014: Ilan Azbel – Below the Surface of Algorithmic Trading, and Why You Must Understand the Game From a Macro Perspective

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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.

What's going on guys? Hope you're all doing great. I've got an interesting interview lined up for you this week. But first of all, I just want to say real quick a massive thank you to everybody who's left a rating or review in iTunes. We're almost at that hundred point in the US iTunes store, so that's really cool. iTunes is sort of like a numbers game. The more ratings and reviews that I receive, the better the show will rank and the more listeners I can reach. So

Thanks so much to anyone who's already left the review. Also a big thank you to everyone who has been sending in emails. with um some really great feedback and it's also really cool to hear where you guys are all sort of at with your journey. We're all in sort of various states and it's just cool to connect. And also get an awesome response on Twitter so

If you don't follow me on Twitter, the Twitter handle is just at chat with Traders. And yeah, really cool to sort of uh engage with you guys on that side of things as well. So let's talk a little bit about this week's guest. His involvement in trading uh started in his early twenties.

and he's got a background in mathematics and computer programming, so it's really a natural progression that he would adapt a completely algorithmic trading approach. My friends, I would like you to meet Ailan Aisbel, Eilan joins us to discuss algorithmic trading and share some insights on a side of trading that is unfamiliar territory to many, especially in the retail space. While we spoke for close to an hour, in the scheme of things we only just managed to scratch the surface.

But all in all, I think you'll find this really interesting and enough to get you curious and maybe even excited about the possibilities of algorithmic trading. Here is this week's interview with Alan A. Hey Alain, how's it going? Good thank you, Erin. Thank you. How are you? I'm very well. How's your week been? Yeah, it's uh it's been uh Interesting week. mit all der Volatilität in den Markets. Aber gut, ja.

Yeah, very cool. So thanks a lot for coming on. I mean, I know you're you're pretty flat out, um, between your trading and running a hedge fund and your own companies and that sort of thing. So I'm I'm glad you could squeeze it in. So Um, really appreciate you coming on. No, it's it's my it's my pleasure. You're doing some good work, so I I um I'm happy to be involved.

Alright, good stuff. So we've spoken in the past and we discussed some fairly interesting topics, so that's sorta the reason why I was eager to get you on the show um and share with the listeners some of your um insights. So In addition to that, I'm really keen to dig into your knowledge on automated and algorithmic trading as well. But um

Before we do, let's start this off by giving us an overview of who you are, your background, and then lead us into how you got started trading. I guess I started trading when I was pretty pretty young. Uh

around uh in my early twenties, I think I was about twenty three or twenty four years old, uh was, you know, lucky enough to run into a little bit of money. Uh not not crazy, ridiculous money, but a little bit of money. Enough certainly uh you know to give a twenty three year old uh the guts to go to go out and and mess around on the markets. And um and I did that uh for quite a few years actually.

um in on the Johannesburg Stock Exchange. And I built some you know, some of my own uh little tools and and gadgets you know, uh because my background is actually um in computer science and mathematics out of university. And so I used that knowledge to to program a few of my own tools to trade. And then uh you know one thing led led to another and I I

I guess my my life diverged in two different paths. One one is continuing to trade. Another is uh running a you know, a company that that sells certain uh trading software. and and that's pretty much how how my life has been since my early twenties, is is running a company as well as trading uh on my own book. Okay, so what would you say initially sort of sparked your interest in trading?

I I guess I have to say greed. I mean, you know, like any any young guy who's got a lot of uh a lot of zest in him, uh and thinks he can take on the world, uh I think that was that was uh you know, a a big factor in it. it and knowing what I know now about the markets, I I'm not sure whether I would have chosen the same path. Uh I'm glad I did, but certainly uh it's been it's been intellectually um very challenging uh in all respects. Um so

you know, I think I think it's it's a lot of the you know, the the youthful energy uh that got me into it and and a bit of greed, I guess. Yeah, right. So I guess that probably led into your what you called your gambling stage when you first sort of got it s got started. So What were some of your early experiences? It's interesting. You know, people talk about a a gambling stage.

I'm I don't really classify myself as well I never did classify myself as a gambler. Uh I think I was always pretty analytical about the markets. I certainly did learn my lessons uh from a financial perspective, yeah. Uh but I I don't I think I think I didn't do too badly. I approached the market in a you know using my mathematics. and statistical kind of background and and looking at at the numbers.

rather than simply, you know, trading uh trading according to my gut feel. So so I guess I guess my my learning uh uh lesson could have been much worse.

But but I am pretty pretty analytical. I'm really keen to get into that side of of your trading. I'm I'm really eager to get into that. But before we do, what sort of markets are you predominantly sort of trading in at the moment? Right. So I was predominantly trading the Johannesburg.

Exchange. That's obviously as you can hear by my accent from originally from Johannesburg, South Africa. Now I live in the US and I trade um now predominantly uh foreign currencies. I have lost touch a little bit with uh with the the South African stock market, not living in the country anymore. And to be honest with you, I've only been in the US for about two and a half years and I find the markets here a little bit overwhelming.

I think in South Africa there was, you know, twenty or forty stocks that were liquid enough to trade. In in the US there's thousands of stocks that that which are liquid enough to trade and and so I think any trader taking on the stock market in the US has a big job ahead of him.

you know, uh just to to have the computational power. Uh certainly the way I look at the markets, you know, to to have the computational power to find the the opportunities, uh the good opportunities in the market. I mean it's an enormous task.

a and I haven't wrapped my mind around it as yet completely. Um I'm I've kind of set myself a five year goal that within five years, that means in kind of two and a half years or so, I'll start uh trading US markets but but I I'm guessing that it'll only be in in the form of you know trading ETFs or you know some type of index uh derivatives and not actually uh the underlying uh stocks.

Um that's kind of where my thinking is right now. But but but in general right now my exposure is primarily in in foreign currencies. Okay, sure. So what What is it that sort of really attracts you to foreign currencies? I guess there's a there's a number of things that that do. Uh I think firstly uh the the margin levels are very attractive. Uh so for a person that That's analytical in the market like me and is able to write systems which are emotionless. Uh it's quite attractive to

to have those high margin levels obviously'cause you can get a lot of exposure um on the market, uh, with putting uh less capital down. Uh I think many people burn themselves because obviously Uh so if you're trading, you know, uh manually then I think you you're prone to making those kind of errors and and and letting your emotions take hold of you. Uh but I guess I suffer from that to a lesser degree.

because of the way, you know, I trade through an automated fashion. So so that's one thing, I guess, is the margin level. Um obviously the the next thing is obviously the the ex extremely cost effective way of trading. I mean the the the the margins in in the in the FX space are extremely uh so not the margin, the the spread is extremely low. Uh and and you can You're sitting at the level that I'm trading.

Uh it's not small, but certainly even at the amount of capital I'm trading, uh you can get in and out of the market uh pretty much at at any time. Uh there's almost a always a counterparty uh to the trades. So Um

So I think th those two things really really fit in with with my style of trading. Okay, that's great. How much Of your trading is systematic or algorithmic versus discretionary v um screen trading?

algorithmic. In fact not almost it is a hundred percent algorithmic. Um uh but but uh I you know, I do do certain uh manual trades Actually not on my own book, but you know, in in in in the company in in my company where, you know, we have foreign currency income and and so, you know, I have to hedge certain positions against fluctuations in the foreign currency obviously'cause uh in the business you it's

It's not about making money but rather preserving cash flow. So I I I do trade a little bit manually, but it's more kind of um uh longer term uh three month uh hedging positions uh rather than speculative trade. But but all my speculative trades are algorithmic. Okay. Okay, that that makes sense. So

What do you believe are some of the key pros and cons of both approaches? Between algorithmic trading and manual trading, is is that right, Erin? Exactly, yeah. Well uh a big pro obviously for algo trading is is uh is the fact that emotions don't get in the way, right? Uh I think that's that's the big uh that's one of the big uh pros. I guess one of the major cons for me is it takes a long time to see

I guess a return on on on the work that you've done. W if you if you sit in front of a a trading terminal and and just push buy and sell, you're immediately making money or or losing money. So you're in the market, you're active, right? So you're there immediately. Whereas in in uh in uh automated trading uh the the investment comes up front. So you do less thinking while you're actually trading.

but you make an absolutely huge investment uh up front, right? So so you're talking about months and potentially years of of of time invested. before you even see a cent, you know, before you're even opening trades on the market. Uh, you know, mostly it's sitting behind uh back testing engines and uh um

you know, things like that and before you place a single dollar dollar on the market. So so in that in that sense it is pretty frustrating. You know, and even taking a new algo and a new strategy to market really takes a long time. Uh you know, uh if you think about taking All the time that you've spent

uh manually trading and evaluating when to exit, when to enter, if you take all that time and literally shift to the front of your trading process. You know that's how much time you need to invest uh in in building your in building your strategies. And then And then of course the you know, m many people have a you know, um kind of a incorrect perception about algorithmic trading. They think that you you know, you build something and you're done, then you go sit on the beach in the Bahamas.

Right, uh counting your counting the money, but but but in fact that that's not true because any uh knowledgeable trader will tell you that market conditions change. And and uh no strategy, you know, will work for more than three to six months at best, maybe a year at best, certainly in kind of highly volatile markets like the FX market. So so, you know, you're continuously

uh working except it's not real time while you're trading, right? I mean it's not within the trading process, it's outside of the trading process. Uh so it's a different type of investment in time. Um and and I guess and I guess um

I'm not sure if that's a pro or a con, but but you you end up in a in the in the algorithmic trading world, uh there's always work to be done. Um even if there's no trades to be taken because the markets maybe aren't open or the the mar there's low volatility in the markets when you should have

be are kind of avoiding trading. You know, there's always work to be done. There's always new strategies to think about, new indicators, new statistical methods to try and add into your into your um strategies. There's you know, you know, so you can literally roll out a bed.

And and and do work and then roll back into bed, you know, so so it's it it takes a lot of discipline to to run a You know, an in an algo training environment I think it's quite difficult to run a a well a well balanced uh lifestyle.

you know, if you've got kids or family or, you know, whatever it is'cause there's always an excuse to go and work. Yeah, I think you put that really well. That's that's great. So you touched on something interesting there which I was gonna bring up. And um y you know, you you often hear people say the problem with algorithms and systems is they work well in certain market conditions or for a limited amount of time and then they become out of sync with the markets. So

How do you deal with this? Like what's your experience is around this? Um my experience is that I I almost never trade a single type of strategies uh single type of strategy at any one time. Uh so

Uh firstly I like to be in multiple instruments. You'll never find me trading one instrument or two instruments. I'm always in five or six different instruments because um uh I th I think uh although some instruments are h highly correlated, I I think it's you know, there's a higher chance um of of being in it in different market modes um when you're in different instruments right so uh so so so I think that's the one way that I that I uh circumvent the

problem that you're talking about. The second way is that I I trade multiple strategies. So um uh if if you look at my basket of strategies um you know I have I have some uh mean reversion strategies, trend following strategies. um I have um I have only one I guess um kind of I I would call a statistical arbitrage system. Uh but I'm I'm I'm I'm not r really into that because Uh

Uh,'cause I'm not really into high frequency trading, like high frequency like thousands of trades a minute, you know, I'm like not into that kind of stuff. I am obviously an intraday trader. Uh but I think to do real statistical uh arbitrage y you need to be in another market pretty quickly. And that's not really where I am. I guess it's not my style.

Um uh but but I'm running, you know, trend following and and um mean reversion systems uh simultaneously and uh across multiple instruments. Okay. So do you just want to expand a little bit on what you mean by mean reversion there? Uh is described as um an instrument always going back to some type of uh middle ground. Um and and uh so so let's say um

It's really the theory of saying that something I guess in in layman's terms, people call it overbought and oversold, right? So if you think of a share going or uh any financial instrument going uh to an overbought state and then up to an o you know um down to an oversold state. Uh so overbought, oversold, over and then and so um that's what we call mean reversion where it's kind of bouncing between uh these two extremes.

Um and and uh so so that's what we call the mean, right? The mean is somewhere in the middle, right? So so it it goes up too much, then it comes back down. Uh I mean I think I think in kind of simple terms if I Put in simple terms, maybe you know, some of the mean reversion indicators more commonly found in in the kind of the simpler trading consoles are like an RSI or a stochastic.

Right, where you tell where the the the indicator is basically telling you, you know, you've gone up too much, it's time to come down again, or you've gone down too much, it's time to go up again. Uh so so th that's what I mean by by mean reversion. Okay, cool. So do things like news have any sort of impact on how your systems or algorithms operate, or are they strictly just focusing on the price? So so news is

uh in my mind quite a contentious contentious issue. Um th the first thing I have to say is that I I I find obviously be you know, dealing with a lot of retail customers in my trading uh business, in my software business. Um I I hear a lot of people saying, you know, avoid trading the news, avoid trading the news, but but if you if you actually take the the calendar of news events and and actually, you know, plot them on your graph w to see where they actually happen.

You know, I'm I'm I'm pretty confident to say that it's it's almost impossible not to trade news. You're you're consistently trading news, whether it's low impact news or high impact news, there's always something happening in the markets. Um and so And so

You know, people ask do you avoid trading news or do you trade the news? You know, what I what I normally do is I try avoid trading the very high impact uh news events. So I would trade through normal news events, assuming that they're normal market conditions.

And then through like very high impact events I would avoid. Like for example, a few weeks ago, you know, Yellen was speaking or, you know, something like that. Something that would where I know definitively it would significantly move the market. I normally kind of push the big red button, get out the market and and see where it goes. Uh you know, I'm I'm not a I'm not a gambler, I I don't really wanna place a uh you know, red or black kind of a a bet. Um so so um

So I trade news, not specifically news events, but I trade through the news as if it's like normal market conditions, but I avoid the very, very high impactful uh events. Okay, that's great. That um yeah, that's really cool. So

Do you do any backtesting on your algorithms and systems? Because I've I've heard it's often tough to back test these effectively, so how do you manage that? Yes. You I think you hit the nail on the head. I think I think that many people struggle with with effective or with accurate backtesting. Um

You know, I don't I don't really want to advertise any companies or any software specifically in the in this talk. I don't think that's the purpose of this talk. But I think uh certainly um i i i if if we're talking about retail traders, you know, they're they're r really using retail quality software, you know, uh out there.

uh certainly in the FX market uh and some of the equities platforms I've seen as well. Um the the kind of uh um software that that that retail traders use is not used by professionals to backtest. Um professional traders use Backtesting engines that are event driven, um, that are portfolio uh

portfolio backtesting uh that can actually uh simulate uh real spreads in the market for certain uh times of day. Um and so And so I think that people say that it's it's difficult to effectively back test, I think have have um a limited uh view of the kind of high end uh software that's available. So so if you're prepared to spend

uh five thousand dollars a month on on a piece of software like I do, then you certainly can back test very effectively. Um, you know, if you're if you're getting a backtesting engine for free from your Forex broker, then you know, then you have to

you know, you kind of you get what you pay for, right? You get something which is uh mediocre and can only test a limited amount. So, you know, um I've seen some scary stuff in my life. You know, I've seen some some some retail traders um you know, take uh equity curves, put them in Excel, you know, and then try combine equity curves and seeing like

you know, how well the system has performed. Whereas an equity curve is actually meaningless. You know, you you know, real you know, professional traders look at market to market curves. Right, so they can see what their real drawdowns are throughout the history of their system. So not only when they actually kind of open or close the trade, but actually throughout the lifespan of the open trades, open positions. So I think you need a different kind. You know

you know, you can back test easily on, you know, one hourly data or thirty minute data, but when you're really doing uh serious back testing, you know, b when you're ready to launch already, right? Not kind of broad testing, but when you're really doing the final kind of QA on your systems. you know, you're back testing on one minute data or or even tick data. Uh I personally don't really back test on tick data, I don't think it's necessary, but I know guys that do back test on tick data. So

So I think I think it depends on who you're speaking to, you know, that'll that'll tell you how effectively you can. I mean, I guess it's not perfect. uh, you know, to back test us um uh uh but but I think you can you can get ninety five percent of the way there. You know, at the end of the day you have to put your money down and and and run the thing forward, you know. And and when it stops performing, you know, you have to push the big red button and say stop.

Right and and re-look at things. And hopefully by then um you've got some ex some more um strategies in your pocket that you can you can go ahead and and deploy to replace um an older uh model that that's not working that way. Okay, great. So

Recently, um I believe machine learning has been a big thing in the markets. Um do you apply this at all to your trading or what are your views on this? Yeah, it's actually interesting that you asked that. Um You know, I have quite a bit of um well, academic knowledge uh in in machine learning. Uh Um a little bit of practical experience. I wouldn't say I'm an expert, but I know enough to understand what people are saying and to have a meaningful conversation about it.

My view is that of machine learning in general, and please, you know, this is just my personal view, is that I I feel uncomfortable uh with a model in which you uh put something in and you get something out and you don't actually understand what's going on in in in the middle. Um I I have applied uh machine learning concepts uh but using uh st traditional statistical methods. So um what you'll find is that a lot of machine learning um tools you know like uh multilayer perceptrons um

are c are really just classification tools, right? And and there are other ways of of doing classification tools, you know, uh from very simple k means clustering all the way through to, you know, high end uh clustering. So so um uh You know, I I'm I'm not I'm not against it. I just feel a little bit uncomfortable with them uh and I prefer to use the equivalent uh statistical methods uh to do to achieve pretty much the same thing. But then at least I I understand

Um the input, I understand the the processing part of it and I understand the output. Um you know, which is more than what uh machine learning gives me, which is just an input and putting some unknown stuff in the middle. Right, so that's that's really good. So just broadly speaking right now

How would you say the industry has changed over the last ten years as a result of the technology? Like what's the sort of impact that you have felt yourself? Yeah, I mean I think certainly there's a lot of companies out there that are still doing you know a lot of a lot of price up. And I'm not at that level. Certainly, I don't claim to be. I don't think I will ever be.

multi billion dollar funds that that can invest millions of dollars into infrastructure, you know, next to the exchanges. Um I'm not at that level. I think those have been the primary drivers of the large swings in the market. But I think that certainly those kind of uh companies that are investing these massive amounts of money in these um low latency uh trading environments uh actually help. They help in increasing volume, they help in reducing uh costs.

for the brokers because they're seeing a lot more volume. I think in general, um, you know, the the more volume you see on a on a market, uh, the better for everyone because at the end of the day you need a counterparty to your to your trades, right? Um whether you're trading OTC FX

you know, Forex and and the and the and the counterparty is your broker or your broker takes your trade and takes it all the way up to a an ECN or up to a you know a bank liquidity provider. At the end of the day there has to be a counterparty to your trade, right? And so um Um I think the more volume there is, the better for everyone. Uh because the the the spreads reduced, the costs reduced, the the the the entries and exits in and out of the market.

um are are almost instantaneous and at the price you expect them to be, which is a huge thing. You know, if you think about your backtesting question earlier, you know, how do you you know, one of the difficulties in backtesting exchange traded markets is

is like you can easily say, you know, I'm gonna buy a thousand Apple shares but what if at that time there wasn't a thousand Apple shares to to to sell, you know, some no one was selling it. So, you know, a w you know, w when you talk about you know, these these guys that are doing high frequency trading and pushing a lot of volume through the markets, you know, they're they're almost guaranteeing a small or kind of I guess

relatively professional guys like myself they're almost guaranteeing us um a a counterparty and and I think it's making uh trading a lot easier and and a lot more accessible uh for for everybody. So I think it's a great thing. Yeah, that's really interesting.

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Something else I wanted to bring up and because you're so involved in this space of algorithmic trading Do you feel there are certain things that your average retail trader is just really in the dark about? Like things which perhaps impact their day to day trading that they're just oblivious to? Wow. Uh you know, I guess the answer to this question is actually maybe driven by my exposure to retail customers through my software business. Um, I think

Um in general I see a a few characteristics of retail traders. Uh firstly they're lazy. they they don't want to apply themselves. They don't want to apply the time. Uh I mean, um you're applying the time in an interesting way, which is, you know, talking to traders and and finding out what works for them, what doesn't work for them. But I I see so many people, you know, not trying to understand the markets just

Going in there blind and and trading. So I think the first thing is is laziness, which is a huge problem for for retail investors. I think the second thing that that I I see is more fundamental than trade than actual trading technique. don't understand the game. you know, um it's it's almost I almost make the analogy like uh someone inviting you to a

you know, to a to a a game of uh Texas Hold'em, right? But you actually don't know uh whether three of a kind is is better than uh than a royal flush, right? It it comes down to people actually not understanding the rules, not understanding the game. You know, I see people Trading FX that that don't understand what margin means, right? That don't understand what a pip is and how much a pip is worth to them. You know, you can ask them a simple question, you know, like

If a price of Euro dollar goes up by five pips, you know, how much is that worth to you? Like they wouldn't be able to answer that question. And and and You know, and I think I I think if if if retail traders actually just, you know, uh spent the time understanding, but really understanding, I'm not talking about, you know, you know, sitting through some online video where you're, you know, checking your emails, you know, while

you're you know while you're watching the training video. I'm talking about really applying yourself with a piece of paper and a pen and make sure you understand all the concepts. Um you know I think that would that would be an absolutely huge step forward for most retail traders. And and the second thing thing I think people don't spend enough time doing is is actually understanding the

the the dynamics of the market. You know, I see I see people trading, uh, you know, I I mean I'm specifically talking about Forex here, but I'm I see traders trading You know, Euro euro dollar in the afternoon in the US. You know, no one trades Euro dollar in the afternoon in the US. There's no there's no volatility, you know. trade it during the London session or very early in the morning in the US, you know, New York time. It's you know, again, i it it just shows the ignorance of

of people going into a game where they actually don't understand the rules and and the strategy around like certain basic, basic principles. Um So so so so I think that that people really do need to try and understand they need to if they're trading If they're not trading FX, if they're trading futures or they're trading

Uh you know, let's say futures for example, you need to know what a futures closeout means, right? You need to understand what impact that has on you. You can't just trade a futures closeout day the way you would normally trade, you know, a future during any any normal day. And similarly with stocks, you have to understand

you know, the seasonality of the stocks. When are you know when are retail stocks moving a lot, you know, during Christmas time and, you know, shopping periods and so and so there's a lot of uh interesting dynamics that people you know, uh uh just just completely ignore. And I think that's very, very important and and I guess that's you know, I guess makes me think about coming back to the question why why forex at the stage is, you know, is um

is because I I find it manageable, you know. The the five or six pairs that I focus on Uh I understand how they move, I understand the dynamics, I understand the the seasonality, under I understand, you know, the imp the high impact events, I understand all the stuff around the the instrument before I actually go and, you know, start building strategies and and trading the instrument. You know, I just beasts that I'm actually dealing with.

Mm. Yeah, that's that's really good, uh, Alan. So thanks for you know, really expanding on that point.

This kind of brings me to another interesting topic while we're we're we're talking about, you know, retail traders in particular and um something we've spoken about in the past a little bit and you've got some strong views on, and that's um education. So What do you believe are the main flaws and, you know, some of the education and the material that gets taught to new traders?

Well, I think there's there's different levels of education, right? So education like, you know, what does it mean when something moves a basis point? Uh what is the word margin mean? What is pro what is a stop loss? What is a take profit? You know, what is a trailing stop? That is one level of education. That is what we call, you know, what I would call kind of fundamental market education, right? Just understanding the terminology and the basic concepts.

And then yeah, I do have strong views about people that go out and tell you that they're gurus. You know, I hear so many people at at dinner parties, uh, you know, people ask me, Oh, I heard this guy talking on C N B C he sounded like he knew what he was doing and he's so knowledgeable.

I say to this people, you know, man, if that's what you wanna listen to, you can listen to but that guy's a talking head, you know, and and similarly main many educators, you know, are are not real traders. I I think I think there are certain certain educators that are real traders, uh that really actually do

do trade the market and have their own book. Uh you know, when I say their own book, not a written book, I mean like their own book, like their own of funds that they trade, right? Um uh but um But there are many, you know, people out there that are selling selling uh education to traders that is gonna make them into millionaires and and it's you know it's and people just go there with with false hope.

Right. Uh, hoping that they learn some kind of secret in the market. I I I can tell you right now that that if someone had the secret sauce in the market They would not be selling you uh You know, uh a trading a trading course telling you how to trade the market, right? They'd be trading it themselves. That you know uh that's what that

That's how, you know, prop shops work. You know, proprietary trading shops, they have a group of traders who know what they're doing. They're out there trading. They're they're out pounding the markets. They're not they're not out there selling

you know, um educational tools, uh, you know, wasting their time talking to traders because every hour they spend talking to traders and educating someone they're losing out on backtesting. Um so so I you know, I I to I to be you know, I hate to sound like you know All doom and gloom, but...

You know, I am I am pretty skeptical. I mean I know how much time that I've in invested in and into into building algos and building strategies and then Erin, uh even you know before this meet before this conversation I said to you, Whatever you do, don't ask me about what my strategy is because I'm not gonna t gonna tell you, right? So so uh in the same way y you know, that y you can't expect I mean

You know, you can't you you can't expect someone who knows a a good strategy to go out and just tell it t tell it to you, you know, for free. You know, for or a hundred bucks, you know, whatever the the cost the costs you so um you know so uh certainly I hold that kind of stuff very close to my chest and and I expect most Uh most professional traders um

real professional traders also do. They keep it very, very close to themselves. Yeah, that that's really interesting. So in that case, how should someone who is new

avoid the fluff and the nonsense and really equip themselves with a solid knowledge base for their trading career? It's actually a really, really interesting question. But but I I do have a view on on on what you're saying. before you even get into trading, you you need to make a commitment

to learn how to trade, right? If you're not gonna firstly make that commitment to actually say, I'm gonna understand the markets, I'm gonna understand the terminology, I'm gonna understand how things are priced, I'm gonna understand uh the the news events, I'm gonna understand the the seasonality, the volatility. I'm I'm actually gonna understand if you if you are too lazy to do that, then you should not even be pursuing uh um

uh you know, any kind of uh career path in the markets because then what you should do is you just take your ten thousand dollars or a hundred thousand dollars, whatever it is that you're trading and place it with a asset manager or right or someone who can actually trade. So So that's I think the first thing. And I think, you know, from what I've seen in retail traders, I think n ninety percent of people who like to think they're traders should actually, you know, just

you know, take it on the chin, walk away and say, You know what, I'm actually not prepared to put in the time because I have uh, you know, a wife, two babies at home and I you know, I can't spend more than an hour a day trading or learning the market. So you need to you need to

Be realistic and and and and walk away when when it when it's not for you. If however you've made the commitment and you've taken that step to say, you know what, I'm actually gonna commit the next few years of my life to actually learning and to to to understanding, I think The first first first first step before you place a trade is to understand the dynamics. Understand. uh um how things move, to to understand, you know, which instrument moves at what time of day, to understand

from a macroeconomic perspective, what are the drivers of that of that instrument, right? If it's if it's um you know, if you're if you're trading REITs, you know, then you need to look at interest rates. Right. If you're trading FX then you need to look at, you know, uh also interest rate, money flow, a whole bunch of uh other stuff, you know. You you need to try and understand

you know, uh what are the drivers uh that that that or macroeconomic drivers that that are uh influencing the instruments that you're actually gonna trade. Once you once you you know you you got your head around that and it's never an answer, right? But you have to understand you know, the game. Then you can start looking at actually trying to figure out the you know, the what what I would call like the cyclicality of of the instruments you're trading. You know, does it go

You know, s simply put, does it go up five candles and down five candles and up five candles and down five candles? You know, is there any kind of cycles that you can see in the market, right? Are there You know, how how is the market moving? Segment the market by hour of day. You know, many people look at the market in in um in this of continuous line. But but actually, you know, uh let's say let's just talk about FX for now. Discount anything that's out of the way.

out of the London time session. For me it's almost irrelevant what what instrument does outside of the London time session because I know the entire movement of most finan Forex pairs happens during London, right? So I focus on the dynamics during London. If I pollute

pollute my mind and look at uh what euro dollar does, you know, uh uh y you know, at uh the afternoon of the US of New York time, you know, I'm then I'll see like little slow upward movements and I think, Oh wow, it's to trade euro dollar in a trend following manner, you know. Actually, that's complete rubbish, right? Because when it's really moving, it's not moving in a straight line, right? It's moving up and down and up and down. So

You know, maybe I'm kind of giving you how I think about things, but I think about things in in a big picture, you know, macroeconomic, political. You know, then I move down into uh, you know, what are the drivers? You know, then I move even deeper into what is the cyclicality. When does it

the the the the action actually happened on this instrument and then I start building ideas around that. You know, oh I c I can see that there's always, you know, a few ups and then a few downs or, you know, there's this kind of

of pattern or you know whatever it is, then I start formulating in my mind, you know, the the possibilities and I write them down. Many people don't write stuff down. You wouldn't believe that then I write things down and I say, this is what I observed. I look At the same time yesterday, at the same time before that, I you know, I started putting some ideas together.

uh to actually find some some pattern, something that I'm trying gonna exploit in the market, right? And then I start thinking about how to actually build a model around that. And that I think for me is like the last step. The last last last last step is is actually building the building the model. So much you know research has to go into it.

For people who uh You know, sort of in that retail space right now, let's say they've got an interest in algorithmic trading and systematic trading. Is that something they should be considering? They can consider it. I mean m you know, many most people don't have the ability to program.

Um uh but uh but I think uh there's a lot of programmers out there that'll that'll program your idea for you. But I think the problem that that that people face is the fact that they're not willing to spend money on it.

Right. They're actually not willing to learn lessons because if you come up with a model, then the reason why you're getting it automated is so that you can actually test whether the model works over a certain period of time, right? And You people say like, oh, I had this idea for a model and then Uh you know I gave it to a programmer and it didn't work. What a waste of money. I can't believe I just spent like

two thousand dollars or three thousand dollars developing this model. Now I'm so upset, I'm not gonna build a model ever again. I don't want to waste money. I say the opposite to people. I say Well, thank goodness that you spent your two, three thousand dollars building that model because now you've just saved yourself tens of thousands of dollars um of of

you know, in the market, right? Trading that stuff manually. You know, so so I have a different view. I think that that everyone should be automating their trading, even if you decide to execute it manually. You should be going out and spending a few thousand dollars getting a programmer to develop it.

uh back tested for you and showing you that either the thing, yes, this it's feasible, it works, which is great, go ahead and trade the thing, or no, it doesn't work, you know, uh it's it's it's rubbish. In which case you should be delighted that all you did was, you know, pay your pay some school fees to actually learn your lesson. Um so

So, you know, in an ideal world I think every retail trader should actually have a program a buddy that actually you know, that they can communicate and say, Hey, I wanna test when, you know, this moving average crosses that moving average, you know, what happens, you know? And You know, tr try it out, you know, uh um even if it's not detailed backtesting, just in general whether there's even a you know, a vague possibility that there's there's an opportunity to make money using that strategy.

Uh so so I think it's very accessible. I mean you can go to all these well known websites um I don't know, freelancer, O desk, all these different websites that have got outsourced programming. You know, find yourself a programmer, spend the money, spend a few hundred dollars or a few thousand dollars uh, you know, to prove yourself to prove yourself wrong that their that your model doesn't work before you go and lose your cash on the market and get really despondent and walk away.

you know, set yourself a budget, you know, if you have a hundred thousand dollars to spend or to or to to invest in the market. You know, you need to be able to budget, you know, five to ten thousand dollars, you know, to get your to get your model right, you know, in in hard cash because then you'll get the payout in the long term. So I I think everyone should be getting into at least testing their their ideas in an automated fashion. You know, you might decide to execute manually, but

You know, you have to test, test, test, test, test, test. Yeah, that's a really good perspective.

What was some of the things that you first started automating? Yeah, um I first started automating what you read in every technical analysis textbook out there, you know, which is like uh moving averages, RSIs, MACD. you know all that kind of stuff

Um you know, I w I won't tell you what my formula is, but I can tell you that all that stuff is rubbish. You know, it it works for but doesn't work for for for but it's you know, it's it all really depends on what parameter you put into them. Uh You know, um if you want a reason to go long you can put a two hundred

bar moving average. If you want a reason to go short, you take the same price graph and put a five candle moving average, you'll get a short short short signal, you know. So so in terms of, you know, technical indicators, I think

traditional technical indicators I I found them to be yeah, I mean it is a bit extreme for me to say they're rubbish, uh but but yeah, pr pretty much I you know I don't trade any of that stuff. Um um I I I just think people are lying to unless you're prepared to reoptimise, you know, every day, every few days to try and get the parameters to fit exactly the market conditions that that you're in.

Um, you know, so if you're prepared to do that, uh, you know, in terms of optimization, then that's fine. But if you're planning to say, oh, uh 15 or 14 candle RSI works for me.

then I think you're you're lying to yourself and and th and that's what I that's what I kind of the hard lessons that I learnt in you know initially in my in my in my career is is almost having to To to pay to disprove that these technical indicators, you know, uh is certainly even in the medium term or definitely not long term, don't offer or they offer very, very little value. So yeah, that's how it started. Okay, no that that's really interesting. That's that's excellent.

Well this has been um really cool. I mean we've touched on a lot of subjects that I have sort of never really brought up in previous interviews. So before we um let you go, do you wanna share with listeners where they can Perhaps learn more about you and connect? Sure. You can just Google my name on LinkedIn. You can connect and I'm always around. I'm happy to chat. Uh I'll never give you the secret source, but I'm always happy to chat.

Uh yeah, so yeah, just just Google me on on LinkedIn um and I think that's the best way. Well this has been really good, so thanks a lot for coming on and we will touch base soon. Thank you, Erin. Thanks for the time. Welcome to the end of this episode of Chat with Traders, but don't worry, more great episodes are on the way. Leave us a rating and review.