115: Adam Grimes – What Hand Traders Can Learn From System Traders, and Vice Versa

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Ladies and gents, we'll Welcome back to Chatwith Traders Podcast. I'm your host, Aaron Firefield, and on this episode, I invited Adam Grimes on for a second time. He was first on episode twenty-one. You will hear me say episode twenty at the start of the interview, but it is actually episode twenty-one. Um just wanted to add that small correction in there.

Adam's been a trader for more than twenty years, he's traded all major asset classes across various time frames, he's traded independently, he's traded with a prop firm and he's run other trading businesses also. The main focus of this episode was to explore some of the things which discretionary traders can adapt from quantitative traders.

And vice versa, meaning what things can quantitative traders take from traders who rely on discretion. We thought this would be interesting to discuss as Adam himself is someone who sits in the middle of both. Then in the later part of this episode, Adam lays out a really solid framework for traders who are struggling to make progress, which they can follow and begin moving forward. Also the types of questions you should ask when you don't know what you don't know.

Yeah just two things to mention real quick. I'm doing another Chatwith Traders meetup uh taking place in Brisbane on the nineteenth of March. It's free, of course, for all the details and to RSVP. Please go to chatwithraders.com slash Brisbane. Also I asked Adam at the end of this episode if he'd be happy to answer any questions that you might have after listening to this episode.

So if you would like to ask Adam a question, just go to chatwithraders.com slash one one five, scroll to the bottom of the page and type your question in the comments area. Thanks very much guys. Hope you dig the episode. Here is Adam Grimes.

Well, Adam, it's been almost two years since you were first on the podcast here. How have you been? What's been going on? Anything to report? You know, I I can't believe it's been that long. Uh no, you know, I mean things have continued to develop. I'm doing um have several

not work related projects. You know, I'm doing, I think it's important to kind of do some things outside of the markets because we get so tunnel vision. So I have some interesting personal projects. If you want to chat about those, we can. I'm writing a new book. Um just began ru uh beginning of this year after massive planning, but I'm writing a book on the overlap between discretionary trading and systematic trading.

And so, you know, that's that's obviously going to be relevant to what we're doing here. But um no, pretty much business as usual. How have you been? Uh yeah, I've been doing great. I've been doing great. Um, you know, it's it's nice to hear that you've got a new book on the way. Um and that topic is obviously gonna be the main focus for this episode. So I'm pretty excited about that. I think it's gonna be really interesting and really beneficial for a lot of people listening too.

For those who haven't heard our first interview which I'm pretty sure was episode twenty. Just paint the picture a little bit, give us a little bit of background on your trading background. Um, you know, you've been involved in markets for around about twenty years, so just give us a high level overview of that of that time and some of the things you've done. Yeah, sure. So I've I've been very fortunate.

And that I've done a lot. I you know, I've seen markets from a lot of different perspectives. Um, it's more than twenty years. At some point, I guess I'm gonna have to say it's almost twenty-five years, but been doing this two decades plus and I started Literally with no clue and no legitimate hope for success. You know, I was trading very small accounts. massively over leveraged. I didn't even understand the concept of leverage and risk. And I was paying some insane, you know, literally

uh 15, 20 times what you'd pay for a commission today uh for a round turn. It d there's no way I could have been successful. But uh, you know, along the way and with some mentorship and guidance. I kind of figured out which way was up and and which way was down, I guess. And I was um day trading the British pound at the right time and made a little bit of money there and then spent um spent a few. few years, quite a few years actually, day trading the S P five hundred index.

And across I I wanted to get a better education, so you know, I'd I'd been educating myself on these quantitative concepts as as best I could, but I went and did an MBA and did a good deal of PhD coursework with that to understand how people were looking at markets from a quantitative perspective.

Spent a few years on the New York Mercantile Exchange. I've traded for a prop firm in New York. Um, like I said, I've traded for my own account. I put together a commodity pool once I figured things out.

Um and now I am uh managing partner and chief investment officer for Waverly Advisors, where I write daily market research covering pretty much everything. You know, I carry the carry the lessons of active trading and my kind of uh you know, very I guess agnostic maybe and m maybe is a word, but uh, you know, I'm I'm very reluctant to believe in anything and I'm able to carry that from a from an active trading perspective.

into um also to inform people who trade on much longer time frames. So I've yeah, along the way I've traded stocks, currencies, futures, options. uh all time frames from very, very short term scalping to building portfolios for quarters and years. So uh I' ki kind of been around the block a few times.

And I'm not gonna ask you too many more questions about that because we covered a lot of this sort of thing on the first episode. So if anyone wants more context around Adam's background, I suggest go back and listen to episode twenty.

That'll just be chatwithraders.com/slash twenty. So the way you're trading these days, Adam, how would you best describe this? So I would best describe it first of all, it hasn't changed in 10 plus years significantly. Um, it's a I I think most people would say it's a technical perspective. Uh and and it's technical in that I look at only price, I don't look at Economics, you know, economic releases. Uh don't look at fundamentals. Try not to consider um, let's say macro and political factors.

And I'll say try not to, but the other piece of this is that my approach is a blend of heavy quantitative and statistical work. with discretionary. So as soon as I tell you I'm introducing a discretionary input, somebody who is strictly quantitative might say, well, then you don't really fully understand what inputs you're bringing in, which, you know, i I I can't

I can't disagree with that, but uh I believe that my process is very technical, very focused on price action. Uh my trading approach and style is very simple. And that's taken many, many years to to get to that point.

Of course, I started with if uh look at some of my old charts, I had multiple indicators. I was drawing all these levels and trend lines and just really marking the charts up because I thought that's how you learn. You know, you put more stuff on and more things that might have an edge, but Uh over time I've evolved to a style that really is based on just looking to understand momentum. And one of the faces of momentum is volatility.

Or, you know, you b perhaps I have that backwards, but understanding how volatility evolves and basically answering the question of, you know, so a market makes a big move. What do we do? Do we position for another big move in that same direction? Do we look for a reversal? Or in fact, is there no edge? Do we do nothing? That's kind of the core of the technical trading question right there. And that's all I try to do with my trading. Okay. Very good.

Now, this is gonna be the the main focus of the episode. You know, we we had a brief chat beforehand and we're gonna be talking about how you trade. Obviously, you're quite unique in the sense that you kinda sit in the middle of being a discretionary trader and being a quantitative trader. So Usually traders are either one side or the other, but you kind of sit in the middle. So, you know, let me just ask this question. Why do you sit in the middle? Like why are you a hybrid of both sides?

Because that's where I have found the best edge. And that's where I believe over many time frames, objectively, there is the best edge. Um, you know, certainly I think if you're a very high frequency trader, then you're operating at a speed where the human can't really compete. So you certainly can make a case for being purely systematic there. But Uh there is power in human discretion. There it there is legitimacy, I guess might be the word, um, in human intuition.

In this kind of implicit processing and learning that basically you with assuming that you, and this is you know, a major assumption that you can trade with discipline and emotional control. Uh a human acting with some discretion can generally outperform a system.

Okay, so you said that for you you've found that that's where the best edge is. Before we go any further I should probably just get you to clarify or just explain how you think about an edge, like what when you talk about an edge, what does that mean? I know I asked you this uh first time you came on as well, but I think it's really important that we just kind of make things clear.

It is really important. And now somebody can go and put these two sound bites sound by side and see if I say the same thing. I hope I do. So, you know, I I would say the simplest way to understand an edge is w we're gonna do a lot of trades. And so you know, that that's key that we're we're talking over a large sample size. And but by the way, you know, I I try to put things

in what I hope is a simplistic and intuitive framework. So, you know, rather than saying law of large numbers, I'll talk about doing a lot of trades. I'm not trying to talk down to anybody. I just think that this is the best way to understand some of these concepts is to make it as natural as we can. And if you imagine from Those many trades.

You're gonna make two piles of money. You're gonna make the pile of money you win and the pile of money you lose because you absolutely there aren't many things I can tell you with absolute certainty about trading. But one of those things is you're gonna have losing trades. You absolutely are going to have losing trades. And if we are trading with an edge, then

Over the course of many, many trades, that pile of money that we make is bigger than the pile of money that we lose. So that's what an edge looks like in in practice. Now, if we want to drill down a little bit more mathematically, I would say that when we identify an edge in the market.

It and we a we can qualify this, we have to be very careful because there there are a lot of different ways this can look or different things we could do, but it basically means that there's a higher probability of something happening than something else. If we don't know that So imagine there is no edge. Imagine that the academics who tell us that the markets just move randomly are correct. If those people are right. then there is nothing we can do that's going to

make our results anything other than random. Of course we're gonna pay commissions, so you know, th there's gonna be and there are gonna be frictions and financing costs, but I if we don't have any edge, then those two piles of money at the end of the day are basically going to be the same, more or less the same.

Uh so what we're hoping to do is to be able to find a spot where there is a tilt in the probabilities in the future of one thing happening over another. Now, what is one thing over another? Naively, I might say the market might go up or, you know, with a higher probability than it would go down. But In reality, it's a little bit fuzzier because the market or it's it's a little bit more specific because the market

Needs to go up over a certain time period. Uh, we might see one edge if we look out, let's just say two to three days, another a month, another six months. we might see that the edge or lack of edge is different at those different horizons. In fact, we probably would. Um, an edge could also be volatility. You know, we it's very easy to get stuck in the mode where I'm looking for a directional edge. But there certainly are non directional edges. There are points that tell us

When this happens, volatility is likely to be higher or lower over some time window in the future. But the key is that we're just able to identify something in the market that says over a specific period of time in the future. the probabilities are likely to be shifted from 50-50.

So let's drill down into this further. Now we've sorta established exactly what you're referring to when you talk about an edge. What can discretionary traders adapt from quantitative or systematic traders? Well so this is the thing. You know, when w when we had our previous chat and Yeah. And we were talking about how unusual it was to do a blend of quantitative and discretionary trading. I think I came around to, well, in reality, that's what everybody is doing anyway.

You know, you you have the hardcore system people who think we're exercising no discretion at all. Well, that's not true. Because You are exercising discretion at every step. You know, you're what are you researching? Or are using a genetic algorithm and you're You know, you you've specifically decided you're not going to be feeding it things. You're gonna let it find things. Uh how do you determine if the system is quote good enough?

How do you determine when to turn the box on, when to turn it off, what size to trade, uh, when something might be changing and you need to take it out of the market? There are these discretionary decisions that go into purely systematic trading. to answer your question more directly. There nobody seriously trades From a let me figure out how to say this. Every discretionary trader thinks they are doing something that has an edge.

You know, you you may not be doing statistical research. You you may not be able to point to thousands of examples in the past, but you believe when you see this condition set up, you believe that this is more likely to happen in the future. Or you know, perhaps you believe, you know, uh maybe you think you figured out something that the market is missing, but you know, that that's still you think you have figured you have think you have identified a tilt in the probabilities.

And what happens with a discretionary trader, an experienced discretionary trader, is eventually you you get some sense of what works and what doesn't. And that some sense can be your P and L can tell you very clearly, you know, when when I did this, I was losing a lot of money. When I stopped doing that, I lost less money. So, you know, you you've learned something about the market.

And the traders who stay in the market long enough from a purely discretionary standpoint, um, is an awkward way to say it, but the purely discretionary traders who stay in the market long enough, they eventually

do their quantitative statistical work through their own trading, that's what it means to evolve a trading style. Now, if you don't want to just go through the school of hard knocks or you don't have the capital to do it, or you don't have the decades to do it, or, you know, for for whatever reason, if you're looking for, quote, a smarter way or another way, well, then you can do research. And you don't have to learn that that thing that I do, you know, so every day a stock goes up five percent.

That's my system. I run in and I buy it the next day. And gosh, I lose a lot of money on that. Well, you you could discover that through research too, right? You know, you you could do a little bit of quantitative research. And see, okay, so I was actually trading against the probabilities there. Um you also what other The the other thing is a question of mindset.

You know, a lot of discretionary traders, you know, I think we all have had the discussions with people in bars who are telling you how smart they are and how they figured this out and they just bought a boatload of you know, uh horrendously out of the money options on something'cause they figured something you know, they they think they've solved the puzzle.

And it it's a lot about Uh you know, th this certain arrogance, you know, and we're all guilty of it, but this certain analytical arrogance and I think another powerful message of discretionary trader can take from the quantitative realm is this idea of scientific method, or at least, you know, if not scientific method, then at least scientific approach or framework.

B and what I s what I mean by that is that we ask questions of the market, we come up with ideas, and then we go to the data. So we you know, I mean it seems like a pretty simple process, right? You say, does this happen?

And then how do you answer it? Well, y you can just go to the data and look and find the patterns. And that idea Uh tying your trading to the underlying, you know, I would say the underlying truths if you want to get philosophical, but the way the market moves, um that idea is powerful and applies to

Everybody, no matter how you're trading. Okay, so let's pick up on that last point you made there. So you said You kind of described it I think as a scientific framework. So you said there's questions, you you go to the data and you find your answers. How can a discretionary trader do this sort of thing where they ask questions and then they go to the data uh for those answers? Usually to get those answers you need some sort of programming capabilities.

I presume that most discretionary traders are not really interested in learning how to program. So How can they do this? Like, is there a workaround? Is there some other solution? Yeah. before I answer that question, just the idea of understanding that this is what we are going to do. You know, th th this is a significant shift

you know, a lot with a lot of the traders I work with one on one, j just the idea of saying, Okay, we're we're going to go to the data and we're going to see what the data says. One of my uh Well, what one of my professors I did a lot of my coursework with had a very gentle way of saying, you know, we we would talk through concepts.

financial concepts, what we thought would happen in the market. And then he would say, let's ask the data. So having that framework, that mindset, that's what we're doing. We're going to ask the data. That alone is a powerful shift of perspective. Now, how do you do that? Well

So I think hidden in your question is a misconception that I had when I started doing this work. I thought, and I think a lot of people share this misconception, this idea that Quantitative analysis is so deep, is so complicated and so confusing that it's something that, gosh, I c I couldn't possibly do this.

because I'm not smart enough, I don't have the time, I don't have the desire to, you know, whatever, we can keep listing reasons. Uh that that's what a lot of people think. But in reality, All you are doing is coming up with a set of conditions. And then going back and seeing what happens, what has happened historically. And, you know, granted, I'm I'm simplifying a little bit here, but I would also argue at its core the discipline is quite simple.

That that's what we're doing. You could do this with nothing more. First of all, there's a lot of free data out there. So you could do this with nothing more than a free data chart. and a pad of paper. Just, you know, let's say your idea is I want to buy um uh what happens if I buy stock after they go up three days in a row. So you could potentially go back and open a completely free chart.

And you could just very carefully visually look and see, okay, three days up. And then you could record the price and you could record the price, you know, I I don't know, five days later, so something like that. You you obviously you you need to figure out how exactly you're going to ask the question, but The the point is to do this analysis at the beginning requires nothing more advanced than access to data and a pencil and paper.

Now what's the problem with that? It's slow and cumbersome and prone to mistakes. You you certainly you you you may see something that looks like three days up, you may miss it. Uh, you may you may you so that there are a lot of things that we can do wrong when we're doing this kind of intuitive. Oh, intuitive's not the word. We're doing this kind of manual work.

Which by the way, I think is important to do this manual work. If you are, even if you are a heavily quantitative character, it still makes sense. to spend a little bit of time getting your hands dirty in the data and just seeing, manipulating, touching the data on a very elemental level. So what's the next step for the discretionary trader? Well the next step is Microsoft Excel or some other spreadsheet program where Honestly, you know, like

I think uh my mother whose computer skill is pretty much equal to Gmail and Facebook, I could probably teach her in a week to do basic market analysis in Excel. Like anybody can learn to do it. If you if you have the passion and the desire to learn to do it You can spend a few hours and what once you figure out how to Google the questions you have.

You can get data in a spreadsheet and you could even then just work manually in that spreadsheet. You could, you know, you create some you know how it works. You create some formulas, but this is you don't have to You you you don't have to write a big framework and C or Python and pull in hundreds of thousands of data points of tick data. You could do this very nicely with a daily chart.

and a relatively simple spreadsheet program. So to the people who are, you know, kind of thinking, oh gosh, I could never do this, I would counter you absolutely can do it. It's it's not nearly as hard as you think it might be.

Okay. Now I think a good question for me to ask at this point is, you know, for someone very new to this sort of way of approaching things. What might be some good questions to ask? Like you gave there the the example of, you know, three days up in a row, what happens after that? What are maybe some other things that that people could experiment with? Um, because, you know, a lot of discretionary traders are trading like chart patterns, for example. So they might be trading double top.

Or that sort of thing. That thing's quite difficult to sort of quantify in many ways. So What is what are some other good questions that they could ask and and how do they sort of deal with that issue that that some of the things that they do trade are a little bit difficult to actually quantify, like write down on paper? Well, so now we're going a little bit deeper. Now we're now we're going to the next level and

Uh here we touch the real problem with any we're talking about some kind of backtesting. The the real problem with any kind of back testing is that we are we don't need to just understand what pattern has been there in the past. That's relatively easy to do. The question is Is it reproducible in the future and is it likely to persist in the future? And that's

You know, I think a lot of people get stuck with market statistics. Like you, you know, the people that just spew tons of market statistics. Of course, you can calculate anything. But the real question is, is this likely to be meaningful? Is it something that's likely to say something about the market in the future? So why why that little diversion? Well, for instance, uh, you could have

You there there's no reason why you could not test your complicated chart pattern. And you know, I I'll come back around. I I don't think this is a great idea, but you you could test your complicated chart pattern just by looking at charts historically. And a lot of people do this. You know, you could let's just say head and shoulders since everybody else in the world loves that. Uh, you know, you could say what happens after a head and shoulders pattern, and you could apply this.

sort of scientific approach. And as you said, you need to define the pattern somehow. You need to say, okay, this is a head and shoulders. This is not. And if you think you just have the skill of picking it out on the chart. Oh you know, o uh I l let's live with that for now. I'm then I'm gonna make it a little bit difficult a little bit more difficult in a moment. But if if you think you can identify the chart in the past, then you can structure the question. Okay, so what happens

one week, one month. Yeah, again, I d I don't know. w how exactly how you want to ask the question, but what happens after the head and shoulders pattern occurs. And then you could answer that again with our piece of paper or spreadsheet. Now, of course, with the pattern recognition, the problem is that what we can identify in the middle of the chart is very different than what we can identify at the right edge.

which we can easily see patterns in the middle that we can't really see forming in real time. So how how do we challenge the person who thinks he can identify a head and shoulders pattern reliably? The answer is to take some kind of system, and there are many, many systems that will do this. Where you can page through one bar at a time, or even have, you know, many platforms will play the market back as as the action forms. And then you can do the same thing. So you are

You're exercising discretionary pattern recognition and pattern reading, but you're no longer doing it in the middle of the chart, which is so artificial. You're now doing it one bar at a time. And just, you know, to be clear, th the the way I would do this is you'd watch your market.

And you say, oh, here's my head and shoulders on this bar. You know, the the because you you have to have a point where you're going to execute. So it can't be fuzzy, maybe, maybe not. You have to have a point where you say, okay, I would do this trade on this bar, and then you track what happens. Uh I would also be a little bit careful. You probably don't want to, you know, as soon as I say that, you probably will tend to go into

a system trading. Okay, so I would buy here, my stop would be here, my target if I have one is here. Uh once the trade develops, I'm going to move the stop like this, or I'm not going to move the stop. Here's the size I'm going to add if it goes down here. You know, there are all of these other questions. And a as soon as I as soon as I start talking about these questions, if you were mapping out the possibilities, you see this just blossomed into some very complicated

Convoluted branch. You know, like like now I'm no longer asking the simple question, what happens after my head and shoulders pattern? Which is not such a simple question, but Now I've added all of these other things and assumptions. And if we change one of those assumptions, my stop is here instead of here, then we get a different answer. So you create thousands of possible answers. I would not do that. I would focus when you're trying to understand the market movement

just very simply on what the market does. So, you know, j just looking at returns. Which the word return just means a percent change. Sometimes people are like, oh, you know, when you talk about market returns, what does it mean? It's just a fancy way to say percent change, how much the market moves. But you would be looking at returns over different time horizons just so you understand how the pattern moves. And the person who You you need a fairly large sample size, this type of work. Um

Well let's just say it like it is. You know how it's kind of if you're a numbers nerd like I am, this is o it's fun to do this for a while. But it does get tedious. It gets difficult, it sucks because You're just looking at a lot of patterns and writing down a lot of numbers. Uh it take it takes a lot of time. But the this is the you want to trade, right? And we know trading isn't easy and you don't expect I hope.

to just go buy some$499 system and have all of the answers. It doesn't work like that. It can't work like that. So this is part, this is one way. It's certainly not the only way, but it's one way you could start to understand and learn how the market moves. And so the person who first identifies the head and shoulders patterns in the middle of the market. should then do the same thing at the right edge. And ideally she would do this with a different data set.

You know, it's uh I I don't want you really pulling these patterns out of the middle and then just playing the same data back one bar at a time because you've you you've learned basically and and you're whether you realize it or not, you're you're going to remember and you're gonna make some decisions. So it should be a clean data set.

This is not even really possible, but that I mean that's quite a deep quantitative question, but uh you know, because things are so tightly correlated in so many ways. But you know, uh ideally what I would like to see if we can deal with these issues. is that the data set where you pick them out. at the right edge looks something like when you pick them out in the middle. And both of those show a similar edge.

That would be verification to me that from a subjective standpoint, you can identify the patterns. We're not ready to trade yet. Then we need to work on bridging this gap into actual trading, probably with some forward testing, some very small trading, and then we're then we're off to the races. But that's one way to do it. Now As I said, I think that approach has a lot of moving parts. I think, you know, identifying the pattern is not trivial. So perhaps

The you're and you're right, the the beginning trader does not know what questions to ask. And I would start by asking questions that You know, a as you do this, don't don't be afraid of asking stupid questions because as you learn Hope we hope you're gonna be able to look back a few weeks, a few months.

certainly a few years from now, and you're that there's an Einstein quote, right, that he would say s to paraphrase, he says something like his best hope for the future of humanity is that humanity would look back on people in the middle of the twentieth century with uh pity. W with a gentle pity. And that's that, you know, meaning of course that people have progressed past so many things we struggle with. Hope that that's your hope as a trader.

that you look back at yourself today from the vantage point of the future and you sort oh, you know, I was asking such cute and wrong headed questions because I've learned more of the right kinds of questions to ask. So At the beginning, it's just a matter of understanding the methodology. You can you can ask something like, uh, you know, i i is there any edge to trade to to buying today if the close is above yesterday's high. You can look at very simple

relationships of bars. We have an entirely other layer of information. There are all these indicators. and moving averages and things that we can start to add and you know people can do a lot of things around there, but I probably would start with price in a more, you know, uh at least at the beginning with a more pure view on price. Because if you just start trading or you start analyzing, say, an RSI or something without really understanding what it might be telling you about price.

I think you're probably missing a few steps. So short answer is I would you can ask whatever questions you want, uh start with very simple. simple questions and the answers to your questions will probably provoke new questions. Also, uh let me amend one of my previous answers. You asked what could uh what could discretionary traders learn from quantitative traders? Well Most quantitative systems fall in a fairly

small area. You know, but basically there are there are things that people do pretty consistently and they do it in different ways, whether they're trading mean reversion or momentum, whether, you know, they're trading on different timeframes. Uh so the discretionary trader if if he was interested, could read some of the

quantitative books and research and you know, he can skip over the code and the more mathy parts, if you will. Uh I don't think I've ever said that word. The the the more mathy parts and can just look to understand What so, you know, w w when they're w when they're doing this mean reverting system

What element are they queuing into? And you know, so how what what what does this quantitative approach say about the truth of how price moves? So I think it's also possible that a discretionary trader May get some ideas for the right questions to ask from looking at other people's work and reading some other research. Are you ready to get serious about trading? Then join Tasty Trade, Investopedia's best platform for options trading in 2026.

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Now just going back to your answer there, you you briefly mentioned it. You mentioned like what sort of answers you're actually looking for. So we've discussed quite heavily what sort of questions might be uh good questions to ask in in the initial stages.

When you're asking these questions, what are the answers that you're actually hoping to get for? Like when you write down on paper, you said there, you know, the returns. When you talk about returns, there's obviously some time factor involved as well. So What sort of things after you ask these questions should you have written down on your paper or typed up on your computer or however you're doing this analysis? But What do those answers actually look like? Does that make sense?

It does, but no, it it does make sense. And I know because of the work that you've done, I know that you're actually hiding a very deep question. And you know you're hiding a very deep question here. Uh so th the answer depends on on what time frame and what type of question you're asking. If we are let let's take the simplest example. Uh if we're looking at say very short term intraday system, Then really we just kind of hope

that the market goes up after our lawn signals and goes down after our sell signals. And we do need to make sure that we look at enough different market environments. You know, it would be naive if I l let's say I create a day trading system and I happen to test it over two weeks of data, which is not nearly enough. And I tested on two weeks in which the market just went up, up, up every day abnormally. And I look at my results and I say, oh gosh, look, look how good the buy signals do here.

Uh sell signals don't work so well. So I found a good buy signal. I'm just gonna trade that. I'm done. Well That's not gonna work. You know that. So uh what we need to do is to somehow adjust for the baseline, uh you know what I would call the baseline, which basically is What happens if we don't do anything to the market? And maybe the easiest way to understand this is to leave the day trading realm and go to, let's say, a longer-term technical system for stocks.

So let's say you're looking, let's say you develop a system, just keep it simple, where you buy stocks and b based on some set of criteria, and you know, this is a rule set that we can test. And our exit is we're just getting out one year later. So if we run this system, let's say, let's say you run this system and you come to me and say, Adam, I'm so excited. I found the system and it makes me 5% a year.

And I was okay, great. So now let me ask you another question. What would happen if you just did buy and hold? And chances are you would go away with that data set and you'd come back and you'd say, Well, Crap. If I did buy and hold, I'd probably make seven or eight percent a year. And all of a sudden your system that made five percent a year doesn't look so good.

So and it the reason th this is much more obvious at these longer term time horizons where, you know, particularly in stocks over a long period of time, we have an upward drift. And the intuition here. is that if I can make seven percent with buy and hold, I just simply have to do two transactions to access that.

Yeah, you know, i i in the most simple and uh I have I pay no commissions outside of that. It takes also none of my time, none of my research. It's a very simple thing to do. So if I'm going to actively trade,

then I need to be paid for I deserve to be paid for my efforts, to be paid for my time and paid for my risk of being in and out of the market. And I'm gonna be incurring frictions, transaction costs. And so I have to With m you're, you know, if you came back and said, Oh, you know, so the baseline drift, the buy and hold return is seven percent. And here I found a system that makes on average 12% a year. Okay, now maybe we have something to talk about.

Um, by the way, interesting aside, it's very, very common in this situation that you might come to me and you might say, I found a valid sell signal that only loses 1% a year. Meaning that if you were short the stocks, they only went up one percent when everything else went up seven percent. Uh and I'm I'm using very made up round numbers here, but the so and this gets us into statistical significance.

So there are two kinds of significance there at least, right? There's statistical significance. And what this means, and you know, there's no way really to answer this question without doing a little bit of math. And the math is d depending on your quantitative background, uh, the math is either trivial or not completely intuitive. But the you know, the basic idea with significance testing is you wanna look at the difference between two things and you wanna say, well, how likely is it that

I just got lucky, or that they're really different. In other words, you know, another way to think about it is how big is the effect? And the effect would be your So you're let's go with our head and shoulders pattern. That, you know, we think when we have the head and shoulders, it does this to the market. And if I just did buy and hold, I would have done this. So how big is the difference between those two sets?

And how variable, how much noise, uh, you know, I try to avoid using words like standard deviation, but how how much variability is there in the data? So how likely is it that there's an actual difference? There there are ways that that's a pretty complicated question, but there are well-established ways. And again, you know, anybody with high school math and the desire to learn can absolutely learn that. And many of you had this in school. So as I said, it's trivial. Um

However, there's still the question of economic significance. It is very possible to find things that uh that short situation where I've seen many, many short signals which are statistically significant. but they still lose money because you would have been short in a rising market.

your rising market would have just um on average a rising market. Your your your stocks would have gone up a lot less than the baseline, but they still would have gone up, meaning if you were short, you would have lost money. That is statistically significant.

But it's obviously not something we're probably interested in trading as an outright. Perhaps we, you know, there could be reasons we might be interested in trading it on relative value. It could have some attractive volatility. You know, there could be reasons we would look at it.

But as a standalone, that's not an attractive system. It's a losing system. Uh there are also day traders will, you know, like one of the famous problems of day traders is it's very easy to find systems that do have an edge. But the edge does not cover your transaction costs or it doesn't cover your transaction costs with any leeway. So you know you're

And you f you potentially can trade something like that, but it's just a very, very thin tightrope. Um also, you know, as an aside, be careful if you're doing day trading systems that uh you you're accounting for the bid ask spread because a lot of things that look

like edges are really just uh, you know, bounces bounces between the bid and ask and there's something you could not execute at all. So that's i i i if what I just said went completely over your head, don't worry about it. But if if you are doing day trading research, That's certainly something to be very aware of.

Now, Adam, I might be jumping around a little bit here, but I think we both know that there are some discretionary traders that the strategies that they trade If we were to do some like various forms of quantitative analysis on their actual strategies, they wouldn't actually hold up. Yet those traders do still tend to make money. Is that problematic in any way?

The way I interpret that is that the edge really lies within the trader. Well, I mean, it depends what you're trying to do. It's a and I would argue the edge does lie within the trader. I think that's legitimate. I think you are correct. Um and I think there certainly are traders who trade very, very well like that. I think anybody Anybody trading, you know, with with a discretionary input, you are part of the edge. So what are the drawbacks? Well, one of the drawbacks is

And you know, this is something that's happened traditionally. There have been many, many successful traders who cannot teach. And many, many successful traders who They don't understand why they make money. You know, let me give you a completely absurd example. But, you know, there were traders back in the back in the days of the pit, there were traders who had lucky ties.

And they wore these ties for years and years, even after they shredded and started falling apart. So they're just wearing some little stub of a tie. And it becomes this superstitious thing. Now the guy probably knows if you if you if you really sat down and had a heart to heart. He probably knows that his uh you know his his training prowess is not tied to the magic tie, but th there uh you you you can just take that a few steps.

And you can see there are people who are using things that don't have an edge. that yet they can make money, but they don't understand why they make money. So they think it's because of the magic moving average or the magic indicator or the magic news stores, you know, what whatever, what it was squawk box, whatever they're listening to. and they have some skill that they don't understand. This is impossible. And by the way, we s we you see the same thing. Trading is not

unique. Uh you you see the same thing in in music. Uh I've I was a professional musician before I was a trader. We didn't talk about that background, but you certainly see many musicians. who can't teach simply because they don't understand how they do or why they do what how why they're able to do what they do. Uh so th w they they might teach in all sincerity, they might really care, they might be the most engaged teacher in the world, but if they don't have the tools to truly understand

how they do what they do, they can't teach it, they can't transmit it. And that certainly has been an issue with trading. Uh one of the other issues, one of the, you know, you just asked me a broad question, is it problematic? It's problematic because if you are the part, if you are part of your edge, then anything that happens. to you can't affect the edge.

You know, some of the traditional things if a trader runs into financial trouble, let's say a real estate problem or a tax problem or an illness in the family or they're going through a divorce. Traders will typically lose money through those times. And the reason perhaps is because they're emotional

element, you know, their emotional makeup is so compromised that they're not able to apply this powerful discretionary analysis that they've learned to do over the years. And so they lose their ability to read the market. If you if if you are part of your edge, then perhaps your edge is a little bit more vulnerable. Now, you know, so th this is one of the arguments.

for trading in a more systematic approach. But I, you know, I I I think it's important to be aware that this is this is a potential problem, but it is n it does not necessarily invalidate the discretionary approach. It's just something to be aware of.

Let's switch tables now. Um You know, the question I asked you earlier, what can discretionary traders uh adapt from quantitative traders? You know, I think we've spent a bit of time on this. Let's turn things around. So what In your opinion, can quantitative traders or or systematic traders, call them what you will, um, adapt from discretionary traders?

Well, it depends on what kind of quantitative trader you are. There certainly are quantitative traders who uh who trade the types of systems that should remain purely

purely, I mean, whatever word you want to apply, algorithmic, I guess, purely rules-based, and they exercise no discretion in the execution. Um those traders certainly exist. I would, however, say that Uh some of those traders probably should be a little bit more open to the I hesitate to use the word creative, but uh let's go ahead and use the word creative to to the creative aspect of doing research because as a quantitative trader, you're going to need to generate and refine ideas.

And as you monitor your system performance, you're gonna find the edges come and go and things will need to be tweaked. I shouldn't say absolutely, but almost certainly you're gonna find this. And so I think being open to Some of the quantitative people I have known have been quantitative to, let's say, almost to a fault.

They're very rigid. They think there's only a, you know, very numerical way to see things. And I think some of these people could probably open themselves to insight. Maybe that's the phrase. Uh and uh what does that look like? Well, you know, I mean, as a former composer of music, w I can talk a lot about creativity and how you take ideas and churn ideas and look at ideas in different ways, but

You know, I think at at least that person should try to find some new ways to look at the data. And it it could literally be as simple as if you normally sit at your desk. than uh, you know, take a printout out and go and go for a walk and be careful crossing the street. You know, but just just somehow shift your work environment. enough that you look at things differently. Um have some specific brainstorming sessions, be very, very, very sensitive. to the message of subconscious intuition.

If you find yourself dreaming about something or thinking about something or obsessing about some small element, uh, you know, go into it deeper. Uh, you know, perhaps consider I'm a big believer And doing different kinds of meditation and breath work and things like that. Uh, you know, there certainly is uh there there certainly is plenty of room for that, different ways to open yourself to different kinds of intuition and insight. And I think i if nothing else.

the very strict and you know uh not to pick on engineers, but a lot of these people come from engineering backgrounds. Uh a lot of these people in my experience could benefit from a just uh you know uh a different perspective. And I mean that in in the most literal sense. Lo just looking at the data a different way from a different angle, just a different perspective. Right. And

I'm not sure how to best ask this question, but I feel as though I feel as though discretionary trading probably plays a lot more on human behaviour in markets, uh more so than Quantitative trade. Maybe that's not a fair comment to make, but I think you kind of know where I'm going with this. Like, how do you factor in human behaviour into like quantitative analysis?

Well, you have you personally have done some system development, I know, and I would argue the patterns you look at, the patterns the market generates are Always you you've done it already, whether you realize it or not. The patterns you have analyzed are shaped by human behavior because this is that this is what moves prices. The, you know, the reality is we might wish we lived in a sterile academic white lab coat environment.

Where, you know, consider the efficient market perspective. The market generates data or, you know, peep the ja data is generated. It comes into the market. It's immediately and correctly processed and people immediately make the correct decisions and execute those decisions with no time lag.

The world doesn't work like that and we know that. So what what is far what is far more likely to happen is that every decision made in the market, includ because we're human, includes both an element of analysis. and an element of emotion.

And there are times when these play, you know, there are times when I would say markets are very rational. There are times when I would say markets are very emotional. And if you have identified a pattern, because it's you know, for as a quantitative trader, that's what you do. you identify a pattern and then, you know, you're you're very familiar with the process I out with the process I outlined earlier.

where you look to understand what happens after that pattern. That pattern and what happens after that pattern is shaped by human emotion. And then, you know, so you might ask the the question, the next step removed, well, you know, what if everybody starts to trade more algorithmically? What if the market becomes more and more algorithmic? Well, those algorithms still encode human behavior in the rule set of the algorithms. So there's still human emotion and behavior and there's still

you know, in the limit, there's still people turning off boxes when things get really crazy or there, you know, there's still when markets go outside parameters, the way things trade change. So there are um You know, th th th there are all of these elements baked in. And I would argue that it's always there that any kind of trading is already accessing human behavior, focusing on human behavior.

Earlier you made the comment that there's an argument that if you apply discretion to your quantitative research that it kind of throws off the accuracy of that research. So, you know, just In regard to your own trading How do you deal with that? Well, so one of the keys I think is you need to define very clearly what is discretionary and what is not. In other words, you know, w what what is an appropriate realm for discretion and what is not. So

Position sizing for me is not discretionary. I I can't say, oh, I have a high competence in this trade. because well, first of all that would be illogical because I know at best I have a very small tilt. So there's there's no point where I can say I must be right about this. I mean, I I don't really know. Um so Uh I'm not I I can't go in quadruple size on a trade because I think the chart

patterns really pretty. I'm I can't do that. Uh but there are so so you know for me, the discretionary element is within some You you set quantitative parameters for, you know, say stop placement, stop could be here, could be here, I'll put it here based on subjective factors. And there's still the question, you know, if uh my trading is pattern recognition based. So there's still the question of, you know, is this a valid pattern? Should I enter here? And there certainly are points where.

uh you know somebody could come back to me and say, I've had many, many people do this. Was this not the same pattern? Were you not looking at it? And you know, for for whatever reason is is a discretionary input. I decided not to take the trade at that time. Um so, you know, th the this the question of, you know, enter or not enter, and it can be because of, you know, correlation with other markets or other types of risk, but

Uh it's it really is a matter being a discretionary trader does not mean you can just do what whatever the hell you want. You know, I I I think I I think some people from you know, particularly from a quantitative background who are suspicious of discretionary trading, that's what they think that we mean. You know, you oh you you just do whatever you want. And I think people who approach discretionary trading like that probably don't trade very long because the reality is

You can't do whatever you want. The market will encourage you to do the wrong things at the wrong time and you're you'll make up you'll make a pile of bad decisions and end up doing exactly the wrong thing at exactly the wrong time enough times and you're out of business. So it it really is a matter and you know

Look, I think we we just had an almost hour podcast where nobody said discipline. How often does that happen, right? Yeah, I I I I think th I think this is the discipline word. You know, that this is this is part of the discipline of discretionary trading is being very clear. on where and how you will use discretion. It's not a free for all.

I really like that answer. I really do like that answer. I think um I think that was Will said. Um Uh this question might help, I think, to kind of bring this whole topic together. You mentioned to me uh when we had a call uh before this that

You're about to start trading some markets and and doing some things that you've not previously traded before. I think uh one of those one of the things you mentioned was commodity spreads. So I'm just interested to know how are you actually approaching this? Like

when you decide to trade a new market and explore something new What's the starting point for you and how do you kind of approach that that whole process from like deciding this is something you're going to explore to actually getting to the point where you're actively trading it? Well, I mean so you uh th there are Basic reasons, you know, I would almost say financial reasons why you why some markets might be more attractive than others. For instance,

um, you know, beginning traders jumping into futures, it's a little bit difficult to deal with the leverage. You basically have to take a lot of risk on a single trade. Well I've l let's say let's say swing trading futures. So you're you're holding for a few weeks. Uh that's a that might be a difficult way for a new trader to start because you're going to be literally risking thousands of dollars on a trade. Um, so you know, there are economic realities that could tell us.

that some markets are more attractive than others. Of course, depending where you are in the world, you have easier or harder access to different markets. So some of these decisions are kind of made for us. Uh there are also questions of of trading style. And this is something that's a little bit hard to, you know, not a little bit hard, it's extremely hard to know at first.

Um, you know, like everybody in the world wants to day trade and they wanna day trade currencies because of the leverage or stock index futures. So everybody kind of wants to right away do the most difficult thing where there might not even be that much of an edge and they think they're going to quadruple their money in a month because of what some website said they could do. And so, you know, at at the beginning w we all kind of start there.

You know, in some variation that most of us do, with you know, I certainly did with with no clue whatsoever. But, you know, th there are things like more quantitative types tend to be drawn to options or bonds. Um the question of if you have actual legitimate expertise in an area. Like, you know, I know people who trade medical and pharmaceutical stocks with medical backgrounds. That makes sense. Um

you know, th there's also a false sense of this too sometimes. Like I thought when I started trading, you know, I've I grew up in a farm community. I have a pretty good idea of how things go into the ground, come out of the ground, what

what it what eats what and what's used for what and you know, how you process these things. And I did a little bit more research and then I thought I was really educated. And so, you know, I thought I I thought I had some special knowledge and skill in agricultural futures that turned out to not be true. And you know, I think there are a lot of people who

for instance, may think they have some fantastic skill in trading stocks that are really active in the news. And, you know, it's like uh maybe they do, maybe they don't, but you can answer that question with your you know, with an objective look at your trading results.

So people are drawn to markets for different reasons, some good, some bad. You do need to consider the practicalities of whether you should be trading a market. And then I think you You know, to to some extent, I'm gonna say something that is probably a meaningless statement, but uh in every market there are a lot of things that are the same and there are a lot of there there are are

fewer things that are very, very different. And, you know, we need to understand what is the same. You know, like if you um You know, things go up, things go down. things trade, you know, you need to understand

the kind of basic like entry level, you know, when's my market open? When's it closed? How do I execute? What kind of account do I set up? Uh so you you certainly should have that kind of knowledge before you execute. But But you know, then you need to know things like the um you know, a stock trader sometimes is very surprised when he goes to trade options.

And he pulls up an option that is priced at three fifty on his screen, and he sees that it's bid at three sixty five offered at Four thirty. And you know, he's like, well, I've never seen that in a stock. And oh, by the way, this thing hasn't traded in the past 10 minutes. And s so it's understanding, you know, what what might be different both from the mechanical standpoint like that.

But also how does the thing move differently? Um and you know, there are objective differences in different assets. For instance, on a daily time frame, stocks mean revert. more than commodities. This is why you don't really hear people talk about trend following in stocks. unless they're really stretching the concept and by the way, generally not taking shorts. Uh, you know, it's but but people certainly do trend following commodities and you can execute some type of trend following currencies.

Where if you you know, you see a lot of people who trade mean reversion in individual stocks. But you don't really do the same thing in currencies because it's the the market, there's some difference in the way the market moves. And you figure this out.

when you, you know, th there are a lot of ways you can figure it out, but uh, you know, hopefully you figure it out by doing some research to understand how the market moves and then you craft your trading approach and you go through this process of Creating a trading system, back testing it. Forward testing it.

And then you start trading with small size. It's uh, you know, it it it's literally not rocket science. It's uh if a fairly basic and repeatable template, but I do think another caution here is that many people develop skill in one market. And my experience has been every time I've gone into a new market, there's been an adjustment period. And, you know, I hope you can hear when I say adjustment period that that's actually code for losing.

So there there there's a period where you go into a new market and you you are you are not gonna take your skills from another market or another time frame necessarily. and just start making money right away, you're gonna go through a significant adjustment period. So you you gotta figure out how to structure your life and business so you can live through that without too much damage.

Just before we get off this topic, you know, what we've been talking about for most of the episode this far, you know, we've been talking about some of the things that quantitative and systematic traders can take from discretionary traders and vice versa. Um, you know, the the goal was not to try and uh push a trader and w on in one way or the other. It's just to talk about, you know, some of the things which um can be helpful across the board. So

Is there anything which you would like to add to the the things we've discussed already? Is there any anything that you might like to add? Is if I missed a question that you think is important uh regarding this topic? Uh no, I you know, I think you've done a I think you've asked the right questions here and You know, like if we were sitting in a bar, we could have a twelve hour conversation about these topics, but uh I've I I think we hit the essential point.

And, you know, m maybe kind of to recap that, i it's it's hard to know what to say, right? Because you don't know who the audience is. Uh ever everybody listening is listening from a different perspective. But if you're listening to this thinking, I could never do this research stuff. Uh you know, I I wanna say to you very, very clearly, you can. It's it's not nearly as hard as you think. Um I I mean, my formal education, I was a musician. I had

I had I think one math course in college and it was basically where we talked about how math concepts made us feel. I I I I hadn't I had no math, I had no training and I I but but because I had an interest in learning to do this. I actually developed some respectable quantitative skills uh just because I had to have them. I you know I I knew that I needed this to understand the data. And you can do it too.

Uh we hear a lot about how trading is hard. Uh there are a lot of ways to make trading harder, but um the I I think that uh one of the ways to make it easier is to clearly lay out a plan of attack and what you need to know and what skills you need to develop. Because, you know, I mean the ma maybe a topic for a future podcast is this isn't really about knowledge. You know, it's it we we we have knowledge.

We have things that we know about markets or things we think we know, but then the skill of trading and the skill of applying these. is not it's it's It's extremely important. It's not just what you know. Uh but if you don't have the knowledge, then it's hard to develop the skills because you don't know what you need to be doing in the first place. So, you know, that that's to the discretionary trader who thinks he can't do this.

And to the quantitative trader who thinks that uh any discretionary stuff is just BS to use a kind word for it, uh you know, I I I would say I think you're probably wrong. I I think you were cutting yourself off from a potentially powerful way of knowing. Yes, there are many cognitive biases, there are many mistakes. There are many emotional mistakes. If you think you have run to systematic trading because you did not have the emotional control to trade as a discretionary trader.

God be with you. Good luck. That's probably not gonna work. Uh and you know, and this is something we hear from a lot of people, but the uh you you you are going to have to have uh you are gonna have to have emotional control, you are going to have discipline and uh having a systematic approach is not a substitute for that. It may make some things worse, it may make something it may make a lot of things better.

but you are still going to face many of the emotional issues of trading, perhaps magnified because guess what? Now you're one or two. You know, the thing about the discretionary trader. I have control. I can go get out of my positions tomorrow. You have, you know, it's w what one of the dark secrets of quantitative trading is you you're a little bit out of control. Your control is two or three steps away.

And sure you could intervene and close everything, but you don't have you know, you uh some people actually experience a magnifying of emotions with quantitative trading, which Seems counterintuitive, but it it's actually quite common. So just you know, i if you are coming from a very rigid quantitative perspective, uh I would argue that an intuitive discretionary perspective is not completely

other is not completely different than your way of analyzing. It's just another perspective. It's another way to focus the, you know, pr pretty profound cognitive power that's between your ears on the market problem. Now Adam, you're a member of the Chatwith Traders Facebook group and I posted in the group

Yesterday I I mentioned that I was gonna be having you on the podcast again and if anyone had any questions, I would try and squeeze them in if we had time. So um I know we've run for over an hour already, but I think um I think we've both got a bit of time. So I'm gonna ask a couple questions that came from out of the group and just for anyone listening, if you do want to join uh the group, of course it's totally free. Uh just go to chatwithraders.com slash

Facebook, that'll redirect you to the actual group page. You just hit the join button and I'll accept you. So uh pretty straightforward. Um One of the first questions that came through, and I thought this was quite a good question, and very relevant to you, considering how you trade. What are your thoughts on trading many asset classes versus just trading, let's say, equities only?

Um just as an example. Because Often traders and, you know, some of the traders who have had on the podcast here really advise against this and they sort of tell you just to focus or or not tell you, they they talk about how they do. what they do is they just focus on one asset class and and that's particularly advice given to beginner traders as well, uh less experienced traders. What are your thoughts on trading many asset classes versus just Focusing on one.

I'm curious, are those traders who give that advice, are they generally day traders or would you say it covers a range of time frames? Uh well the one trader that comes to mind, um, probably because it was just uh recently, uh would probably be George, uh Rolly Trader. He was on episode I think it was one hundred and ten. Um, so he's an equities trader. He trades in the

um Australian markets. But yeah, he's he's not a day trader as such. He's more of like a swing a swing trader, I guess you could call him. Um and I don't mean to single him out. I'm just Bringing that. Yeah, I I I just kinda threw the question out. So I think from a

You know, from a day trading perspective, you could easily make the case uh the the answer to this question is it depends. So I'll put the answer up front. Uh from a day trading perspective, yeah, you know, you you want to dig deeply into market. You want to get familiar with its quirks with its time of day influences with what happens with other markets and

uh, you know, how influences might flow back and forth. And to do that, you know, to begin to develop, let's say you're an active day trader, uh, you probably would need to spend I don't know, six months at least. before you start to develop some real knowledge of a particular market. Uh, it is very, very difficult, depending on the type of day trader you are, to follow more than one market. So there certainly is a justification for specialization there. There also is a justification

for specialization based on the information you use. For instance, If I were an equities trader who traded off of, you know, let's just say uh earnings releases or off of changes to language and earnings releases or SEC reports or something like that. Uh Obviously I have yeah and and then and then let's say I'm that kind of trader and you drop me in commodities.

I I got nothing, you know, because because I I I have no information. Or, you know, if I'm a commodity trader who trades on crop reports. And then you put me in the currency market, I don't, I don't know what I'm looking at. I don't know what to do. Uh so there are pot there are possibilities for having legitimate edges based on certain types of information that are asset class specific.

Now, if neither of those things is true, if you don't need to focus on one, um then you or you're not using specialized information. So let's say you're more of what we would call a typical technical trader. I think you still need to be aware. So, you know, here is one of the lies I think of traditional technical analysis. is we are told you can apply the same systems, the same tools, the same chart patterns, the same indicators to any market or any timeframe. Have you ever heard that?

Of course. Right. Yes. And you know, uh so I I can tell I can show you then, well, I can create a very simple quantitative test. Let's just say uh buying a breakout of 20 day highs. And if we apply that in commodities, you would see buying 20 days high, 20 day highs, shorting 20 day lows would make you a little bit of money, all other things being equal. Uh, and then if we apply the same system in stocks.

It would lose us money. So then I would say, well, I think what we've seen here from a very simple test is uh an expression of this idea that commodities tend to trend a little bit better. So if this is true, why would we expect that we could just apply something blindly without even knowing what's on the chart. Now, I think there's some truth. I I I I don't think

You know, the idea that you can cover up the what it what's on the chart and cover up the t the the price scale. So I don't know if we're looking at soybeans or wheat or or whatever. I I think you Probably could make a lot of good trading decisions based on that. But I do find, at least personally, because I'm aware of the quantity.

quantitative difference with the power of mean reversion, you know, the balance of let's say the balance of mean reversion and momentum because that's that's how I think of it. You know, from a quantitative perspective You have these two forces, mean reversion and momentum, which typically tend to be in balance.

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

one force is likely to prevail in the future, then we will find that price movement is not so random. And because I'm aware that this balance of mean reversion and momentum is different. in different markets, I will do types of trades. I think it's subtle, but I think it's real. Uh I'll do types of trades in currencies or commodities that I would not do in stocks and vice versa.

Also in stocks, I am very aware that I may think I'm the smartest stock trader in the world. And by the way, I'm very aware that I'm not, but you know, I might think that I do the best stock selection possible. But I know I can belong the six best stocks in the market. And if something happens that cracks the market tomorrow, I'm going to lose on anywhere from four to six of those.

And you know, in fact the it's just so tightly correlated. And that's not really a concern that we have with most other things, but you know, we certainly need to be aware of concentrated currency exposure, or, you know, if you have on a long trade and crude, uh in crude Arbob and Heat. You don't really have on three positions there, but you know, then you have one one and Nat Natty at natural gas.

then, you know, it may maybe you do have another position there. You know, you need to understand the correlations and how things move together. So I think you I think you need a level of understanding that goes beyond the simple chart pattern. Now, I don't mean to

Yeah, I want to be very careful about this because I think sometimes people talk about trading concepts like they're so complicated, you could never learn this. And uh, you know, like one of the th with the traders that I work with, you know, we work on very simple concepts. Yeah, and all of this stuff is Like like you know, this insight that I've just talked about

I think somebody trading an asset class for a year or two will get a very good sense of this. And I think if you if you trade it and do the research, you can have a pretty good understanding. So, you know, for me There there's a certain diversification. And I can point to many, many times when my stock trading has sucked, but I've made enough money in currency. These to make up for it.

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

Yeah, the answer is it it depends. That that's my answer, but I think uh i is there room for somebody to specialize just trading one particular stock ticker? Absolutely. Is there room for somebody to just trade a single currency or just swing trade uh wheat or something? You know, absolutely. There are people who do that and do that well. So uh truly it depends.

Okay. I think it is probably a fair suggestion for, you know, less experienced and and traders who are very new to this to just kind of narrow their universe though. Would you agree in that? I think so. Narrow and simplify. Um yes, especially and you know, th thank you for pointing that out. Uh you know, I I think it would be irresponsible to think you're gonna trade everything all at once.

Um, but uh I I think pick some place to focus, focus on it a few years when you have a little bit of proficiency, which, you know, honestly, depending where you are on the learning curve. That may not mean you're profitable. Let's be clear, the learning curve is usually several years. In fact, I've never seen it be significantly less.

Um yeah, so w what once you've developed some skill and then you want to investigate another asset class, I think that's fine. But what a lot of people do is they'll kind of be like the um, you know, like L like the bee that's bouncing from flower to flower to flower, just you know. And if you do that with trading systems and approaches.

you never give yourself time. Not only you never give yourself time to really learn, but you also never give yourself time for all of these things. What was the first thing I said, I think, was that all of this stuff only works if we do a lot of trades, if we collect a lot of data. And if you develop a trading system and, you know, you go and you do five trades and you're not happy with the five trades and you trash it and move on to another trading system, that's

probably not a w not the way you're going to build a career. So you definitely need to spend enough time in one place that the law of large numbers starts to work for you or against you. Let's be honest. Uh but you you start to see some clarity and you start to develop some skill.

Absolutely. Absolutely. This question also came in uh this the question is what advice do you have for struggling traders who have lost several accounts?

I mean it's a very basic question. I think it's probably a good question to ask. Um, I usually try to steer away from using the word advice, but what are your maybe um There's some tips that you could uh give for for someone who's just generally struggling, like they've just been trying to make something work in their trading for a few years or a couple of years and just

Kind of feel as though they're not really making any progress. They've lost several accounts. Wha what do you think they maybe need to do? Well, okay, so let me Let let me outline the structure that I use when I coach and mentor traders because I I think you know, for first of all, working with a coach or a mentor is one possibility, but

uh many people can do this work for themselves. You don't necessarily have to work with somebody. So this is not this is not an ad. This is a structure that I think anybody can use. So the first thing I do with a struggling trader is I stop the bleeding. And, you know, I can't tell you over the years how many I I can't how many people have come to me and said,

I'm losing money. That's the first thing they'll tell me. I'm losing money. I'm struggling. I've blown out several accounts. I'm learning this trading system. And can you help me increase my size? Now you you uh as I tell you that, you probably can't even believe that I've been asked that, but I've been asked that many times, many, many times. People don't understand, you know, it's like for some reason increasing size will solve my problems.

Uh, you know, or they trade for prop firms that want them to increase size even though they're losing. And of course, we understand everything that might be going on there. Uh So the first thing you do is you stop the bleeding. And what this means is you stop trading.

You cannot learn to trade without trading. This is true. And I know many of you are already, you know, kinda kinda pulling on the leash and saying, you know, but I I gotta be in there. I I I gotta be in it to win it. I got I gotta I gotta have some skin in the game. You've done that. You've lost. You you you've you've been bloodied by the market. So you've you've had that experience. We're gonna come back to that. But the first thing we do is you stop trading and you stop the bleeding.

The second thing you do is, and by the way, that's very important. That's the first thing you do. The second thing you do is let's look at your trading plan. Oh, your what? You know? So now a lot of these struggling traders have this kind of oh shit look on their face. My my what?

Uh yes, you know, your your very well written out, precise trading plan that tells me what you will and will not do in the market and how you will do it and how you will evaluate your results and how you will change your plan and how, you know, how you will grow as a trader.

and what your plan is over, you know, but but both on the individual trade level, what markets will you trade, what what gets you in and out of a market, and also, you know, how are you going to grow this business? How are you going to know if it's working? All those questions, let's see that document. And here you can hear the thunderous silence.

So most people who are struggling do not have a plan. That's, you know, that that that's my point that I'm hope that I hope I'm making somewhat humorously here. So you write a trading plan. And there again, there's no one right way to do that, but uh, you know, I have some ways that I structure trading plans. And from there, you now you have a trading plan that says what you are and are not going to do in the market.

That's step two. We stopped the bleeding. You created a plan. Step three is you back test. And stop rolling your eyes. You know, I can already hear everybody rolling their eyes. Back tests are worthless. Yes, I think back tests are almost worthless, but here's a way we're going to make it useful. And you know, depending on how your how your plan is structured.

Perhaps it's a plan that we can test algorithmically. Perhaps we can program it. Uh and we have some tools to do that. Or, you know, uh equally powerful is we go bar by bar. And if we go by bar by bar, we're gonna talk about you know, looking at different assets. You know, let let's not look at just energy stocks from two thousand eight to two thousand ten. Uh you know, we're gonna look at different assets, we're gonna look at different timeframes.

uh by uh I shouldn't say time frames. We're gonna look at different market regimes. Let's say that. So we're gonna look at periods when the market was flat, when the market was up, when the market was down, volatility increasing, decreasing. We just need to make sure that all of this is captured in the back test.

And you're going to come back to me after a period of a couple weeks of, you know, a couple weeks to perhaps many weeks of very rigorous work, and you're going to say, I have this back test. And we're gonna look at the numbers of the back test. And one thing that I can tell you with uh you know, and you know

uh wi with a high degree of certainty is if your back test doesn't look good, it's not gonna look better if you start trading it. Now also, you you may have a back test that shows me that you're going to start trading the system and buy every building in Manhattan in two years and, you know, I would Caution you. Let let let's wait and see because you know the the point is your results are not gonna look as good as the back test, but we have the back test. So now we have some idea we think.

of the potential in the system. What have we done? We've stopped the bleeding. We've created a system, uh a trading, a trading rule set. And we have back tested it. The next step, and there are only really two more steps. The next step is back test can be crap for a lot of reasons. And one of the reasons is that we've created something in a back test. that we cannot replicate.

A classic example would be let's say that you have a back test where you're buying at the moving average. Uh what people don't realize is that the moving average, what people might not realize at first. Is the moving average moves as the bar is forming. So we're going to have a number of situations where Uh let's say the bar opens and the moving average is below the bar. And then let's say it never goes down from the open. It just goes straight up, but it goes up enough.

that by the close, the moving average is pulled above the open into the range of the bar. Can you visualize that? Most you know, if you haven't thought about it, it might be a little bit of a difficult concept. But I guarantee you stuff like that happens. And if you tell me you buy it that moving average, um

There's no way you could have executed that in real time. That's one example, but this type of, let's call it time machine trading, where we're bleeding information from the future somehow, happens in a lot of different ways in the back test. And our solution for this is we forward test it. So still using no money, you take a period of time. And depending on the system, this sometimes can take a long time. So

You know, th th this is a commitment, but you want to learn to trade, right? That you know, I I'm not gonna give you something you can do in two or three days. There's there's nothing I can do. to change you, to, to change your results in two or three days. You're gonna have to go through this process of doing this work. And so the next part of this is you are basically think of it like this. You're back testing, but you're doing it in real time.

So, you know, really it's a forward test. So you're doing theoretical executions. And yes, there's no emotion involved. and your actual executions at each stage. we'll probably see a little bit of degrading of the edge. So in other words, your forward test is probably not going to look as good as the back test. The next stage is we start trading it with real money. First of all, on vanishingly small size.

If you, if you come to me with a million dollar trading account and we get to this stage, if you're a stock trader, you're literally trading no more than a hundred shares perhaps. Ideally I would prefer you to trade one or two shares, but there can be some execution issues there. Uh so you're still trading vanishingly small size. absolutely no emotional involvement from the PL. You know, if you uh i if you buy the stock and it goes to zero

You're you you you lose$50 where you know your actual probable risk on the trade is more like a few cents. So you're not making any money, you're not losing any money. Yes, you're paying commissions, that's tuition.

We're not concerned about commissions. You so we're looking at the results, you know, backing commissions out. But what I want to see here, and you know, I think you're starting to see the threat. We've we've stopped the bleeding, we've created a trading plan or refined the one you have. We've seen what kind of edge it has in a back test.

We've seen in the forward test that that edge can be identified in real time. That's what you've proven there. And now we're actually trading with very, very small size. And now what you're proving to me is that we can actually execute those points. And we go through the process of collecting data. And then the key idea with all of this, which, you know, probably I should have put up front, but the w the way I think about this is you must earn the right to trade bigger.

You have to earn that right. It's yes, it's your money, it's your risk, but how do you earn that right? Well, you earn that right now we shift into uh a very behavioral mode. And we're uh you basically evaluating each trade with how well did you follow the rules, how well did you follow the system? That's all that matters.

If the system is somehow jacked up, then, you know, w we've got to go back and change the system. And that happens. You know, this is I'm drawing a straight line here. A lot of times it's much more of a meandering path.

where we go back and you know change then do another back. So th there that we can have many branches here. But once you've once you have something that looks good, good back test, good forward test, good very, very small size, then You prove to me, or rather, you prove to yourself that you can execute with perfect discipline and then you earn the right to trade a little bit bigger.

And once now you're trading a little bit more meaningful size, but still probably under your target size. You do this for a while with perfect discipline. And by the way, if if you don't think you have the patience or the discipline to get through this process, then maybe you don't have the discipline to be a trader because a lot of trading kind of sucks. And that's that's what they don't tell you. You know, a lot of it is a real grind.

And you know, z so at each stage here, you're showing you can execute with discipline. This is where psychology, you know, I haven't Actually, here we just had an hour and a half interview and I haven't said the P word. I don't think I've said psychology up to this point, but psychology plays a part through all of this.

But you know, now the uh at each phase in the process, the reason I built this out in these silos is then somebody else will probably rip the structure off, I guess. Whatever. Uh you know, the the the the reason I built this out into these silos is because different aspects are important at different sections at different areas.

And here we're looking at execution skills. And here's where we also really start to focus on the psychology of execution versus the psychology of research and psychology of developing an edge, which is a separate thing. Uh, you know, psychology is not quite as simple as just following the rules, but Uh at the end of the day, that's that's the process. So You know, you you can work through that with somebody, you can work through that with a group of somebody.

Um, I'm also a big believer in working in a team. Uh, trading is it but you need to be careful about that. This does not mean working in a trading room where you're sharing your calls and ideas with 20 other people. Uh, you know, I mean working with somebody where you know, I hesitate to use the word, but you work with very intimately, um, even to the to the standpoint ideally of where you would share PL. And, you know, I'll tell you what this does.

is so many traders find themselves just doing stupid shit. Yeah, just just to say it like it is. Uh how many people take boredom trades or they, you know, get out of trades early, or they take trades, you know, whatever. You you've you've heard the list of things. You've probably done them. Uh we all have. Uh but you're much less likely to do something stupid if you know it hurts somebody else too.

If if you know that the money is not going to only come out of my trading account, but it's going to come out of our trading account. And you know perhaps it's the fact that you're going to have to justify that position to somebody. Or, you know, perhaps it's just the fact that knowing that your actions have an impact on another human being's financial wealth or f financial health.

Um that that's a surprisingly powerful way to fix some of these behavioral problems. So, you know, you you can b you you can bring somebody else into it. Uh or you can just go back and listen to that basic structure that I outlined and put yourself through it and be your own coach, be your, you know, be be be your own source of discipline, but just make yourself at every stage, make yourself earn the right to go on. And by the way, this is a journey.

This is months. This this is not something we do in days. I don't even think it's something that can be done in weeks. This is something that is done over many, many months because within this structure, what this actually is is a structure. A template to guide your growth as a trader, but it's still that. It's still you growing and developing as a trader. And that just takes time.

Awesome, man. I appreciate you really breaking that down step by step. I think that was that was really good and I'd encourage anyone who is struggling who can um relate to the question I asked at the beginning to play that over and over a few times and and actually write some notes down. I think um that could be really helpful for you to follow that process.

And I think we may have touched on psychology very briefly when we talked about it's a misconception that going to a completely systematic is um gonna get you around all psychology challenges, which it's obviously not. Just still in line with uh

with this topic here about, you know, being a struggling trader. Another question came in which which is in line with that. I'm good just gonna read out the the full comment as I think it sort of paints the picture a little better, adds a bit of context. So uh bear with me here.

Breaking through to profitability is, in part, an exercise in discovering what you don't know. Discovering the unknown unknowns, if you will. Traders ultimately need the answers to questions they've yet to ask, and professional traders can help shine light on those areas. After all, professional traders have crossed the chasm I think I said that right between confusion and profitability and the views from each side are very different. So I'd suggest asking Adam the following.

What are the top three questions or top few questions, if you will, top few questions aspiring traders should be asking, but never do or often don't? That's a good question. And you know, as a little personal aside, uh I saw your post late at night. Uh it was a huge storm here, so I was up late, couldn't sleep with the noise. And I s I saw the Facebook post and I saw that somebody had actually asked a very specific list of questions. And

Well, I read those questions, I thought, my gosh, you know, those are the wrong questions. And then this this actually goes back to what I said in our previous conversation where, you know, you've really developed the skill of interviewing and asking the right questions because As soon as I got to the bottom of that, I saw you basically said the same thing. You said that these are not helpful questions you should be asking. And I thought at the time, you know.

The question that guy really should be asking is what questions should I ask? And then this particular question that you just read came in, which is exactly that. Um, you know, I I think the I in a situation if if you just go to somebody and say, well, what question should I be asking, that's you know th that kind of open-ended question can speak of laziness. But I don't think that is at all the case here. I think this is actually

exactly the right way to structure and think about the question because you don't know uh y you don't know what you don't know. Uh I think at the beginning The questions that a trader should think about have to do with Ha having a realistic understanding of expectations because a lot of people start trading thinking they're going to triple, quadruple their money over some, you know, very small account over some year. Uh

Uh how uh what what are realistic expectations? Uh what's a typical learning curve? Uh you know, what uh the the question of how how should I learn to trade? Because I think there there's a lot of misguided thought about this. You know we have this idea that the harder we work, the better. So people come up with these crazy rigorous ideas of sitting at a desk for hours and hours and hours. and that you have to put in your ten thousand hours, which is a com uh that that that's a

entirely separate discussion. Uh there's no 10,000 hours. This says that never was a thing. People have all of these misguided ideas. I think that one of the right questions is how can I best learn to trade? How can I best develop the skills of trading? And then there are things that you can only answer for yourself, you know, in terms of risk tolerance.

How is this going to fit into your life? How long? If I tell you it's going to take you five years to learn to trade, are you up for that? Five years of pretty consistent losses. Um, you know, if i if you know that's the reality, then you know, maybe you'll think about how to structure your trading so you uh

can lose as little as possible, but you know, i if if you believe that's going to happen, are you going to do this? Are are are are you basically up for that? Those are the kinds of questions that I would ask as a beginning trader. And then kind of the next step is Um what is your edge? What is your trading edge? How do you know that's an edge? And how do you know that edge is likely to be enduring? And that question is not so easily answered. But if you can't answer that,

If I say what's your edge and you don't know how to answer that, you don't have any business risking money in the market until, you know, see somebody that's gone through that process I just outlined would have a good answer to that. This is my edge, and here's how here's why I think, here's how I know.

That's my edge. Um, if you don't have an answer for that question, you don't have any business trading. I really liked that point you made about if this takes you five years to learn to to get to a point where you are profitable, if that

that that amount of time does take five years, are you going to do this still? I think that's a really good question to ask yourself. And I've said something along the same lines to people who have, you know, I get a lot of emails and that sort of thing from people listening to the podcast. And, you know, I I think that

really something you do need to think about and answer. You know, if this is gonna take you five years to become profitable, not saying that it it definitely is, but if that was the case. Would you still pursue this?

I'll be more pessimistic than you and I'll say it probably is gonna take you five years and and and and whatever the what whatever, you know, fortunate things that happen to you inside of five years, whatever money you make. is i is not likely to be sticky. You know, I've seen lots of people who have thought they've learned to trade in a year and a half or two years, or people who get lucky in the first six months. And I

Yeah, I guess never say never, but I've I've never seen anybody who really develops enduring skill that early. Uh most of those people, you know, I think one of the worst things can happen to a developing trader is

is you get lucky and make money at the beginning, that that's a hard thing to overcome. Uh you know, I'd I'd much rather see the market kick you around and punish you and see the the trader the trader who, you know, perhaps uh seems backwards, but the trader who has h had nothing but losses, you know, essentially nothing but losses, and has struggled and just been so beaten up.

at the beginning. I think that trader has a better foundation for success than somebody who, you know, doubled their money buying options with their first trade. Yeah, and that's one of the things which has been really eye opening from doing this podcast, having spoken with so many traders and hearing so many stories about how they took years and years to actually see any signs of success, has been really interesting to hear about.

And sort of paints a realistic picture as well. That's one of the things that, you know, back to the uh, you know, what insight the quantitative types, you know It if this was truly as purely quantitative of of a game as we think it should be sometimes. I don't think that learning curve would be like that. You know, I I think this would be a problem that people could solve in more of a step by step fashion and there'd be no reason for this long learning curve. But

Typically, even for quantitative traders with strong quantitative backgrounds, there is a massive learning curve when it comes to actually executing in the market. So perhaps that points us to um You know, m maybe we're still not asking exactly the right questions about how to learn to trade and what's actually behind the skill.

Yeah. Let's save the rest of that for another podcast. Sounds good. Let's close this out. And Adam, where is the best place listeners can go to find out more about you? Sure. Uh so follow me on Twitter at Adam H Grimes. I It basically everything I put out I kinda put out there on Twitter.

Uh you can go to my website, Adamhgrimes.com. That will take you to my blog. Uh I also have a completely free and there's no premium area, no upsell, but I have a fairly massive trading course with 30 some hours of video that is uh, you know, I've had And many traders oh it's this has been out there a few years, but I've had many traders say that, you know, they th this has been the thing that has taken them from uh struggling to profitability and you know, like I said, th th

It's it's a great resource. I I I I hope it's a great resource, but it's a resource that has helped people. Um, and it is absolutely completely free. You can find that again, my blog, www.atamhgrimes.com. Uh, you also can check out my firm, waverlyadvisors.com. That is everything's linked from my blog. But I do write a daily research piece that depending on how you trade and what kind of trader you are, that might be something that uh

you know, could be could be very useful for you. Uh I cover all the assets that I trade. So I cover uh, you know, currencies, commodities, stocks, we cover volatility, time frames from intraday to longer term, our focus. is on, you know, probably what I'd say intermediate term, a few days to a few weeks. So, you know, check that out there. There's a, you know, free trial. Love to have you take a look at it.

Cool. Yeah, and I have also heard nothing but great things about uh your free course as well. It often comes up in discussion in the Facebook group. people talking about how it, you know, they have got a lot of value from it. So uh I'll make sure to include links to all of this in the show notes. Also, your podcast, are you starting that back up? I know last time you were on, you were doing it fairly frequently. It sort of um faded out a little bit. Is that coming back?

It it is. You know, I in you and I talked about this a couple of days ago. Uh I really respect what you've done here with building uh momentum and a brand and and you know, you you you've certainly built a very successful podcast. I was basically less than thrilled with mine, though I was getting a l a lot of very positive feedback. Uh and I took some time off that turned into some more time off to kind of figure out how to recalibrate and retune that.

Uh and uh I'm looking actually th very likely I'll have a new episode out by the time you publish this. So the short answer is yes. Oh, cool, cool. And that's the podcast is called Market Life. Correct. Market life, yes. And that also is linked from my blog. So if you go to AdamHgrimes dot com, I've kind of created that as a uh you know, it's kind of a hub for everything. So you'll find the podcast there too. It's also on iTunes and, you know, every place else. Sure.

And uh right at the beginning you mentioned that you have a new book on the way as well. How's that coming along? Do you have any idea for when we can maybe expect that? Uh keep uh keep in touch with my blog and Twitter and I'll let you know as it comes along. Uh it's you know, for me, the process of writing a book w when it's When everything is right and Yeah, and this is an entirely separate discussion. It it's rather it's rather easy. Yeah, but it I just don't

quite have all the pieces fitting together yet. So uh I'm uh struggling a little bit with the craftsmanship, worksmanship aspect of it. Um, but you know, again, uh uh working hard on it and hopefully I'll turn the corner. What what once I w once I start to make good progress on it, it should come together pretty quickly. Okay. So it's still a work in progress. We'll we'll keep an eye out for it.

Um, Adam, one last question. I I think that there's going to be some listeners who have listened through this podcast and they're probably going to have some questions regarding some of the topics uh which we've gone into and discussed. Would you be open to answering uh some questions in the comments area of this interview on the website? Absolutely. Let's say that's a good question.

I guess I should say inspired, right? Inspired is a better word than provoked. But this has been been provoked by uh smart questions from traders who uh, you know, either have a different perspective or, you know, know more than I do. So uh yes, I'll I uh certainly I'll address comments and, you know, I may I may build some of them out into bigger picture answers. So please I I

I value the interaction and questions from listeners and readers very much. So please ask why. Uh excellent. I appreciate you offering to do that. So guys listening, if you do have a question for Adam. Go to chatwithraders.com slash one one five, for this is episode one hundred and fifteen. Scroll to the bottom of the page. You'll see the comments area. Write your questions in the comments.

I'll keep a close eye on it and let Adam know of any questions that come through so that he can um do his best to answer questions. uh and share insight where you can. So Adam, again, thank you very much for coming on the podcast, man, um and giving what's almost two hours of your time um to to share your insight with listeners. It's been a lot of fun. Thank you very much. Thank you very much. Take care. the end of this episode of Chat with Traders. But rest assured there are more episodes.