004: Nick Radge – How to Power Through Trading Losses and Continue Executing

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chat for more information. Tasty Trade Inc. is a registered broker dealer and member of Finra, NFA and SIPC. The biggest secret of the best traders in the world is that they're just like everyone else. However, they've worked hard to learn the markets and discover what works and what doesn't. How can you hear about these? Here's your host.

Thanks for listening to the fourth episode of Chat With Traders. I really hope you've enjoyed the first three episodes and ideally learned a few things from the guests that have been on so far. If you haven't, then I think that's all about to change. Today's guest has ridden many waves of the financial markets since placing his first trade in 1985.

With almost thirty years of skin in the game, Nick Raj is here to share some of the crucial lessons that have allowed him to not only survive, but consistently profit along the way. In addition to 30 years of trading, Nick also runs a highly successful stock market advisory service, the Charters. He's also been featured on Michael Coville's trend following podcast, appears on Sky Business Channel once a month, and is the author of not one, not two, but three books.

One of the things I really enjoyed about this interview was how Nick went into great detail about many aspects of trading that are not often discussed. I feel as though there's something in this for traders of all levels. Now before we roll into the interview, please remember to visit ChatwithTraders on iTunes and leave a five star rating and review if you like what you hear.

By doing this, you will help us to reach even more listeners and the support is really encouraging. With that being said, I'm your host Aaron Firefield. This is Chat With Traders and here is today's guest from the Sunshine Coast, Nick Raj. Hey Nick, awesome to have you here. Thanks for coming on the show. Thanks, Aaron. So take us back to where it all started in nineteen eighty five for you. Um how did you first discover the markets and what was it that really appealed to you?

Well, I was an average student in school. I didn't go to university. I really had no idea what I wanted to do when I left school. And um Um a a friend of a friend worked at uh a big stockbroking firm and offered me a job as a clerk there, just pushing paper. I had no interest in the in the stock market or anything like that at the time.

But uh it was a job in the city so I went along and and quite enjoyed it. Um as I said, it was pushing paper, it wasn't anything to do with the markets. But um I had a stroll through the private client desk or private client area of that stockbroking firm and came across a gentleman who had some chart paper. and was drawing some red and blue lines on that chart paper and it just kind of intrigued me.

And I asked him what he was doing and he showed me and basically it was a five and ten day moving average crossover strategy on the share price index futures. And I could just see the trends right there. He was saying when one crosses over you buy and when it crosses back you sell. And you know, back in nineteen eighty five it was a pretty strong bull market, so there was some nice trends showing there.

So by the end of the day I kind of had gone down to the stationery shop and bought my own chart paper and red pen, blue pen, black pen and from that point I just started plotting it.

Um, and I don't know, I don't know what it was, but something just clicked and it made sense. Um, and then uh A few weeks later I went into the old wiley office manager and asked him if I could set up a trading account to trade futures, which was quite stupid in hindsight because back then the spy was a hundred dollars a tick.

Um, and I was only earning about twelve thousand dollars a year. So he kind of frowned a little bit and said, Okay, well, so long as I sign off on each ticket and that's how I started trading. Okay, excellent. So um you're right into it. Um what were some of the early setbacks you encountered? So you were trading um your personal account straight away? You weren't you weren't a at the firm as a trader at any point, were you? No, absolutely not. Um

The they didn't have any tra well, they did have some traders upstairs on the money market desk. Um and that's the paperwork I was pushing their kind of trading activity, but on the floor that I was working on, it was just all brokers. So they had retail brokers and they had um institutional brokers and

Uh I never really had any inspiration to go that way. It was just all kind of happening around me and um it was just interesting. Sure. Okay. So once you did start trading with your your own personal account. How did you go with that? Were you sort of a bit of beginners luck or was there, you know, some early setbacks and expensive learning lessons in there or how'd you go?

Yeah. Well back in nineteen eighty five, you know, it it was very different to what we have today. I mean, obviously we didn't have the internet back then. We We didn't have the myriads of courses and seminars and books and trading magazines and data and software and all the stuff that you have today back then. I remember vividly the only way you could r get a real trading book was

uh request a catalogue from the US which would take three weeks to get to you, then, you know, it was a little black and white catalogue for books and then you'd send one off and six weeks later or eight weeks later a book would turn up in the mail and that was predominantly it back then. So I had no idea what I was doing. I had no money management, no nothing. All I had was a five and ten day moving average crossover.

and a bull market and that's that's where the luck came from. Um I guess my early setback was just when a little bit of greed set in. Um Uh we back in those days you had a two week settlement period. If you bought a share, you didn't have to give anybody any money for two weeks. And of course the share market back then moved a a long way in two weeks. Um So we found a little bit of a loophole, if you like, and started trading in and around

uh this loophole where you didn't have to pay for your shares for two weeks and you know, after you make a little bit of money and you've seem to be making this free money, then you just get bigger and bigger and bigger and of course, you know, then the nineteen eighty seven stock market hit. So I learnt a very, very expensive lesson very, very quickly.

Um but young and stupid and not knowing what I was doing, that's what was to be expected at some stage. So um after that I didn't do any trading for for quite a number of years.

Okay, sure. So what sort of led you back into it, um, you know, after that those few years? Did you go out get an education? W you know, how'd you sort of A's back into it. Well, by that stage I was actually working in the business. So um I started off um in the back office, as I said, but then went down to the trading floor of the Sydney Futures Exchange. and

Down there there was different kinds of traders. You obviously had the scalpers and the day traders. Um and then you also had a lot of institutional traders, bank traders coming in. mainly putting hedges on and that kind of stuff. And then you also had the big funds. Um and back then really it was early days for the hedge fund industry or the CTA industry um as it was back then. And

we used to see their business come into the pit and I was quite intrigued because they were a hundred percent systematic in what they were doing and I'd never been exposed to that before. And that really interested me because they were obviously running computer models. Um and that's where I started doing a lot more work and a lot more research. We had a a gentleman, um, Gordon Manning in our office who had a computer that you were able to back test on.

And I remember going in after work each day and sitting in this room and plugging stuff into this computer and back then you'd push the button and close the door and have to come back in the morning. sort out all the paper'cause it would just spit out paper. and then go through all the back test results. So it was the combination of seeing these big

uh systematic trend followers come into the market and what they were doing and also having access in the office to a computer that you could do some back testing with. And that's how it really got started for me again. Okay, so it sounds like a lot of it was sort of self taught to a certain extent. Absolutely one hundred percent self taught. Yeah. I have no formal qualifications.

um in any way, shape, or form. As I said, I didn't go to university. I've never done any kind of technical analysis um courses or any trading courses or anything like that. A hundred percent self-taught. Um and it's all from being involved in the business both uh personally and professionally and and with a passion. I think that's the key difference right there. I think

uh you've got to have the passion'cause if you have the passion for something you will find a way to make it work. Absolutely. Yeah, no, I I agree with that one. That's that's a really good point you make. So let's sort of talk a little bit about your trading style. You define yourself as a trend following trader. So how how do you describe that? Um and what are some of the benefits of it versus sort of the other sort of trading styles out there? Sure.

The easiest analogy I can come up with for trend following is like being a hitchhiker. and we're not predicting the market, we're not analysing shares, we're not using any fundamentals in any way, shape or form. Uh, at the end of the day, any kind of trading, whether you're a fundamental investor, value investor or whatever the

The profit is made from price movement. Price has to move from A to B in order to generate a profit. That is the bottom line. It doesn't matter how it gets there, what drives it, but in order to turn a profit, price has to move from A to B. So as a trend follower, that's all we're actually interested in, following the trend from prices moving from A to B or B to C, wherever it may be.

And if we use the analogy, I guess, of a hitchhiker, um, let's say you're in Brisbane and we w need to uh hitchhike to Cairns, which is in the north. So The first thing we're going to do is stand on the northbound lanes of the Bruce Highway.

Um for the simple reason that a car that is going to Cairns is more likely to be travelling in the northbound lane than in the southbound lane. So with the stock market what we do is we position ourselves in the right direction of the price movement right there. The next thing with the hitchhiking analogy is that we don't know what car is going to stop, but if we stand

on the side of the road for long enough, we do know a car will eventually stop. And same with the stock market. We don't know what stock is actually going to go up, but we do know somewhere, sometime a stock will be going up. And then once we jump on board that ride, we don't know where it's going to stop. So for example, if we hop on a ride in Brisbane, we don't know if it's gonna stop here in Noosa, we don't know if it's gonna keep going.

To uh Rockhampton, Townsville, or maybe if we're lucky, it'll go all the way to Cairns. And same with the stock market. We don't know how far the share price is going to go, but We will stay on that ride so long as it keeps going in the right direction. And as soon as it turns around, we will hop off. The basic

Um the basic premise of how we make money therefore is that when we get on a ride that lasts a long time, we make a lot of money. And when we get on a ride that doesn't do well, we only lose a small amount of money. So Look, we may only get it right fifty percent of the time, and to the average person that probably doesn't represent a great deal of success, but mathematically

we make a lot more money on those fifty percent that we're right. We might make, you know, three dollars on each one. And when we're wrong, we only lose one dollar. So mathematically, that's how we make money. And in my view that's the easiest concept to understand. It's the easiest way to actually generate money in the markets. Um, psychologically it's a little bit difficult because these rides don't come along every day. Um the stock market especially.

um offers, you know, quite high correlation. So you will have periods of time where lots of stocks are moving very, very well and you make a lot of money. But then there will also be periods of times when the stock market's kind of moving sideways and some of those rides aren't available and that can be very, very frustrating.

But you've got to take both sides of the equation. Um, you know, that's just the way the world works. Absolutely. Yeah, you described that really well. I might just backtrack a little bit there. You mentioned when you trade you only lose a small amount. How do you ensure that is only a small amount? Have you got your stop losses in order before you even enter the market? I mean, how do you determine that you're only going to lose that small amount?

Sure. Well everything we do is planned in advance and that planning comes in the format of some kind of a a formula or mathematical equation. So we might say something very simple that we're gonna buy this stock, let's call it stock XYZ. Um we will follow the ride so long as it moves up. But if it moves down against us by let's call it ten percent, then we will exit that position.

So ten percent loss sounds like a lot on an individual stock, but that's why we buy a portfolio of stocks. So in reality Each time uh we have a loss, it only represents half a percent or maybe even point eight of one percent of loss of our trading capital. So all our losses are very, very small.

But if that stock keeps moving higher, we might make ten percent, twenty, thirty, forty, fifty, sixties. Sometimes, you know, just recently we exited a trade in the Commonwealth Bank where we finished up with an eighty-seven percent profit. So from the amount we win can sometimes be four, five, ten times as much as the risk on the trade. And so long as we keep doing that over the longer term, we'll always be ahead. Of course, yeah. It's um all about winning more than you lose, so

That's right. And the stop loss doesn't have to be anything complex. I think people like making things complex, but it doesn't have to be. The the key trait here is one, to remain invested when the market is going up and revert to cash when it's going down. That's a key component. And second of all

making sure your profits far outweigh your losses over the longer term. And that's that's the bottom line. It doesn't have to really be any more complex than that. Hm. Yeah, I've I've heard you say that trading is really simple. um a few times and sort of different talks you've had and that kind of thing. Um why do you think people do you think that people sometimes um overcomplicate it? Oh definitely. I I think people believe that well, it's not necessarily that they overcomplicate it. Um

I I think that people don't understand that it's not a linear journey. It's not something that's gonna make you money every day, every week, every month, every year. Uh nothing is like that in the world, you know. Uh it doesn't matter if you invest in property, it doesn't matter

Uh, if you're a fundamental or value investor, I mean Warren Buffett does not make money every day, every week, every month. In fact, Warren Buffett does have losing years. And sometimes he has significantly large losing years. It's a fact of life. Yeah. But I think what happens with a lot of people is they

They have some kind of vision of a professional trader makes money every day, every week, every month and every year. Look, I'm sure there are people out there that do that. But by the same token, you can be very successful and you can make a lot of money and become very, very wealthy. Without that, y it's just not necessary. You know, the eighth wonder of the world is compounding. Um and that's how Warren Buffett has become so wealthy, not because he makes a hundred percent returns every year.

You know, his annualized return, well, over the last fifteen years has only been about s eight or nine percent, but over the last forty, fifty years it's been about nineteen percent. Now, for the average man in the street Um, I I guess there's two kinds. You've got the people that think to be successful you've got to be making a hundred percent a year, uh and that's just not true. Uh but they tend to be a lot more impatient and want things quicker. and they tend to be the ones that that fail.

And then you've got the, you know, more mature, being around the block, middle aged kind of people that realise that The secret to success is being there for the long term, not necessarily making a lot of money very, very quickly. Um so patience is very, very difficult for for a lot of people to um to come to. Right, yeah. No that that makes a lot of sense. Um something else I've I've heard you talk about a few times.

um also is um your way of viewing trades as quantitative versus qualitative. Yeah. Do you want to maybe shed a little bit of light on that? Because I thought it was really interesting and th probably something that isn't talked about as much as maybe it probably should be. Sure. Look I I don't know too many people that talk about it at all. Um, I presented this back in two thousand and nine.

um at a conference in Melbourne and uh to me it's it's you know i it's a significant part of of the whole equation. So We've got two sides to trading. The first side we can call quantitative, and these are hard and fast rules. that you will read about in any book, in any seminar that you attend, or anything like that. And it's it probably represents ninety five percent of all material on trading out there. So

As an example, let's use something like um uh don't risk more than two percent of your account. Okay? It's a common rule, fixed fractional position sizing, it's technically known as Everybody talks about it. It's in all the books. It's something that you can actually replicate. Um a moving average crossover, for example, uh would be another quantitative trait. It's something that you can replicate, you can physically see, anybody can do it, anybody has access to it.

So anything you come across in a trading book that you can do would be called a quantitative trait. Okay? And most people believe that's all there is to trading. So uh if we you know, cut profits uh sorry, cut losses, let profits run, buy breakouts, trade a trend, will I be successful. Well, m that is the case from a quantitative perspective, yes. But then we have what's called the qualitative perspective. And this, I believe, is the difference between professional traders

And amateur traders. Qualitative is let's use a uh the analogy of driving or teaching a teenager how to drive a car. Okay, which is something that I've recently been through. So the quantitative sides of teaching a tr a teenager how to drive a car would be put your foot on the brake to stop, put your foot on the accelerator to go forward, turn the wheel to the left to go left, turn the wheel to the right to go right. things that your teenager can physically actually replicate and do.

So that's the quantitative. With the qualitative, it's things like how do you teach a teenager to understand a dangerous situation on the road, okay? As we have experience, we can feel when a situation is dangerous. We can feel that the traffic is getting faster and closer and and whatever. But how do you teach a teenager that when they don't have the experience, they don't have the feel? Um uh how do you teach a teenager that

During wet conditions, it's going to be very slippery, you've got to slow down, you can feel the car sliding if you like. You can feel that situation getting out of control. These are qualitative things. And when we talk about trading, We're talking about how do you teach someone that you've got to have ten losses in a row? You can tell someone you will have ten losses in a row.

But the feeling of having ten losses a row, then getting another signal and thinking, gee, do I take this signal or not? Because I'm not feeling very good about this strategy is a very, very different thing and you cannot teach that. So the qualitative traits are things that you can't really teach.

And these represent the hurdles that most people get stuck on. So for example, most people think trading is linear, i.e. they make money every week, every month, every year, but that's not the case in reality. So even if you have the most profitable trading system, you may still have a losing year. Now It's very difficult to place trades every single day, every single week, every single month for a whole year and have a losing year because you haven't been paid for your efforts.

And but this is what people need to understand will be the case. So the way I get over these kinds of things is that I research how the journey is traveled by many traders before me. So you can access the track records and performance reports of many great traders going back for twenty, thirty, forty years.

And you can have a look at them. Uh there's a gentleman in the US, David Drews. He has been uh trading since nineteen eighty one. Uh he has an annualized return of in excess of I think seventeen percent after performance fees have come out. Now that is an exceptional track record, but you can go back and have a look at his monthly returns.

every single year through to nineteen eighty one and that gives you a good understanding of what he has had to go through in order to achieve that very good return. And I don't think that's what people most people will not do. They don't accept that you can be one of the world's best traders and have a losing year. In fact, someone like David Drews, from memory, I think he's had five or six losing years in his career. Um but people don't view a losing year as a trait of a successful trader.

So as soon as you come to understand that that is actually the reality of it all, then you're in a much better position to be able to deal with those hurdles when they come along. And they will come along. They come along for everybody. So I think people have um the wrong view of the world. Obviously many people have been fed um

incorrect information, but you can go and access the track records of these great traders. Uh even Warren Buffett, you can go back and take a look at his returns, see what he's been through. Let's have a think back to Warren Buffett, the great example in the late nineties, when he rejected investing in tech stocks. Back then everybody said that, you know, he'd lost the plot. Um, you know, uh he he's he's had his day in the sun, it's all over. But at the end of the day

it didn't matter, you know, it didn't affect his long term return. Um so I I think the qualitative traits, things that you can't teach Uh having a losing streak, um, is one thing. Having a losing period of time, placing two hundred orders and not making any money, well, that happens, you know. Mm.

We might try and um find some of those uh track rec track records and um put them in the show notes'cause I think they're quite interesting. Um I've seen like when you actually sort of zoom into a a certain section, as you mentioned, like one year. you can sort of see in the shorter term how it was a losing, yeah, but in overall, um, as the years go by it's, you know, a nice up curve. Um so I think we'll put those in the show notes'cause they're really interesting.

Yeah, I mean a a good example recently I was looking at and w certainly added in there, Campbell Co. is a is a big fund in the US and they manage over two billion dollars. So it it's not small cheese. I mean it's it's big money. Now you know, they they have had a number of years of going sideways, um, but they've been in business since nineteen seventy one. They don't change what they do. um they just accept that that's part of the journey. And I guess if we look at that in in in real life.

Um outside of trading. Let's think of something like airlines. Let's think of something like Qantas. I mean, at the moment I'm pretty sure you can walk down the street and most people would tell you the last thing they want and own and want to own is an airline stock. But we don't see quantus. getting into iron ore mining or we don't see them getting into

um any kind of technology or interbanking or anything different. They're an airline. That's what they do. But they understand that sometimes the airline business uh goes through good periods and bad periods. They don't change what they're doing. Let's you know, Jerry Harvey with Harvey Norman. Retailing goes through good periods and bad periods, but he doesn't change his business model just because of that. We can look back to the GFC and the last thing you wanted to be was a bank.

But they endured, they got through that well most of them did anyway, um and now they're all still six very, very successful companies. They didn't change their business model. So I think what happens when most people come to the trading arena with the qualitative trades, when things get a little bit tough.

they change direction completely and they go for something else. And that uh roundabout, if you like, just going around and around in circles, looking for the Holy Grail, is what actually undoes them in the long term.

Yeah, they get stuck on what you've called the beginner's cycle. Um exactly right. So There must be a point when, you know, you s you talk about riding out these losing streaks. Some people say, you know, you take three or four if you take three or four losing trades, you need to stop, step back, reassess what you're doing and, you know, maybe back test for a while, paper trade, just whatever that might be.

You're sort of saying that you just sort of gotta push on through it, just keep pushing that button and executing. as the opportunities come up, um, is there a point when you sort of gotta step back and say, this isn't working? Um yes. You you've got to firstly and foremost, before you even start trading, is understand why your strategy will make money. Okay, that's the key right there. If you don't know why your strategy is making money, then

You're going to find it very difficult to to keep pushing forward when the time comes. So, for example, let's take a basic trend following strategy. um that trades long only in equities. Okay? So we know that Our mathematical expectancy is creating by writing trends and cutting them, cutting the losses short. So that's how we make money. But we can also know, intuitively know, that sometimes the stock market will go through periods where it's either going down and we may stay in cash.

Or it's trendless and goes sideways and we have a little bit of a whipsaw. Now that's something that's happened in the small ordinaries here in Australia over the last couple of years. The small ordinaries is basically at the same level as it was four or five years ago. So it has been trading sideways. So

There are small windows of time in there. I remember the last quarter of 2010 as an example where in a three month period of time the trend following model made about twenty-four percent return. And for the other eight, nine months of the year it did absolutely nothing. So most people I've come across would be pretty happy for a twenty four percent return, no doubt about that. But

Most people I also come across are not happy sitting there for eight months waiting for that great three month period to come along. So to get back to your question, you have to know why your strategy makes money. That's that's the key. i if you're doing ten different things and y you have no idea why that is making money, then

y you've got to change that, you know, you've got to understand why. And once you understand why your system will make money, then you can start to answer questions as to why it's not doing so well during those periods of time. So Again, I I know why a trend following model in The resource stocks is wouldn't be doing particularly well at the moment because the resource sector is is is underwater and going down. It doesn't mean the model is broken.

It just means that it's out of sync with the market and one day it will come back into sync. So what a lot of amateurs try and do is avoid those periods of time, whereas a professional doesn't avoid them. They accept that that's part of the journey. And rather than avoid those periods of times, what you should do is add a secondary or a third system or strategy to the mix so you have different strategies doing different things that make money in different environments.

Um I I think a lot of people want to avoid the pain completely. I mean I guess that's natural human tendency to avoid the pain, but Rather than avoid the pain, what you should do is keep pushing through and add more strategies to the mix to diversify. Okay, so when you say strategies, um what do you mean by that? Like learning sort of extra bind signals or um looking for different patterns and set ups? Do you wanna just elaborate on that a little bit? Sure. Yeah. So

Uh personally, for example, my core strategy in the Australian share market is the trend following model. Okay, that is my core exposure to the Australian market. It's a breakout model which means we buy strength, sell weakness. Um it has an average holding period of six to eight months and we tend to trade uh small cap stocks outside of the ASX one hundred. So that's that's the basic premise of that model.

Then in the US market, I also run a short term mean reversion strategy. So very different in many aspects. One, it's trading the US market, specifically the S P five hundred stocks, so completely different market. Second of all, it's trading a completely different style. Rather than buying breakouts, it's actually buying dips. So it's buying into weakness rather than breakouts.

It is doing uh a lot more frequent trading. So we do eight hundred to a thousand trades a year in that strategy, which gives us a little bit more consistency rather than the twenty five odd trades in the trend following model. And lastly, the average hold time is only three days. So you're diversifying across different markets, different time frames, different styles, all sorts of different things, and you're getting a completely different return profile.

uh than you would with a trend following model. So rather than and last year is a very good example. So last year I think the trend following model that I've uh that I use in Australia I think had a minus twelve percent year, one of the first losing years we've had since the GFC. Now a lot of people would say, well, that's not good enough, I'll go on to something else.

Whereas that's part and parcel of the journey we're trading. But the US model or our US models uh made anywhere between twenty two and forty five percent return last year. So one model in one market didn't do particularly well, but over the longer term it will be perfectly fine, whereas the other model did exceptionally well. Um, and that's what I'm talking about. I haven't avoided the drawdown. I haven't said trend following doesn't work anymore and I'm not gonna do that.

So it will always work. It has to work. Tr stocks have to trend. They can't not trend. But they can go through these periods of time where we go sideways. So uh rather than avoid that twelve percent negative year um or take an opinion that the next year won't be any good, I stick with it. But I add other models to the mix that will help diversify. Okay, cool. Are you ready to get serious about trading? Then join Tasty Trade, Investopedia's best platform for options trading in twenty twenty six.

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I think we may have already covered this a little bit, but just so we're really clear, I mean, you're in the business of dealing with quite a few novice traders. Where would be one of the key areas you see them slipping up? And what would your advice be to overcome these setbacks? Yeah, it's a great question. Um There's probably a few areas where uh people slip up on. Let me talk about two in particular that don't get spoken about a great deal. First of all, commission drag.

I think that's a very key reason why a lot of people fail. A lot of people come into the stock market, even when they're well capitalized, they b come into the stock market and say, Well, I've never done it before. Um, I'll just start with three thousand dollars or four thousand dollars and see how I go.

Now when you're paying a broker twenty dollars to buy and twenty dollars to sell, it doesn't actually take a huge amount of transactions to chew up your account or a significant amount of your account. I had a gentleman in the office recently And he was the father of a friend of mine and he wanted to buy this whiz bang trading system that was being um uh that was being sold. And I showed him that he needs to make twenty-two percent per annum just to break even.

And the simple reason for that was the quantity of trades that this strategy was doing, the broker that he had to use and the commission drag that the strategy created.

uh he had to make twenty two percent a per annum just to cover those costs. Now, I don't care how good you are, twenty two percent per annum is a big, big ask and if you've never traded before, it's an impossible task. So He had to go away and have a good think about whether he changed broker, which he really didn't have an option, or he included more capital into there so that drag went down.

So I think a lot of people come into the business not understand that these peripheral costs can actually chew up the account significantly and make it almost impossible, mathematically impossible, to be successful. I think the other core trait uh that people uh fail at is they simply don't understand what the journey entails and we've discussed this already to some degree. Um, you know, the journey of trading does entail losing trades.

It does entail periods of time of losing and it may entail having a losing year. It's very, very difficult for the average person to accept that they can place trades for a whole year and have a losing trade. Um or have a losing year. And until they accept that, they're going to find it very, very difficult to to be successful in it.

Um, yeah, sure. I would like a strategy that makes money every day, every week, every month, every year, as anybody would, but it doesn't exist. I'm a realist, I understand that. And as I said earlier on, there might be w a few people out there that do have that, but I don't and you don't need that to be successful.

Um, I think if people take a longer term view of applying the strategy rather than micromanaging a strategy and trying to avoid those bad periods of time when they come along, they'll be a lot more successful. Mm. Okay, that's great. This just made me think of something else. You were talking about commissions there, so some people might be paying twenty dollars in, twenty dollars out. That's a a forty dollar round trip.

If you take a step back, you were talking earlier also about maybe only risking one percent of your account. On a smaller account, say around five thousand dollars, you can't really buy too big of a position with that. The market's got to move quite away just to cover your forty dollar commission. Am I right in saying this?

That's correct. Absolutely correct. Yeah. If you're going to use correct risk management tool such as m fixed fractional position sizing or the one percent or two percent rule.

You know, first of all, you're not going to be able to actually do too many trades. And second of all, your position size is going to be so small that yes, the market has to move a phenomenal distance in order to just cover your costs. So I understand that there are certain people out there that say you can trade with a thousand dollars or you can be successful with a thousand dollars and look, I'm sure there's people out there that have been.

But there's also people out there that win the lottery. But for the very vast majority the chances of success are very, very low to to nothing. So I'm just talking about probability of success. I'm not talking about impossibility. I'm talking about probability. So Trading is difficult enough as it is. And there are certain aspects of successful trading that you can control. And one of those aspects is your commission rate.

You can go and move from a high priced broker to a discount broker. You can do that yourself. Um, it's common sense to to make it as cheap as possible for your own bottom, you know. Uh the second thing is um you can control the amount of capital or you should take responsibility for the amount of capital that you want to put in. If mathematically you start with five thousand dollars and you wanna be a short term trader and you're gonna have to make forty percent return just to break even

Well, that's your responsibility to to remove that. Yeah. You've either got to don't trade wait till you've got more money or put more money in if you can't. So it comes down to the responsibility of the individual to to make that happen. And a lot of people don't. They go, I'll just give it a go and see how I go. And of course they're gonna fail. So Um it's important to make things easier for yourself, those things that you can control, and that way the probability of success will increase.

Okay. Excellent. So just one other thing um I wanted to ask you. Um How do you track your prog your progress? Does it all come down to the value of your account or do you sort of um regularly set goals? Do you document every trade and then sort of reassess afterwards? Um do you have any sort of I personally don't. At the end of the day your account balance is going to tell you how you're going. That's the bottom line.

Uh I've been doing this for almost twenty nine years now. So I get a good understanding of of what the market's doing and why my strategies may be underperforming. Um so long as I understand that I'm not really concerned about what's going on.

Um if I don't understand why a strategy is performing then I will certainly look into it further and research that. And look, we have had those incidences in the past. Um I used to trade a strategy in the Australian market that just seemed to be going nowhere to backwards.

Um, and it just made no sense as to why that was happening. So we researched that and went through uh about four years worth of trades and we found out the problem was the wanted price that we or the price that we wanted to buy or sell at was actually considerably different to the price we actually got filled at in the market. And we calculated that on every single trade we made for that four year period, we paid an extra forty five dollars.

So the bottom line was that slippage was costing us between eleven and fifteen percent per annum. And that comes down to the Australian market just being illiquid, but Y that's why the strategy wasn't working, because Uh the illiquidity was meaning we were paying away in slippage, but consistently. You know, having slippage on one or two trades is fine. Having slippage of forty-five dollars on every single trade you make.

Well, that adds to the bottom line considerably at the end of the year. Absolutely, yeah. No, that definitely soon add up. So yeah, back testing was very important there. Um

All right, so this sort of moves us towards the end of the um interview, so we'll go into the closing bell, which is um a series of just sort of short, sharp questions that we ask um everyone on the show. So What is the best piece of advice you've ever received? Yeah, I I think understanding why your strategy makes money. That's that's key. If you don't know why your strategy makes money So the more you can understand why your strategy makes money.

the better you'll understand the market and why a strategy's not working well during that period of time and that really helps the bottom line success. I think a lot of people just throw good money after bad, just punting around if you like. They don't really have any kind of rhyme or reason or if they think they do, they don't really understand why it's making money. Um I so I I think that's the best piece of advice that I've ever got. Understand why your strategy makes money.

I think that's really important. Very, very, very good. So, next one, why what does a typical day in the life of Nick look like? What does your um daily trading routine look like if you have one? I'm a little bit different I guess to what the model trader would be. Um I'm what's called an end of day trader, which means I download my data at the end of each day.

I run my strategies, place my orders for the next day, and that's pretty well it. I don't sit there and watch prices through the day. I've got better things to do in my life than do that. Um so generally first thing in the morning um we run our US strategies and I place those orders. That's tends to be done by eight, eight A. M. in the morning, eight thirty AM in the morning.

And once that's done I'm I'm done with the US market until the next day. And then after the ASX bell each evening I would um download the data, run our strategies, place those orders, then I'm done. So that's that's pretty well the routine. It's it doesn't take long. Some of our strategies only take five or ten minutes. Um that seems a little bit difficult to understand for some people I understand, but it's taken twenty nine years to get to that point.

Everything we do is predominantly automated now. The computer does most things. We simply put our account balance in the computer. It tells us how many shares to buy, where to buy, where to sell, and uh it can actually place the orders for us. So we've got that routine down pat. Awesome. Good one. So what is the one trading resource you couldn't live without?

I would say the one trading resource that I couldn't live without would be the ability to back test our strategies. I am the kind of person that needs to know What and why the strategy is, how it operates, uh how it's operated in the past. And that will give me a very good understanding of how it's expected to operate in the future. So the software we currently use is Amy Broker. So I think that's a core resource that I couldn't do without.

Very good. What is one book you believe is a must read for any trader just starting out? Um, that's a good question. I think if you're an absolute beginner, um Trading for a Living by Doctor Alexander Elder would be a a very good start as a very basic introductory book. It's an oldie but a goodie. Um I think if you're looking to do any kind of basic trading, that would be a great place to start.

If you're more specific in your needs, for example, that you wanna manage your super fund, be an active investor, well, you know, my book, Unholy Grails, would be a great place to start because it builds a strong foundation. um without going into all sorts of other areas. Um but yeah, those two books would probably be the best. Okay, great. Knowing everything you do now, what would you have done differently come day one again?

Stick to the strategy. Um I look I've fallen in the trap where I warn people today about the exact same thing, you know, the beginner's cycle. It's it happens to everybody. It's happened to me. I've certainly had strategies and then doubted them and then gone off on a tangent and then come back and thought, gosh, why did I go off on that tangent? Why didn't I just do it? So, you know, I think

that you have to find a strategy that suits your personality, understand why that strategy works, and do not deviate from it. Just let it run and let it go. if you find that that strategy has periods of time that make you feel uncomfortable, then rather than deviate from the strategy, add other strategies to it to diversify. So I I think that's the big key, staying with the strategy over the longer term.

Awesome. Awesome. All right, Nick. Next level responses. Thanks so much for giving up your time to share so much value with myself and the listeners. Um before you go, do you wanna tell us the best way we can connect with you and uh then we'll wrap things up? That's great. Thanks Aaron, thanks for having me well. The best place to connect is through our website thechartist.com.au

We're also on Facebook and on Twitter, um thecharters dot com dot AU or y via our book Unholy Grails. All right, thanks Lotnik. We'll put those links in the show show notes below. Great stuff. Thanks for having me, Aaron. You're welcome. You've come to the end of this episode of Chat with Traders, but don't worry, more great episodes are on the way. iTunes. if you leave us a rating and review.