239: Confident Consistent Trading - Laurens Bensdorp

Welcome to Better System Trader, the show for systematic and algorithmic traders, and today we've got a very special guest. He has published a number of books, one called The 30 Minute Stock Trader, the other Automated Stock Trading Systems. He's also been featured in Vantharp's book, The Trading Beyond the Matrix. Welcome Lawrence Bensorp. Thank you very much, Andrew. Uh happy to be here.

It's really great to have you here. I know we've been going back and forth a little bit to uh organise you to be on the show and uh yeah I'm really excited to uh to discuss trading with you today. So thanks for joining us. Bye bye. Yeah, and we've also we've already got um welcomes in the chat as well. So uh we're all excited to have you here today. So how about first of all uh first all first of all, it's very early here, um do you want to give us a little I'm going to go back.

Titulky vytvořil JohnyX. Sure, no problem at all. So um I'm from the Netherlands, currently residing in uh Portugal. Uh lived in 12 different countries and uh I've been a systematic trader since 2007. Uh I started trading uh in back in 2000. At a time where I basically had no idea what I was doing. Uh that eventually led to uh finding my own style in trading. Um and going fast forward right now I um

A suite of 55 non correlated systems simultaneously, both long and short. A lot of different styles on full automation. And Um besides that, um I have a uh mentoring company, trading systems.com. Once in a while I host uh a seminar with my friend Tom Basso. Um and besides that it's um it's all about um enjoying life. Wow, so fifty five trading

Strategies or styles. People might go, how do you ever get to that? But we all start somewhere, right? So what about can you take us back to your very first trading style or strategy? What was that? And why did you choose that? Well the first time when I started trading back in two thousand, um I basically had no idea what I was doing.

And um I thought it was fairly easy with a thirty thousand dollar account to make a hundred thousand dollar a year return and uh having a great life with that. Um that wake up call came It was a long time of studying, reading books, um uh understanding things about technical analysis and I think the first thing was that I realized that okay fundamental analysis is not for me. I very much liked technical analysis a lot more.

Then I started to learn about trading systems, uh, read a document about um the turtles, um how they traded, and uh that it was full systematic with specific rules. And that really grabbed my attention immediately. That I said, okay, this is what I would like to do because this makes really sense.

Um and that was back in 2006 or so. So at that time I started to hire programmers um to turn my ideas basically into um Into um algorithms that I could test so to actually see if my idea had an edge and um My first trading style that really resonated with me was mean reversion. Okay. So before we dig into that more, I just want to go back a step. You said that it was very clear early on that it wasn't going to be as easy as you thought.

What were was there a particular incident or some clues that that made you think that? How did you come up with that observation? I just consistently lost money every single day. Um, so you get the feedback, of course. But I think above all, um I had no idea. What I was doing, um I mean I read about trends, then I read about pullbacks, then I read about indicators, overbought and oversold, and I had no trading plan, there was no structure, there was nothing basically.

So it was all just guesswork. I was looking at the news messages. So if there would become a Fed decision. I would be glued to the str uh to to the screen and at the moment when um uh the Fed decision came out, I immediately said, Okay, this is going to be a long trade, etcetera. So there was No structure whatsoever. And I basically lost money consistently. And that's when I realized: like, okay.

Hey, I'm really just gambling. There's there's no edge at all in what I do. Um, if I continue like this. I will lose everything, period. So that's that was the trigger to say, like, okay, I really need to educate. Um I think the market is an excellent feedback tool to t to tell you that right. And the the ultimate uh feedback is in the bottom line or how you're doing with your PL. So uh I think

Your story is quite common among amongst a lot of traders. I did the same thing. I tried lots of different things at the very very beginning and had no idea what I was doing. And uh, you know It it's uh I guess a common story amongst all traders. How did you go for it seems it seems that we have to go through that period as well to to understand one's own incompetence to to really realize how hard uh trading is it's it's not easy.

Yeah, yeah, exactly. And so I th did I hear you say you read five hundred books or something to try and absorb knowledge? More or less, yes. Yeah. Wow. That's incredible. So that really goes to show that the drive that you had to um you know to to figure this out. What I mean, five hundred books is a lot of books. That's like one a day for a year and a half, right? So Did you find that there was not a lot of good content in there or why why did you why couldn't you figure it out to

I didn't I didn't know of course. Um especially in the beginning there were so many books that I read and I didn't know if the content was actually good. It was just Um I had a belief that I needed more information and knowledge about the markets and everything, so I just read everything. Um but there weren't any real books that gave me uh specific trading ideas of entries and exits, neither was there anything until later that was talking about

um uh the psychological part of trading as well. So I think um the the the books that really stood out to me And uh that really helped me um to to start to transform myself was probably um the books from Jack Schwager, uh Market Wizards and New Market Wizards. Uh as many traders have uh read and liked those books.

And for me also the book from Van Tharp, uh Trade Your Way to Financial Freedom, for me was was definitely uh something that that really made a lot of sense. And at that time I suddenly got it like okay, there is actually no holy grail in trading, that there's one strategy that can do everything.

Yeah. Yeah. So you've mentioned the word beliefs a few times now and I know through reading your books that um One of your beliefs is that you that you need to have uh, I guess, trading styles that suit your personality and your beliefs and your preferences. Did you uh how did you end up with mean reversion being the first style of trading that you uh really dug into? I'm a contrarian by nature.

Uh I kind of do not like to go with the herd, but do completely my own thing. So I understand very well the um um uh the thing of greed and fear. And when there's a lot of fear, it is often because the herd is wrong. So when I read about that, it immediately made perfect sense to me. It was like, okay, yeah, that makes perfect sense to me. Um, I think also at that time, because s since then my my styles and my objectives and my beliefs have changed and evolved certainly.

Um but at that time because I was younger. Um it was for me a great trading style because mean reversion was a shorter term style with a high win rate generally. And that was something that really resonated to me and and what I uh really thought uh that was that was a comfortable way of trading instead of being a trend follower that appeared to me a lot more boring and crowd following.

Right. Okay. That's interesting. I was thinking about this myself um when I was reading through your books, is that, you know, when I first started trading, I had this belief. that I needed to trade all the time. I had to take lots and lots of trades. And I started out doing trend following and I was quite bored by it. because it was just like I wasn't taking a lot of trades and I was I was a very impatient young man.

uh as I'm sure a lot of uh people that age are. And I also had problems with uh you know, I always wanted to be right and so the low win rate in trend following um kind of irked me a little bit. And so all those things kind of pushed me away. As I get older, I get more patient, yeah, I I start to realize these other things. Um, so it's interesting to hear you talking about your own transition there.

What I found fascinating about your comment is you you actually listed a number of different factors to wire that trading style um you know s suited you. So what factors can traders look at um to kind of find out, well, what's really the best style for them?

So what is it exactly what your question is like what How can traders figure out without going through the five hundred books and testing all these different traders How can they kind of shortcut the process and go, Okay, I need to take into account these factors, this trading style might suit that. Um I think there's a couple of things. It's it's um as I mentioned, win rate is incredibly important um immediately. Some people are just not geared towards a small

win percentage of trades. Um I think the other thing is trade duration as well. Um and also I think what a lot of people need to take into consideration is that whatever style they come up with. Um it won't be a style that makes money in every market environment.

So for example, if you say, um, I really think that trend following is for me, that probably also has to do then That um you look uh and you like to look at the SP 500, for example, you want to beat the SP 500, but with a style like that, you also need to understand that there will be times. um where you could be like two or three years without making any money.

Now, if you have a mean reversion system or another kind of system with a higher trade frequency, that means that you have more chance to climb out of that drawdown. So there's there's a lot of pros and cons basically that you first need to take a look at um before understanding um I think reading about simple styles.

Is is something that can really help you. And you could see, like, okay, do I like trend following? Do I like mean reversion? Yes or no? But also, do you like short selling? Yes or no? Some people like it. Some people can't do short selling um because of tri um trade regulations and uh and stuff like that.

Hmm. Yep. So um How do how do traders go about validating their beliefs in the market? Because you know, as humans, we have all kinds of biases. You could look at a chart and see one thing and I could look at it and see completely the opposite thing. How do you go about validating whether your beliefs actually align to something that could be profitable in the market? Um you need to be hundred percent comfortable with the pros and the cons of every trading.

So if you have the trend following system, you need to be comfortable that you could get 20, 30 trades that are losing trades. If you want to be a trend follower, you need to have the belief, the core belief, that you're hunting for that big outlier. Right.

version it's basically that you so you will see that you have a higher than normal win rate but on the other hand the average win loss is close to zero uh close to one base And and that is kind of the the the the two differences that I think that that if you see that that is uh those are the statistics. uh then you can validate like okay this is what I like this is how I uh like uh to trade. I think very often as well it is something that one finds out more. While trading lies.

You know, um, sometimes you read something and you say, Okay, this makes total sense to me. Uh, but then you trade it, but then the live trading experience can be very, very different, and it's like I don't like this at all. Um I'm selling those I'm selling short those stocks and the back test looks very nice and everything. But um in in live trading, the experience could be very Different as well. So it is also quite an evolving concept, I would say.

Yeah, I think you touch on a really good point there. Um I think Sometimes there's a disconnect because traders uh they back test these strategies and then excuse me, it spits out this really nice looking back test report, right? With this pretty smooth equity curve and you go, That's great, I'm gonna trade this thing. And then when you get to the live trading, you don't see all the little bumps and the daily gyrations, right? And uh so

So the expectation of what it's going to be like and the actual implementation or the experience of that can be very different. How can traders kind of get that experience in a safe manner without, you know, blowing themselves up?

Best way to do it if you have a back test that you actually start to zoom in. Uh and not only look at a twenty year back test with a wonderful forty five degree equity curve from lower left to upper right and say, Oh, I could do this and oh I could handle the drawdowns because I see what the outcome

Um, because in live trading you get the day to day feedback. Many people say that is so great about trading. I think it's the hardest thing there is for trading actually to have on a daily basis your PL. Um so what you can do if you have a back test that you actually zoom in and you start to look day after day or week after week what the returns would be. And especially take a look at the time when you see where your largest drawdown was or your hardest time in your back test.

Um how would that how would that feel? Um how would you feel if you're eight or nine months without making any money and you're fifteen percent down? Because again, on that wonderful equity curve you say, Okay, it's no problem at all but then in live trading it can mean that you're just completely fed up with it and say, Okay, I stopped doing Now if you zoom in a lot more and then you start to actually uh building up a lot of mental scenarios in your head.

Where you say, okay, let's say I'm trading this with a million dollars, and right now at that time I would be down$150,000. Could I still deal with that? Yes or no? So um trying to make a simulation actually as as um as real as possible as what live trading would be. That is probably one of the things that I really, really recommend. And then the other thing is the moment you trade live.

Do it small. Don't start immediately with uh a big chunk of money, uh, because then your emotional side is most likely going to take over from your rational side, and that is not what you want to have. Yeah, yeah. And and uh continuing on with this back test report or back test um theme, it sounds like you I mean there's there's two two three hundred um you know metrics on these reports, right?

It can be a little bit crazy to look at. Uh do you look at any particular metrics or because you're you're speaking a lot about, you know, trying to understand the experience of how it would be to trade this strategy. So what do you really focus on when you're looking at um you know back test reports?

Um it depends on the strategy. You know, if you uh develop um I think I think the the the there's a lot of metrics as you said, like sharp ratio, marr, whatever, uh Sortino, uh There's too many to mention. First of all, it's important to know that all of them are just a representation of the past. No indication of the future. But secondly, uh the one thing that I most look at is this system, when is this system supposed to make money?

But when is it likely to lose money? And especially if you understand that second question, uh that will make your life so much easier. So, for example, a long-term trend following system. Um yeah, uh this year in 2023 on the SP 500, NASDAQ 100 was a wonderful time. But you were supposed to be down in 2022, uh, 2008, um, etc. So if I see that in a back test. Then I say, okay, this is this is solid. This is what it's supposed uh to be. So it it really, really depends.

Right, okay. Um well that leads nicely into I guess diversification because of as you've uh you mentioned earlier in our discussion, your strategies aren't always profitable. Say for example you've decided that trend following is going to be your thing, um and You know, that really aligns with your beliefs and um

How do you go about diversifying with just one particular trading style? Because you mentioned you trade fifty five different styles and you I heard you say trend following and mean reversion in there, which are both very different stylistically. How how do you how do you address diversification if you're specialised in one thing only? Um so you start to look at what you have and then you see what the weaknesses are of that strategy. So the the the the basic example

Is um uh a tr a long term trend following strategy. Let's say you run a back test from ninety ninety five. Uh it's supposed to make money from ninety ninety-five to two thousand, then you get the dot com bust scenario. So you will see a big drawdown there from two thousand to two thousand three. Um and those are the time periods where you need to take a a mark on to say, Okay, uh they are losing money during that time. They're supposed to lose money.

So then the next thing is, and that turns then into an objective to say, okay, what kind of strategy can I find? That could capitalize during the times where the trend following strategy would lose money. And this strategy would then make money, but at the same time, in other time periods, would not give back too much money.

Right. So what you then get is basically that big long drawdown. If you add an or overlay that with a trend following strategy on the short side, or it could be a mean reversion strategy on the short side. you're kind of those holes uh which to me is incredibly important that you always take a look at at the holes and with the holes I mean if you see an equity curve um The forty five degree. Is wonderful. But

Normally you will see an equity curve that is a lot more goes up and down and is a lot more bumpy. It's a bumpy ride. So what you need to find out is what happens during those bumps. During those drawdowns of that strategy, and that offset that with another strategy. Right, okay.

So when you when you started out with min reversion, what were the holes that you saw in that style that made you want to uh investigate other trading styles? Yeah, that was a great uh good question because um I thought in the beginning, like, Okay, this is everything that I want to trade, it suits me perfectly. Um I think 2007 to 829 uh were were very, very uh favorable for mean reversion. I traded both long and short mean reversion. Um my my biggest wake up call was two thousand eleven August.

And um I th I th you you remember the time, I suppose, right? Yes. And so my mean reversion law systems, they got hammered. They got hammered in a way that I just could not believe it. And one at that time would think, well, but you have your short selling systems. Yes, but those were mean reversion short selling systems. And the market dropped down with so much momentum, so there wasn't an upward pullback.

So I didn't get any fills on the mean reversion short systems. So suddenly I was totally net exposed. on margin because I didn't have that much money at that time yet, but a very high confidence that my uh strategies uh were doing good. So um I got uh I got uh a pretty decent beating uh at that time when that happened. And then that was a huge wake up call for me because I said, Okay. Damn, what happened here?

I couldn't believe it. And I started to analyze that. So the first thing I did is lower my position by sizing by 50%. So I could get my rational back instead of being very uh mixed up about all my emotions about the the dollar amount that I lost. And then I started to analyze and I saw, okay, yeah, this is what is missing over here. This kind of strategy of just selling short, for example, when the S P five hundred is below the fifty day exponential moving average.

Would have gotten me in a trade that would have lowered that drawdown maybe by 50% or so. Yeah. It's it's a funny well, it's not a funny story, but it's uh the reason why I was smiling when you were saying that is because I had the exact same experience. I was trading mean reversion strategies.

during that period and I my strategies took a hammering and in fact I pretty much blew blew blew up my account'cause I was trading on leverage. And uh that was that was probably my first really big drawdown. And emotionally it was very tough. I ended up I stopped trading for a while. I blamed the market, I blamed the computer, I blamed everything else.

But over time, you know, I kind of realized this is actually a a learning experience for me. There's a lesson here and that's probably one of my biggest lessons in training was that moment and I'm so grateful for that. But at the time, very tough. It was very tough.

you know, I gave up trading for a while. What about you? How did you get yourself through it emotionally? Um I I was doing at that time quite a lot of uh psychological self work already, so um I was I was I was able to uh to deal with it from an emotional

standpoint of view, um after the first shock. I mean, first you're in complete shock, like what the heck happened here? I can't believe this. Um uh but then after that um i was able to to kind of look at my awareness work on that and um the first thing was like okay um I needed to find out what what actually happened. Why did I lost money? As I said, if you know why you lose money, it's so much easier. Once I found that out.

Um I knew that in my approach, it wasn't that there was necessarily a flaw in there, it's just mean reversion long short only um in a time like that or possibly a time like uh the covet crash as well could hammer a lot of uh accounts big time so Um because I wasn't emotionally uh that attached to it anymore because of my self-work, um, I immediately started to look for

Solutions that were non-correlated to the stuff that I was doing already. And that's when I suddenly found out like, okay, um, I need a lot more systems basically. For other scenarios that could possibly happen where mean reversion only is not working.

D did that did that also shift your focus in s in some way? I was just thinking back to my experience that you know, up until that point I was all about profits and, you know, trying to leverage up as much and make as much money as possible. And from that moment my My uh focus, I guess, shift com shifted completely to risk management and, you know, being being more selective about the times when I do trade. Um, so how did that experience switch the way you look at trading?

Oh yeah. Um I looked at that from from that point on, I immediately looked at it like okay, uh one thing is your back test, but if your back test says that you had a Uh fifteen percent drawdown. Uh your largest drawdown is always in the future. And um I did not know that at the before that time, but the market teach one uh a perfect lesson then and shows it that it actually can happen. So um I said, like, okay, well. I need to expect for myself. that I will have a drawdown that can be at least

Uh double the size of my back tested drawdown. So I need to take that into consideration as far as my position sizing and risk management to make sure. that when I am in a drawdown, that it is a drawdown that I can emotionally uh tolerate. So basically um My my trading was at a position sizing style that was very exciting and I turned it into boring.

That's I think as far as the execution, the execution is supposed to be boring in trading. You should be completely detached from it and not really uh be worried at all what your daily P and L is. And that is only possible if you put down your risk to a level where you're comfortable with it. So we always need to be first a risk manager and then a trader.

Right. Okay. Yeah, that's um that's i I found that's easy to say and difficult to do until you build up that muscle, right? How can people build up that muscle? You you've mentioned that they can Uh reduce the position size, but is is there anything else that they can do to kind of get more I I think position sizing position sizing is probably there the most important part, which has has to do with your psychological uh profile, of course.

um and I think I think what is important is is um many human beings have a tendency that they want to get rich Quickly, whether we like it or not, we we have that all in us. But That is the biggest trap there is because if your position sizing is too large, um there's a very large likelihood that you will suspend your trading. Guess at what time?

the worst possible time when you're in a in your biggest drawdown, when there's possibly nothing wrong with your system, but you say, okay, I'm out of this because I just can't handle the dollar amount that I lost anymore. Um if you look at from uh at it from the other side actually and you say, Okay, I understand the law of compounding. Um

Even if I aim to only get fifteen percent compounded annual growth rate per year, that means that still every four point seven years you double your money. Um that is a lot better than the alternative. Where you uh bail out with a 30% drawdown, feeling miserable, and probably for many people don't want to ever know about trading uh for quite a long time.

Yeah, yeah. I think you touch on a really good point there and um I myself was Uh my objective when I came into the markets was to make a lot of money very quickly and didn't turn out that way. Um I know you work with a lot of traders. W what kind of um mistakes or or challenges do you see? traders coming in with coming into trading with their objectives. Like is there um You know, false expectations or what kind of things do you see that traders kind of stumble with?

Initially, most people say they want to make as much money as possible with as low risk as possible. And uh that sounds sounds familiar, right? Yes, very familiar familiar. And we we all know that it's not not really possible like that because everybody Has a very different personality. Let's say if you're somebody who really likes to look at what the SP 500 does. Um and if you then trade short selling strategies

um it's it's it's not going to uh to work that well. Um if you really want to beat the benchmark the whole time, if that is your profile. then you should trade long only, most likely trend following only. Um and I think many people they have an issue with that, that um it is a lot better to trade the strategies that you're hundred percent comfortable with. versus trading something that is more complex, could possibly be better, but you're not comfortable trading it.

But also, for example, I've worked with with money managers that have specific um uh rules and requirements because they need to think of how their clients uh think and their main job is to make sure that their clients stay on board, right? So they need to design a strategy uh that makes sure that they can increase their assets under management um and uh and stay in the game base.

Right, okay. So what you're saying then basically is a strategy that aligns more with your beliefs and your your personal preferences is more important than than one that's been uh rigor rigorously back tested. Is that the conclusion there?

Absolutely, yes, I think that's that's absolutely true because I could give um my fifty-five suite of systems to somebody else. and all the rules and they would immediately tweak it. And um interestingly, my my uh seminar uh partner Tom Basso um Uh we spent a complete morning in my office when I lived in Spain. He visited me over there uh with the objective basically to uh compare both our strategies.

And Tom, I mean he's a famous ex hedge fund manager guy, market wizard, of course, so um I kind of knew already how he traded. And um we compared both our stuff and um we came to the conclusion like yeah both things have a phenomenal edge.

But I could not trade Tom's stuff. Tom could not trade my stuff because there's just some core beliefs that are against uh the person if it's not created by yourself it needs to be your own brain child if if you have developed it from the core you know its strengths and its weaknesses then basically it it it helps you to uh to go to the good but also through the bad.

So very often uh when when Tom turns his hatches on on his S P five hundred system, um I get a lot of long orders actually, my meme version system. And that's totally fine. Um it's two complete different styles, but one needs to accept um what you are comfortable with. Mm. Yep. So how do you um

uh manage periods in the market like that because even if you're diversified, sometimes you'll just get days where that diversification doesn't work, right? Or maybe not days, but you know, weeks or whatever. Um do you use hedging or how do you kind of uh approach those times in the market? Yeah, I mean I trade trend following long, trend following short, mean reversion long, mean reversion short. Uh then I've got trend following for uh um uh diversified instruments.

uh commodities, etcetera. Um I have strategies for special situations, for example, when there's V shapes in the market. Uh I try to make my my strategies as as diversified as possible. So even with the trend following strategies. I have trend following strategies that have a twenty five day look back, so you enter very early in the trend. Uh they're not necessarily the best performing strategies as far as compounded annual growth rate.

uh a maximum drawdown, but at the beginning of that trend, you're making a huge amount of money. I also have strategies that use like a 250-day look back. So I really try to spread it around as much as possible. Same with mean reversion strategies, strong pullback, medium-term pullbacks, um uh shallow pullback.

And and making sure that you create as many as possible different return streams because especially with stock trading, there's a lot Of variability in your system because of the corporate risk that you can get with stock trading. Hm yeah. Now I know you um uh you studied a lot of Van Tharp and Van had a concept with

I can't remember that what he called it, but it was like market regimes or market moods or market quality or something like that. And you know he would he would talk about how some strategies work great in specific markets and then typically as the you know the regime changes that's when you get into a drawdown do you use that approach

'Cause fifty five trading strategies is quite a lot. Do you have times when you switch them on and off? No, not at all. Um I just let the markets but uh the specific strategy tell me when it's time to be in. But generally you can expect when you use um I mean I use for some strategies I use a market regime like only trade uh when it's above the two hundred daily moving average for example.

Um but I don't switch strategies off um I think for trend following it doesn't make sense at all because trend following gets switched off already automatically when the market starts to decline. Um I think for mean reversion uh you could do that, for example, or you could Uh find an algorithm to say, okay, if this specific strategy is not performing anymore, I switch it off. But

There's pros and cons to that, and we're we're we're working on that right now to have that back tested as well. But the the moment you add a rule. to say you switch a system off, first of all you add another variable to your set of rules. Secondly, you make a prediction that from that time on, that specific strategy is not going to work anymore.

The indicators are less than random as far as predicting what is going to happen. So A good example is, for example, in in the years 2017, 2018, and 2019, all my day trading systems did not make money. And I had a lot more strategies, so the impact on the account wasn't that big because I had a lot of other stuff that was doing very well. But especially in two nineteen it it definitely lowered the the uh performance uh

Quite a bit, but I looked at the strategies and I said, Well, there's nothing wrong about it. Um, they weren't over optimized or anything. Um, and I I couldn't find a reason. to suspend those systems um except for looking at uh a recency bias. Then so I I continued to trade those strategies, then came two thousand twenty.

Uh COVID made huge amount of money on the downside and on the upside with those uh strategies, and those specific strategies were the best strategies for me in two thousand twenty. So to me it's it's it's um it I think it has pros and cons. I do understand from a psychological standpoint of view that it can be comfortable to switch a strategy off.

In my case, uh trading fifty five uh strategies, I say I don't care at all. And I think for most of of uh people that I work with as well, they end up with quite a lot of strategies as well. Um it it it wouldn't make a lot of difference as long as the strategies are very well uh designed to be different. So you have those different return streams. Yeah.

Um we've got some questions in the chat which we'll we'll get to in a moment, but I just want to dig into a little bit more about so you've mentioned simple strategies a number of times and you're just talking about the design of strategies there. Do you have um some kind of guidelines or rules around um how many perhaps parameters or indicators you might have in a strategy? Um you know, kind of to keep it simple.

Yeah, I'm a I'm a big fan to keeping it very, very simple. So um for stock trading um A long-term trend following strategy, you could have a market filter, you could have one trend filter, and then you have a ranking if there's more setups than your position sizing allows. And then a stop loss and uh a trailing stop. That to me would be ideal. Um so very few parameters. I know a lot of people like as well to have market exits and stuff like that.

uh that could be possible as well. I personally am not a fan of that, but I know people who have and are very successful with it as well. But um if if you go above uh six or something, you really need to ask yourself uh the question why? You know, if you have if you have seven or eight indicators, um, do you have those seven or eight because it improved the back tested return? Or is it because you designed them in such a way that they work? Together.

And if that could be the case, then it could be okay to have more if there is a valid. concept behind it but the worst what you can do is um have two or three in the um um rules basically and let's say that gives you a 20 component in your growth rate and a 40 drawdown And then you're gonna add five more rules to lower that drawdown by another ten percent. To me, that is completely. Curve fitting uh to the past data that you have and um will will decrease the odds.

Of having a robust system in uh in live trading. Uh so it's all about simplicity, but then multiplying simplicity with different systems.

So people um or some traders may think, Wow, fifty five strategies, I could never get to that. That's that seems excessive. How do people go from maybe just one or two up to there? What would you recommend that they do to you know, work their way up to having more strategies. Um I would start to see what you have as far as a style. So if you have um a trend following style No, uh let's go one step back. First, long and short.

Because those two can really offset each other incredibly well. They can hedge the the the the the non performance of the of the long systems. So definitely go long and short. The second step would be diversify in type of strategy, mean reversion and trend following. And then the third step is Um is to really change The rules of every single system as well, with look backs, a 25-day look back for a trend, or a 200-day look back for a trend. It gives a complete different system.

Uh the other thing I would say is that somebody can do a a non correlated uh portfolio to it. So a very diversified portfolio with gold, oil, uh metals, grains, etc., that gives Another level of diversification. It is no guarantee that they will not lose sometimes at the same time. That can definitely happen, but you increase the odds that you have better diversification. So then you already are at like seven or eight strategies.

fairly easy. And one of the reasons is that I move up to so many more strategies is because I want to lower the corporate risk of um the stocks that I'm trading. Um but also it takes the the variability of future returns to a lower level because you've got different very uh different streams of uh returns. Yep.

There were um that are some great tips there, Lawrence. Thank you. And now I'd like to let's go to the chat. We've got a couple of questions about mean reversion in here. So I'll put it up on the screen and let's see. Okay, this first one is from Antonio. Lawrence, how would you describe your version of mean reversion? Do you measure range expansions and do you do live benchmarking?

So my style of mean reversion is is is very simple, like at least the core mean reversion systems that I trade, they look for a trend. Um that could be a a longer term trend or it could be a shorter term trend. Uh generally, I want to trade that on a large basket of stocks that are fairly volatile. Once there's a trend established, then I look for a pullback.

And then the next day I enter the market on a lower price than the previous close. So you're kind of catching a little bit of a falling knife in an uptrend. You then place a large stop loss. And the idea of the yeah. stop loss is uh that it's not really supposed to to hit it, but it's there for an emergency uh stop, but also for position sizing. And then you just look for a profit target.

Look for when it reverts to its mean, which could be a four percent profit, it could be one average to range profit, it could be that the close is above the five day or the four-day simple moving average. Um Uh it could be that uh today is the first day that uh uh the stock closed up and then you close the position. You could add a time based exit To that as well, to say you really want to have a large trade frequency, because since you have a low expectancy,

you want to have a lot of trades. So you don't want to stay too long in a strategy that doesn't make that small return. So that to me is the basic mean reversion. And you can make a lot of variations. No, yeah.

Antonio has a follow-up question here, which is a a good one. We touched on a little bit earlier with mean reversion, the psychological damage. How do you deal with this? When they make it look overextended, then you get in and it defies all logic, keeps pushing and pushing more and more. We've all been there. And and this is something um that um generally speaking, this is a stuff that with mean reversion you do not see that often in your back test.

But you do see it in live trading more. So the first thing is if you have a mean reversion strategy and it tests with a let's say twenty percent compounded annual growth rate and a forty percent drawdown. I would say that's that's probably quite realistic actually, that that actually could happen. So be careful, because if you then start to add all kind of rules, what you're doing is all those big fat tails that moved against you, you're kind of filtering them out.

But that does not guarantee that that doesn't happen in live trade. So um I think first of all is to have clear expectations of what can happen. Um what I do on the short side for uh meme reversion systems, I think many people remember the the meme stocks rally, uh end of two twenty, uh beginning two twenty one.

And uh that was a time where where definitely a lot of meme reversion short systems got got hammered. And when I looked at that, and of course my meme reversion short system suffered there as well. Um that was one of the few times where I added a rule to my system. And uh the rule was I said, I'm not going to trade. a uh a stock that has more than a certain amount of uh huge volatility over the last two days.

Because it means that something weird is going on. If a stock on average moves more than twenty per five twenty-five or thirty percent in a day, then I don't think that a measurement of an RSI is of any use. So that's how you can kind of um uh lower that a little bit, but once in a while with mean reversion strategies, you're just going to get hammered.

Um so make sure it's not your only strategy. Have different ones that will be in different stocks is a lot more important. So when you get hammered on one stock, that the overall impact. is not so big. I think you raised a very good point there, Lawrence, because I think that's a good thing.

Th those occasional losses in mean reversion, if you're not careful, it's very easy to optimize those out or to adjust your filtering so that they're gone. Uh and that's only a small number of instances typically compared to the amount of wins you get because it's a very high win rate type of style trading. So I found um that that was one of the things that caught me out at at the beginning is I was optimizing those occasional large losses out and thought beautiful, look how smooth this line is.

And it was a very different experience in real life trading. So Exactly. And and for example, uh with my with that uh short selling system, that extra rule that I added, um it it decreased my back tested return. On all of my systems, but I felt a lot more confident on having it in my suite of systems because I said this makes perfectly sense. So um sometimes even if you add a rule because it makes

Very good sense. But if it therefore drops your components annual growth rate by three or four percent, but therefore you have less of the fat tail surprises against you, it's well worth it to me. Yep, absolutely. Okay. Uh we've got a question in the chat here about the m uh about your mastery school, so maybe We'll come back to that one in a minute. Uh maybe, um well actually Lawrence, can you share like how can people get in touch with you or learn more from you? Where can they go?

Sure, so they can go to uh trading systems dot com Uh there you will find information as well about my mentoring program. There's some videos in there as well. Uh you could email me or my uh business partner. Alexa at infotradingsystems.com. And uh you can find me on Twitter, of course, or on X now as well at the handle Lawrence Benstore. Yep. Okay. So this person, uh, who is it? Oh, Zoran uh wanted wanted to know more about the course. So d is it best that he contacts you directly?

Probably best, but just go to trading systems dot com. Uh you see an outline over there but in a very small recap because I I don't want to to I'm I'm not here on a podcast to promote uh the programme. I really like to help uh the people who are listening. But it's a four-month program. We do a psychological part, uh, we do three months of development part, there's a position sizing part, and there is a uh going live part.

Uh but there's a lot more involved and uh generally we request uh that you send an application, we look through that and if we think we can help you, then uh we get in contact with you and we schedule a call and and see if there's a fit. Yeah. All right. All right. Thanks for um explaining that, Laurence, and thanks for the um the d the discussion today. It's been really

Great um talking to you and um and I'm sure the audience has appreciated it. So anyone who's watching this live or you're catching the replay, please remember to hit like and subscribe to make sure that you get um notified of any new content that we release. on Better System Trader Channel. Now Lawrence, just to wrap up now, uh any closing thoughts? You've covered a lot of um or you've shared a lot of great uh trading experience and knowledge today. Anything you'd like to wrap up with?

Um, I think the most important thing is that people find a uh style of trading that really suits them. Uh but secondly and probably the most important part um Be aware that your largest drawdown is always in the future. And therefore, try not to shoot for the moon. I've seen too many people blowing up their accounts with a strategy that there was nothing wrong with. um you generally when you trade very aggressive, uh you tend to feel very miserable uh when you're in those huge equity downswings.

So to everybody, I would say um take it easy, um be very careful, be a risk manager first. Um because the whole thing about trading is to stay in the game. If you're able to stay in the game with a mediocre system, that's ten times better with having a too large position sizing of a better system because you will bail out. when it goes against you too much. So whatever you think you can handle as far as volatility and drawdowns, please cut it in half.

Wow. What great advice. I wish I had that twenty years ago. For me, yeah. I learned the hard way and and Lawrence did as well. So take that advice. Thank you very much for sharing that, Lawrence. What a great way to end the show. So thanks for joining us today and thank you everyone for joining us as well. And uh Lawrence, I wish you all the best.

Thank you very much, Andrew. This was very much fun and uh I wish you a great day. It's still early over there in Australia and uh I'm going home now and uh soon it's bedtime already for me. All right, excellent. Well, thank you. Enjoy the rest of your day, what what you've got left and we'll catch you again soon. Cheers. Excellent. You take care. Bye-bye. Bye. 다음 영상에서 만나요. Bellboy from Hotels.com Bellboj, jag har suttit i möten helt.

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