is something that I am slowly changing my attitude on there. I have the notion that you should have lots of discretion on your exit. I was learning. Well, actually you need some discretion but there needs to be some hard and fast rules as well. You cannot just completely decide what you are going to do in the moment. Now, I am even considering the last week I ve been doing a lot of backtesting on a completely mechanical exit which is something that I swore I would never do because it is something I convinced myself that you couldn t do. I had this belief that you have to have some discretion in there and I am changing my view on that now because I ve spent 300 weeks of backtesting with a completely mechanical exit and it does okay. What s interesting was as I was backtesting it, I could see the moments where this is where my mind would be screaming to you some discretion. It s confident to know that you can approach it from a mechanical point of view as well. If your risk model is good and you let it play out over a long enough period then you can still make profit trading that way. Yeah, that is fascinating. I know a few traders, obviously. Like in the forum, Reima uses a mechanical exit and he walks away and at the end of the week, he has a sneaky peek to see what happened. Page 9
I think it makes a lot of sense. To me, it makes a lot of sense for you because your basic philosophy is to stay away from don t cloud up your execution with analysis. Basically, it s the way I view it. I do not know if that is the same way that you would but that is the way I view your trading. Exactly that way. Yeah. It makes sense to me that you would end up that way because you are definitely not using any real like what you would normally call analysis in the entry. The last thing that you are holding on to is your exit and now, you let go of that too. It is at that point where this is where a lot of traders start thinking about automating and whatever. I know you are probably like me, it is not necessarily the first thing, it is not necessarily something you are comfortable with. I think that it ll make a lot of sense and, in some ways, it ll free you up too because you have... Really, you get into the trade so you ve made that decision and then if you could snap on a mechanical exit, it will allow, I guess, it would free you up from that last piece of decision making. The only thing is, if you had another trade come in like in the opposite direction. Do you know what I mean? Like, mechanical go off, or you would have two positions, or would the trade be over and then the other. You know what I mean? I know you do some hedging and things like that, we ve talked about that before. Yeah. I have been working on removing that discretion all the way through. Before, I had basically, once I was on a trade, I d wait for a specific trigger. Once that happened, then I would have three options. My mantra was that it does not matter which one you picked because you do not know what is going to happen next but you need to pick one of these three options like moving to break even, just taking profit or setting up a hedge trade. I thought, well, if it does not matter which three of these should I pick then surely all three of them should work on their own as well. That is why I started doing that. I started backtesting Okay, I am just going to use option one and I am going to run that, backtest for 250 rates. Then, I am only going to use option two and I am going to run that and so on and so forth. It was quite enlightening. I think I had one twenty week period. I was backtesting chunks of twenty week period. I had one period where I did not make profit and it was like minus 5 pips for the whole period. Page 10
I am sure that trading that live would be pretty painful but it was really enlightening for me. This is the route, the path I am now. I am at the point where I am, basically, constantly going over my beliefs of what is true and not true. Testing them and taking them to the extreme, see if any of my assumptions are right and really boil my strategy down into like the E=mc2 if you like the perfect, elegant simple equation to suit me. Obviously, it suits me and suits some other traders. Finding it suits them as well but on the subject of automating, again it is something that I have always been... I have a belief that it is not the right way to go. I think just because we re left to hold on this belief that discretion is really important and a lot of the times we like to hold on that because it gives us the easy out. It gives us that way of explaining our mistakes, it gives us that way of dealing with the disappointments of trading. It gives us that way of dealing with the bad weeks and we won t be able to explain the way the bad weeks rather than accepting that however you trade there are going to be bad times. I am exploring the automation now and if I can get it to work, I ll certainly use it. If I backtest something and it works, I know that it is about the process. If I can automate that, then I ll certainly set up a second account and I ll run it. No doubt, it ll end up being far more successful than I ve ever been trading it manually. Well, I hope it does, anyway. Yeah, that is funny. What is interesting though about this approach is you are taking an approach that most people don t which is you ve traded it for a while and then you re like you are slowly moving from the discretionary. Or not really discretionary but sort of manual execution of it, I guess. There is discretion but and you are moving that into the automation. Are you going to test it that way? Whereas a lot of traders, they don t go to that first step. They just get the automated thing and they go Yeah, woohoo, let s go. That is a very different mind set, isn t it? You don t know it well. You don t know it well enough to anticipate what is going to happen in the future but if you actually traded it for some time you do and you will know what to expect. My big thing has always been -- and I ve said this over and over again to those traders who say oh, let s automate this or whatever. All traders are discretionary traders and the reason why is because even if you are trading a robot, you are the one that flips it on and off. Page 11
That is the one thing that people forget to account for as user error. You re the universe for that system, you flip it on and you flip it off. You turn it off when the non farm payroll is coming up or you turn it off when the election result is coming up or whatever reasons you have. You are the guy that gets to turn it on and off. It is a discretionary system, isn t it? You decide when it is on and when is it off. If you are one of those people who s traded it for a long time and then you automate it and then you say Yep, I am going to let it go all of the time. That is about as close to automated trading as you can get but I think a lot of us just cannot do that. We have reasons to jump in there, we come up of reasons to make ourselves important for the process. It is tricky. Yeah. I think people tend to automate systems that looked too good as well and if it looks too good, then I am GBS about it s longevity because he s probably trading some sort of anomaly based on the period it s been tested on. I am always wary of results that are completely out of the park. It was encouraging for me when I did the backtesting to see that it did not always perform well. There were weeks where there were really big wins and there was really big losing weeks and in between there was this average. That felt real, that felt that I could. I was, perhaps, on to something that would perhaps stay on the course over the long run. That is fascinating. I really like this. I think we should actually have a whole webinar on this idea of making trading easier, automating it. I think a whole webinar, a whole podcast. I think it s going to be fun to do that. This has been really cool. I did not know you are going down to this path, Darren. This is so interesting. I really like this. I think the problem has always been, for me as well, is that I cannot program. Even when I explain a very simple system in my head to somebody to trade manually, they really get it the first one, two or three times. I am always having to trying and get my ideas through to someone who could program though and that add some in the level of complexity to it. Let s definitely do a podcast on this because the whole automation thing is new to me and it is bringing up interesting things for my manual trading as well. Page 12
Great! Thanks for your time, Darren. We will definitely see you next time and we ll dive into that. Sounds like a good topic. There s a lot in there, obviously here. A lot in it. Alright. Thanks, Darren, for you time. Cheers, Walter! See you soon, too. Page 13