¶ Intro / Opening
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¶ Introduction & Experience Question
My friends, welcome to episode 235 of the Chat with Traders podcast. I'm glad you're here because today I bring you a man who's truly seen it all, Chris Caddy. Having surpassed 40 years as an equity index trader, Chris has lived through pretty much every type of market environment imaginable. But is experience all it's hyped up to be? Well, that is the opening line for our chat.
From there, I get Chris to open up about some of the best times and some of the worst times throughout his career and futures markets, which just so happened to coincide with his years as a trader on the exchange floor. Chris also tells a captivating story about the Hunt brothers when they cornered the silver market in nineteen eighty. Then the later half. That's when we get more into Chris's trading philosophy.
He's a market profile guy analyzing price through the lens of what he calls structure and process and predominantly trading a style of mean reversion. Chris dropped some absolutely fantastic one liners during our chat here, so be sure to listen carefully. He also makes reference to various things like software, books, events, etc. Check the show notes. It's all there should you wish to explore further. ChatwithTraders.com slash two three five. And now from NY, I present to you Chris Caddy.
So Chris.
You know, when speaking to someone who's been in the game forty years like yourself, it seems obvious to ask about, you know, their experience. But one of the things which kind of struck me when we had our uh quick preliminary chat the other day is you made some comments which almost made it seem like experience is overrated to a certain degree. Why do you believe experience is perhaps slightly less important than what most people perceive it to be?
¶ Experience Overrated In Changing Markets
I think experience comes too late in the game and at the cost of usually some trauma associated with the the obviously negative experience. I mean, there is the understanding of deja vu, and it does happen in trading. Or as Mark Twain would say, you know, things do rhyme exactly. Um So there is the gut feel which comes with experience.
I don't think you should necessarily use experience as your only metric in regards to taking advice or finding a teacher because uh as I say, it usually comes after uh uh the game is changing and it comes after the fact in a changing game. So um I would suggest that If you're looking for a teacher to find one that is mentally flexible and also offers a way to uh get for your own self an emotional handle on your emotions quickly so that they don't hamstring you when things get crazy or volatile.
Yeah, it seems like you when you said this during our uh chat the other day that it it was largely because of how markets can change so quickly. Um and and I also recall you were saying I think the first thing you said to me when we got on the phone was um the market is a joke and you were getting a little bit fired up about it.
¶ Modern Market Surprises & Vertical Moves
Um, so I mean, let me ask you this like after all these years, you know, what surprises you about the current market environment?
To let people know who have n never came from a exchange floor environment, um, there was something called professional courtesy. And the idea of Well what's changed now is that the markets distribute themselves in a vertical fashion versus in the old days on when we had professional courtesy.
the horizontal distribution pattern um allowed you to exit trades usually without uh too much damage if you were wrong because there was always the understanding that that prices were distributing around what was perceived as fair value and fair value was not moving that quickly so there was a much more courteousy courtesy or professional courtesy environment, um because
center of fair value, what was perceived as fair value wasn't moving very quickly. Now in this modern world where information is distributed very quickly, the ladders give the illusion of liquidity, but there's really no resting bid or offer. So that if if there's some sort of dislocation in inventory.
In other words, there's a there's someone needs something ever since just in time inventory occurred in the late nineties with Amazon and the beginning of the internet revolution, we've m switched to a just in time inventory and that includes the markets as well. So when you have
When you have something that needs to go or something that needs to be bought, it takes time to find the other side of the trade once it becomes apparent to the screen. And because of such just in time inventory and the execution of people need something or out it goes no matter what what the cost or the or the loss. Um there is no horizontal distribution. Things are moving vertically. As I said, it takes time to find the other side to the trade. So it ha that sort of
a l that sort of change has required that A, we become much more mentally flexible. B you can't average because
you know, there's no there's no resting bid per se. There's no perceived s value. It's it's moving in a momentum based environment. And so uh there is no court there is no place for courtesy um in that environment and so as a as the people who are listening have been participating, it seems as though those boundaries of rationality um in regards to what is perceived as a normal market movement have been stretched to to levels that none of us have ever seen. And so to your point about experience.
¶ Professional Courtesy On Trading Floor
It's interesting that you use the word curiosity. Uh sorry, not curiosity, courtesy. Professional courtesy. Because all the stories you hear about from trading on the floor are You know, they're all very cutthroat. It was a very, um, ruthless environment.
Oh no, no, no, no, no, no. The guys on the floor as as a general rule, I was w I've been on was on the floor for forty years. Th no, I'm sorry, thirty years. And um Most of them were very much stand up. And uh and there was a mob rule that eff effectively created its own rules and its own ethics. In fact the regulators used to come down to the exchange and ask us what we were doing and then they would write the rules around what we were doing.
um because the game was evolving so quickly, right, from open outcry to a blended um technological and open outcry world to finally an a completely open outcry or completely um screen based world. So um professional courtesy was uh something that um allowed you to um participate uh on the floor as part of a group that was ruled
by the group. And so if you were a competitive or an asshole or or somebody who was shady, uh, the group would look the other way when there were good orders and you knew, right? You knew on the floor when there was a good order. And so um professional courtesy was was uh never really talked about, but existed for many, many, many generations.
When you say a good order, what would be an example of that? You mean like someone who's like an uninformed order, someone who hasn't uh adjusted their quote, you know, for some breaking news or something to that extent?
Well one of the advantages of being on the floor was that you you saw people y I mean we would meet we would meet people in a bar and they'd be like, You're on the floor, you you see stuff.
But um to put it in a more eloquent terms, y you could you knew what people's positions were and and typically you could get a feel for if the ring, the exchange floor members, uh had a had a big short position or or had a big long position and You know, they all needed to buy them and you know, a good order would be in regards to the participants on the floor, help them out to to get out of their position if if they needed to sell them or if they needed to buy them.
¶ Avoiding 1986 Market Blowout
Okay. What was the most profitable error during your forty years in markets?
The most profitable error was in nineteen uh January of nineteen eighty six. When I went to Barbados and I was windsurfing and I And I would get the the Wall Street Journal came by plane, but it came a day late. And uh that first ten days of nineteen eighty-six, the market went up hundreds of points every day and and blew out.
everybody in the ring. We'd never seen a vertical move like that before to the upside. And was the beginning of what eight you know, in in eighty seven, uh, they also did the same thing. And so by not being there, I I saved myself. Um Most errors um
were predominantly negative. So the in this case, one that I didn't make money, but I didn't lose money. And I learned I completely blew my mind to see the and then when I came back to the the exchange, a lot of my friends had lost everything and were gone.
Yeah.
Why is that? Because they hadn't seen a move like that before, thought it had gone too far, continually trying to shoot.
I mean, the question of why is always a trap. Um, why the market did something. I mean, our job as a trader is generally just to make sure you're in touch with where we're going, not why. So uh there's also you know, thirty five years ago. Um
But what about this blew out most of your friends on the floor? The fact that they were trying to short this
Biggest. If you're on the floor, the you know the brokers Everyone's got buy orders, right? And you're standing there on the floor. And it the brokers are like, buy you know, who do they buy them from? Right. And so the essentially you get put into the position where you're learning to trade from the short side because the only orders Essentially the only orders that are coming in are buy orders.
So while you may be thinking that this is expensive and and you're selling them at a ridiculous price. Then when you go to cover them, it's like, oh no, you're the one paying an even more ridiculous price. So a lot of times just because you're in the at the time in the ring, you just because you were there, you were put into positions from a scalp perspective that you n definitely didn't want. But you thought that you might be able to scalp them out for just a tick or two.
Okay. Understand, yeah. Man, what a um what a good time to go on holiday.
Right. Like but I mean there is the understanding that as we go through life and and a sort of a philosophical thing that we are probably ignorant to the fact that we've we miss so many close calls, you know, just around the corner.
¶ Periods Of Easier Trading
Absolutely. Yeah. So I mean was there a
Yeah.
I mean, this was definitely a period which um, you know, saved you a lot of money. But if you think back to a time where, you know, you were making money perhaps a lot easier than you were today. Um, you know, maybe that's not the case. But was there a point in your trading career whether that was on the floor uh during the transition to moving to screens where trading I never liked to use the word easy but was A lot easier. less difficult.
Right, Taleb talks about this in his uh Fooled by Randomness um books and uh he says that certain personalities dovetail with a sort of a a particular market cycle and um so people confuse the m background
economic cycle and their personality as pure talent. And the Fed also in the past ten years has created a a monoculture, a single culture of people who can only buy them. And in some of these rallies that you see recently in the past week or so, you can see the the sort of the rush to buy them, the incredible fear of missing out. Um, and the markets are up two, two and a half percent in a day and then failed to go anywhere after that, as though it's a testament.
to the fact that so many people have only been able to buy them to make money and are also afraid of missing out. But in in regards to the uh question, I think
Trading becomes easier. Um, you you think of yourself as a new business per se. And when you walk into the bank and the bank is like, Well, you have no track record, uh, so we're not gonna loan you money, but as a trader, um as you develop a just the going to work and doing it and and after a while you get the the track record of knowing that you can come back from a loss.
Um that mental understanding of this loss is a temporary phenomenon versus one that's a catastrophic loss is one of the steps that helps you become a um or should we say helps make trading easier.
the whole process itself um is always gonna be a learning process. So I would suggest that m Trading can become easier if you have a way to make sure that you don't let your emotions get the better part of you, as well as having a flexible some sort of tools that allow you to think differently about a particular situation faster than anybody else. There is no point in saying, you know, the the ring the ring was easier because the ring's not coming back.
Um, so that is it is what it is currently right now. And so it's in it's like music, right? Music has gotten incredibly portable, right? You can trade on your phone.
Um
But does that make it easier? N probably not. But it's more accessible and um the ranges are very large. So if you are cautious and you have some structure to lean against, I guess you could say that it's easier It's easier to make more money on, it's easier now to make more money on a smaller position than it's ever been, if you're right.
Let's flip the question, you know, the flip side of this.
¶ Challenges In Tough Market Eras
Do you recall that era during your trading career which was the toughest time? You know, where you kind of really struggled to make money, you're struggling to grind it out. Um, kind of some doubts started to creep into your mind. It's like, you know. Is this gonna be the end? Like was there ever a time like that?
In in regards to the term error, right? Error is generally um When in the old days when you would trade with somebody across the ring and then they didn't trade with you, right? And so Um versus now, which is where there is no such thing as a trading error, but because it's all on the mouse and there's everything is is recorded. Um
I just more mean an era as in a period of time.
Oh right. Yeah, of course. Um
like a a tough era, uh a tough period of time.
Oh E R A, right.
Yeah, sorry. Accent.
Right. Um, yeah, many, many, many, many of right. Um nineteen ninety four, um the S and B sat in a thirty handle range for the year. It was horrible. We just sat there on the train on the trading floor and just sat there. Sat there, right? When you see all these pictures of guys standing up in the ring, screaming and yelling in nineteen ninety four everybody just sat on the ground.
for a whole year and waited for something to happen. Um then in in the year two thousand at the highs, um right, in ninety eight, ninety nine and uh oh, Nasdaq doubled year over year. And so that carried out a lot of people, right? That no one had ever seen. uh the Nasdaq double year over year. And then I I in fact I asked a very old guy, he was ninety eighty-eight, ninety years old, in the middle of ninety-nine. I said, would you have caught this whole move?
And he said, No. And I said, Why? And he said, Because prudence prudence dictates exiting a winning position long before the high. Right? Trees don't grow to the sky, kinda story. And so so those moves caught everybody off guard. It had never happened in recorded history. And so You know, it would be like every day you get into a spaceship, you fly to the end of the universe.
And you get out what's there, you know, more universe. Cause we hadn't it was off the charts literally every day. You were just the chart went to new highs. Then that that period, um, that sell off what was easier to trade from two thousand. The um the move up in oh eight, the where the big short was filmed, right? That whole thing about subprime.
you know, we had lived through a couple of those. So we were ever we were a little bit more wary and everyone was a little bit more knowledgeable that there is no real sort of boundary. We knew that the distributions now were vertical. So that became a little easier. Uh well, what was surprising was in that sell-off where we went to all the way down to 600 in the S P.
that it sat there at the lows for five days. That was that was tough. At the time you could buy the seven hundred calls and sell the five hundred puts and it was trading six sixty six for a credit. So you could do the fence for a credit at the lows, but you had to sit with them for five days.
Which was tough. Um, that was the hardest I've ever that was one of the hardest long positions I've had to sit with. Um, and the rest of that has just been straight up, which has been impossible. I mean, till now, which is now finally the traders are back in the game. But yeah, the oh eight to eighteen, nineteen you know, right until currently, uh, was just a straight shot to the upside, you know, three percent, four percent pullback.
um for a decade and was the biggest we'd get. And so it was normal to get a ten or twenty percent pullback once a year uh in the markets historically. So the Fed central banks, money printing did a wonderful job of stripping volatility um from the economy. Um But now now um you know, you can see that the the volatility's higher, the economy's struggling um with the volatility associated with things like gasoline, things like food.
And um, you know, that's that's where we find ourselves today. So I you know, it's I think it's more of a perspective in regards to what's hard or what's not hard is is in a more of an internal perspective rather than an external, right? If you're blaming the external situation which is out of your control, you're essentially placing yourself as a victim which is not the right mindset to trade with.
¶ Prudence In Exiting Positions
Can I just ask you to repeat that quote that you heard from the older gentleman? Um Yeah, what was that one?
Prudence dictates. Exiting a winning position long before the highs.
Can you just uh elaborate on that, please?
You look at our you know, everybody has the malignant optimism of, you know, if we only had the right drug, if we had the right therapy. if you know, only if we tried harder, kind of thing, or mag you know, that's mag uh malignant optimism, or there's the Dunning Kruger like we talked about, or, you know, trees grow to the sky, every story has a happy ending.
Being prudent means that you recognize that there are limitations. You can only be so good as a Howie Cohen old floor trader friend of mine used we used to say, You only have so much good karma. And um and so the understanding that um you can be you can be right for for a little bit. But there's so many inputs to the present moment that you can't see outside affecting
every price, right? It I mean, it's impossible given the cause and effect of this gigantic system that we live in, to think that you, you know, you have the ability to to master that is is arrogance to the you know, is
his grandiosity be off the charts. So so I think the older gentleman saying again, prudence dictates exiting a winning position long before the highs was a nice way of encapsulating the fact that your range of perception is smaller than you think and you're part of a system that has many inputs that you can't see.
I'm gonna store that one in my memory. It's good.
Isn't it great? Yeah, he's um obviously long since passed.
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Can I just ask you before we get into a little bit of um into a little bit about um your training approach and um philosophy? Any like really memorable days or events through your career, like some days that you'll just never forget. or or a story that might be really interesting. I I did quickly um just sort of skim over one of um the interviews you did with uh Paul is it um Blowhorn?
Hornblower.
Hornblower. And you spoke to him about uh chasing down a guy on the subway who uh was um responsible for the the margins on silver and yes blew out the Hunt brothers when they tried to corner the market. I mean I don't know, maybe you want to share that story or anything to that extent?
Yeah.
¶ Impact Of Trading Trauma
Sure. Yeah, but you know what's interesting just uh before we share that story in regards to memory is that trauma is generally makes a deeper imprint than uh the big the big winners. So for longtime traders as well as people out there, um, and of course trauma is subjective, right? But the idea is is that you need to make sure that your accumulated trauma that you're experiencing From trading.
somehow integrated or diffused so that you don't become gun shy or you you still need to have the courage and curiosity to have an open mindset uh to participate in this.
Thank you.
So it's an it's an unfair an asymmetric is I guess the word I'm using looking for. It's an asymmetric uh emotional payout in trading because we show up, we expect to win. So when we do, even large winners, which can be destabilizing, uh like people who you see winning the lottery, but generally speaking that it they're expected to win. You're expecting yourself to win and the and the losers, of course, come
w with no one to really blame but yourself. And you and you're generally not gonna find sympathy from your from your family or your wife or your girlfriend.
¶ The Hunt Brothers Silver Corner
So th that's just something to make sure that you're cognizant of if you're approaching this game is is understand. the the trauma associated with losing it can take a cumulative toll. And um and Paul Hornblower, who's who's actually his great grandparent,
Oh
had a had a firm, you can read about it on Wikipedia called uh Hornblower and Weeks. He comes from a a a very, very esteemed family in regards to senators and and Fed members and back from the eighteen nineties and so He he views it as a m as a m imperative from a family tradition perspective that he's involved in the markets. So I met him on the trading floor. Okay. And so he's uh he's an excellent trader. um and takes huge shots. But um that story about silver was uh I was on the
This exchange here in New York, uh in the Old World Trade Center. Uh where they traded uh the metals, where they traded um You know, the Comex was there, so it was gold, silver, copper, and then of course the Nymex was there where they were trading crude oil all in this room and and then I was trading stock index futures over Uh, on the other side of the room, there's coffee, sugar, and cocoa there. So we had a a it was a a real it was the only commodities exchange in New York and um
Silver guys were considered cowboys, right? It was the most radical thing. Um For example, I was riding up in the World Trade Center elevators, which were huge. They'd hold at least 25, 30 people. And it was just three of us coming up. Uh and I was a young kid at the time and two silver traders were in'twas just three of us in the elevator, two silver traders uh standing there and this one silver trader says to the other guy, I caught my wife with another guy.
And the silver trader other guy goes, Did you kill him? Dead serious. And uh guy says, No, I told him you slept with her, you have to keep her. And I was like, whoa, okay. And so um, and there's also stories about when the Hunt Brothers broker. Who just would hang out in a limousine out in front? So we were on the eighth floor of Four World Trade and they had windows, right? And the the sil the Hunt Brothers silver broker would s would sit in a limousine just parked out front.
And when he would get out of the they had guys with binoculars. When they when he would get out of the limousine, people would just by the time he got up to the eighth floor on the elevator, silver had rallied thirty cents before he had started buying it. 'Cause then isn't that a great story? I was like, Jesus, you guys are geniuses. Um So fast forward many years later it was a summer time. Um
And this uh older gentleman, silver hair, gotta be eighty something, uh, in a seersucker suit, perfect, you know, silver hair, tan, right? Wire rim glasses. you know, not you know, good posture, can walk, he's you know, and he's followed by all the present
brass on the exchange, right? Like you see you see these guys. You know, the exchange at the time was a non for profit thing where we elected our own presidents and so you s you knew who they were and and all of a sudden this guy You know, an exchange is a place where you know there's five thousand of us, but you didn't You know, you knew pretty much everybody and they all and so all of a sudden
guy in a seersucker suit goes by and he's, you know, followed by all the important brass from the exchange and he you know, he walks by our ring and on his way to I just, you know, watching, he goes over to the metals and then comes out and everybody is You know, he must be somebody important. Must be, right? Everybody's like, you know, this guy's
you know, I saw it on the stock exchange when I was there. My boss was chairman of the stock exchange, Walter Frank. And so I saw the way the you know, when people you know, they were like God in that world, right? It was it was like, you know, this is this is the you know, this is important person. And so I just when he left, I just f followed him to the subway and then just got on the same subway car. He was going to Grand Central, back to Greenwich.
And I just asked, you know, I d doors open, he gets any, holds the silver rail. I hold the silver rail next to him, doors shut. It's a long time between Between Brooklyn Bridge and uh where the the you know our downtown Wall Street stop. And then this next stop is 14th Street. It's probably a four-minute ride. going full tilt on that subway. And uh so I just, you know, I look over him at him like, why'd you do it? And he goes, why'd we do what? And I say, why do you know?
Why'd you blow out the Hunt Brothers? Why did you change the rules? And he just looked at me and he said, Because we could
🔇 Silence
Dead pan. No smile, no laugh, just because we could.
So what was the I mean, for anyone who's not familiar with what happened to the Hunt brothers or what they tried to do, um, can you just tell, I guess, that story, uh, just briefly, just a quick outline?
It was a successful corner of a commodities market. Um the in of course there were a prior in the eighteen hundreds, there were many people who had cornered markets. It was It was genius, I think. I mean, th it was And so they had it they had I guess they must have had everybody caught because the exchange changed the rules on them.
So they had a humongous long position in silver.
Yes.
They're broke or not the brokers, um I don't know what the right word is, but the the people who determined the margin requirements, which is this guy on the subway, changed the requirements to blow them out. Is that correct?
The exchange can change margin requirements.
The exchange, correct.
The exchange can change margin requirements at their discretion and they do not have to uh tell you they just and it still exists to this day.
And that's what was the cause of their undoing.
Well, the people who had the information that they had that they were gonna change the rules. Um on the Comex governing board. Uh some of them bought skyscrapers. I kid you now. And we s we I kid you not, some of them bought I believe it's 110 or 120 Broadway down here, bought skyscrapers. And so yes, they changed the rules.
Well that's uh quite an amazing story.
Yeah, true story. True story. Um, none of that is is probably known and Um but yeah, it's it's a true story. They changed the rules because they could. And so by the way, anybody who's listening, always understand that they can do that at any time. And so that's why you need a great relationship with your clearing firm. Make sure that you have someone there that you can literally pick up the phone and talk to.
And build that relationship as a as a matter of course you should Know somebody in the risk department at your clearing firm, even if you're at IB, just become friends, just scall up somebody at risk at I at Interactive Brokers and be like, I would like to have a personal relationship with somebody here just in case of emergency.
So think twice before you attempt to corner the market.
¶ Modern Market Cornering Possibilities
You know, I don't think it's possible anymore. Yeah. I mean, what what would be a m I mean they might be able to do it in lithium or or one of these weird rare like nickel, didn't nickel have some sort of
Oh yeah, that went berserk a couple of months ago.
Right? Was it a Russian guy?
Uh Asian of some sort of a little bit.
Yeah. Well it was was Asian or Russian. I forget who it was, but yeah. I mean, so in an esoteric commodity that's probably got a few producers. And a large short interest. I mean, you see them doing that in stocks. They did that with GameStop and AMC.
¶ Trading Approach: Structure & Process
All right, uh Chris, let's change gears a little bit here. Um, I'd love to get into some more about your you know, your trading approach, how you look at markets n these days, how you think about markets, how you try to make sense of it all. So Just a very short version, and then we'll obviously dissect it a little further. What type of trader are you today? Like day to day, what sort of things are you doing?
Um, trading indexes um or crude if it's extremely n nasty. I always say crude traders should moonlight in a dungeon. But lately it's been
What does that mean?
Oh, they should be the people who like turn the the the torture up at they're so used to crude is one of the most difficult and painful things to trade. So I'm like the the guys who trade crude. Moonlight as one of these dungeon masters as a joke, right? It's um the kind of trading I do is integrating structure and process. And uh
Uh
Okay. Well let's hold it there. We'll um let let's get into that and sort of flesh that out a little bit. So When you talk about structure and process, you know, I I don't know if it's worth covering this before we get into that, but the factor of time. From what I understand it's something that you like to you like to remove time as much as possible from your kind of analysis and and view of the market. Can you speak to that a little bit, please?
¶ Time Is Empty, Price Is Transaction
Sure. Time is empty, essentially, to use the Buddhist term. Time exists to meet somebody for lunch at twelve o'clock. Time exists for our convenience. Um, but from the market's perspective, time is not relevant, time is empty. Uh, price exists from a perspective of facilitating a transaction. So price exists to facilitate a transaction, that's all. Any subjective
um attachment of cheap or expensive is purely that subjective, right? Price exists to facilitate the transaction. Price is also empty of its of any meaning. Time is also empty of meaning in regards to the markets because they don't care what time it is. So there's lots of implications in regards to what tools work, in regards to the free tools that you get on the side of your trading screen or on the top, because of those realizations. Um the thing uh the speed of price through time.
I'll say that again, the speed of price through time is the only metric where time is of value.
Okay. Can you elaborate on that point?
Well, I mean that's... That's a m that you know, you people would say, Oh, that's simple. That's momentum, right? And and you could say, right, the price behavior of a particular asset class is its best marketing tool for more money to be allocated to it.
Right. The price behavior, I'll say it again, price behavior of a particular asset class. Is it's best marketing tool for more money to be allocated to it? Like you're you could say, Well, why'd you buy'em? You know, it's going up. Okay, right. It seems so simple. Right, but you know, successful social behavior is contagious. So you know, w where you know, where does time figure in that? I don't I don't think time has any
You know, other than you can see when something goes viral on TikTok, right? You see how quickly something moves the number of views through time, right? That or the number of spins of a new hit record. You know? So that that isn't works in the same in the same sort of it functions the same way in in the market, right? Time in a in and of itself is non existent in regards to prices. But the but in regards to the speed of price through time.
that's the only metric that you can use. You integrate the speed of price with time. And that's a very, very, very sophisticated and accurate way to measure price.
¶ Time Variable Market Profiles
So what tools are you using to uh try and look at the market and understand the market and price action, et cetera, that disregards time. or allows the market to more organically define itself.
Right. I mean I do not have an equity stake in any of the things that I mention here. Just so I am I have nothing to sell, nor do I receive any money. if anybody uses uh the products the following products. I do use uh Stadelmeier's capital flow thirty two software. Um it uses what he calls time variable profiles. In other words Um
Yeah.
I it very quickly to to give you an idea, imagine that the market's distributing itself in a bell curve fashion, and as in Stadelmeyer's data segmentation element to that software. He will only create a new profile, a new data segment when it breaks the range of the of the second half. that later half of the profile. So imagine you have would have what is equivalent on a chart to a sideways ice cream cone or a pennant.
In other words, the market's had a big range in the in the beginning and has now narrowed itself down to a small range at the end of this sideways pennant. or triangle that it's creating. And then so if it were to continue sideways. Doing nothing. Um There's really nothing happening there. The there's no reason to create a new data segment.
And then when the market then breaks the range, then the n you start creating another you segment the data on that break and you start to create the data that creates the next profile. And so people who are time based who are drawing lines or creating profiles or candles for that matter, if nothing's happened, you create a new data segment, it's it kind of It it inflates the value of time.
Right.
It right. It creates times it it creates more importance and that it I don't think time deserves. So in the case of Stadelmeier's software Uh Pete Stonelmeyer who was the creator of Market Profile um made seventy million trading grains for himself. Um not many people use this software. Steve Hawkins, who not the astronomer, but a a Pete's partner, wrote a book about market profile and you can reach out to him. He's in Chicago. Anybody can call him up.
and talk to him about profile. He's very nice.
Okay, so you use the term time variable profiles, that's the same as market profile. Is that same terminology?
Yeah, it's the same thing except that in Stadelmeyer's case he's using that idea of only creating a new profile when it breaks the range of of the pr you know, the last data segment, right? So people who are doing regular market profile, um on some software platforms like CQG and and um I'm sure um Cunningham and things like that. Um
can probably do that manually, but this does it automatically, that's all. The idea is is that you don't wanna you don't want to create a new data segment unless something happens.
¶ Market Balance & Vertical Movement
Right? Why would some let a let's just do quick force a nick thing. Why would something happen? Right. The market's balanced.
Right.
And then something happens. Well, that means that there's a big order, right? Somebody's going to displace the market. And if nothing's happening, right? Well, you go back. If nothing's happening, that means that most of the market participants view that the market's fairly priced. And then most people are either flat or comfortable with their position. So any sort of inventory displacement from a balanced position, i.e. the market's doing nothing, is usually the beginning of a vertical move.
Which means that if you're leaving from a a balanced position, right? If you're leaving from a balanced positions everybody's comfortable and you get a displacement from a balanced position, a vertical move, that means there's zero. And I'll say that for emphasis. Zero chance of a retracement. From that balance position with the beginning of a vertical move. So you can see how important it is to segment data along the concept of.
understanding that the market moves from balance to imbalance. And that's one of the principles of market profile.
When I hear about uh traders who use market profile, it's it seems to be mostly the futures traders. And I'm not sure if that's because, you know, most futures trade twenty-three hours a day. So Is market profile perhaps more effective in futures markets because of their continuous nature um instead of something like, you know, stocks which have a defined open and close, you know, six hours a day?
That's an excellent question. I do run both versions of the cash markets and the futures, and there are many people who will only trade when both line up in particular In other words, the the cycle and the in the cash market, the stock itself and the cycle the time cycle or whatever they're using, you know, the
something RSI, whatever. They have to have all their indicators pulling in the same direction. Um and so there are people who do that, um and are very successful at doing that, by the way. Um Profile is is is just a is just a way of taking the behavior And being able to look at it in a way That you can't necessarily see in a bar chart.
So I'm I'm struggling to to answer your question in regards to best. I would suggest that it's just a different way. Remember how we were talking about a successful trader needs to be able to see things differently quickly.
Mhm. And so...
This may just be another way to take the same price action, but give you a different perspective. For example, right, if you're upset, just go up and take a walk at a drink of water, right? Like you come back to your screen with hopefully that different mindset. The understanding of when you look at a profile, you can see where there are places where the market hasn't traded. and places where there has been a great degree of acceptance and you may not necessarily see that on a bar chart.
¶ Deep Dive Into Structure & Process
Yeah, right. You only see half the picture.
Yeah. So it it's not necessarily the answer. But it is another tool. Is that a nice way to put it?
Yeah, of course, of course. You speak a lot of or use the terminology a lot. You haven't done it quite so much um in our call up to this point, but I know uh from hearing you speak and um you know other content you've put out there. You use the terminology structure and process. Um, can you speak to that a little more? Like um, what are you referring to there?
Well the markets are it when you trade every day. When I was younger and I was on the floor, I I'd ask the older guys, you know, what's it you know, what's it like? You've been here fifty years. I'd say it's like a bad marriage. You know, you're coming to work every day, trading this thing has its own personality. You don't necessarily like it every day.
Yeah.
And so I started studying Systems theory, which is a family therapy sort of thing. Out of uh the center f uh for Neurochell, I was reading Fogarty's and Tom Fogarty's and Bowen's. uh com unedited, unpublished compendium. and then f uh started reading John Gottman stuff out of Seattle. Uh he's the one of the world leading experts on divorce.
Yeah.
Uh and I was convinced that, you know, financial stress creates the same sort of stress that a bad marriage does. And what did the you know, where do prices go? They always go to where the most pain is. And and even Sodomier would say stuff like do the hard trade, right? So I figured there had to be a giant psychological component to it to or behavioral component to economics. So I read that stuff for probably five, seven years, ten years.
And in there, in that there was a the uh there was the understanding of there's structure within a relationship or a marriage or or whatever you're doing and process the associated sort of here and now affecting you or you're dealing with and so you could say structure could be Your gut feel of the market, right? And the process would be the tape going by, right? Trying to read the tape. You could say structure in a relationship would be you've you've had
you know, eighty, eighty it's or just even the beginning of a relationship, right? You've had eight good dates and then on the ninth date you have, you know, there's some sort of disagreement, but you have enough of a track record, right? You have a positive structure to sustain the negative process. Right. And so the understanding is is that you see the same thing in the market, right? You if you understand how to read market structure, then you measure the process against the structure.
So structure would be a little bit of a longer look back. Structure would be bigger data segments, whether you're using profile or things of that nature, or longer term moving averages, right? So structure and process and so when you have a positive structure and you have a positive process. that should be one of those days that you would call a trend day where the market just goes straight up, right? And so you can see that there are sometimes days where you have
In the context of an uptrend where you see that people are buying the dip, right? And so you have a negative process against a positive structure. Right. So stuff like that. So the just the concept of and and so in my case, right? And so my case I look first at the longer term stuff and then bring it down to the shorter term. And on my charts I have a one minute a
ten minute, a thirty minute, and a daily, right? Of the same thing. So you can be cognizant of where you are in all time frames. And that's I think important to have a understanding of process and structure. In that regard. Does that answer your question?
It does, but that last part was interesting because you said you've got a one minute, a thirty minute, etcetera. Which is obviously refers to time, which you try to Remove, right?
Right, for sure. For sure. But I mean it's just I don't live in a vacuum. I understand that other people are going to use this and and you're still looking for essentially we're trying to put together the pieces of the puzzle. And so a lot of that is
You know, what
What does the market want to do? Right. It's not about what I want to do. I mean, think about it, right? We come to work, it's like we have to dance with. with who brought us. You know, you we have to trade what we see, not what what we think. You know, what does the market want to do? So we have to we have to be able to look at at what everybody else is looking at. And then we have to be able to see if if we ag if we can't see the flaw in their logic using conventional methods.
If we can't see the flaw in their logic, then we have no reason to fight them, right? On the only time that we can we can fade the obvious is when we see the flaw in their logic.
¶ Mean Reversion Trading Strategy
And so that comes from from thinking originally and and do you know, uh trading is not a neat a neat and all tied up in a bow experience. It's really messy. Like essentially, you know, what is trading teach us? Right? It teaches us that it's life is messy. It teaches us that that we need grit. Uh it teaches us that we need to come back.
from uh from negative experiences. So it helps to understand through, in my case, I'm using a a flow chart, a trade flow chart on CQG, a one minute chart with a with a reversion to the mean program. Everybody should build that, right? 80% of the time the market's reverting. So in your toolkit, you should have a reversion to the mean program. Then in my 30 minute, I use a 30-minute bar chart with a 65 period and a 33 period moving averages. And when those lines go flat.
Everyone should build this too. A 30 minute chart with 65 and 33 period moving averages. When the lines go flat, that's essentially a quick and dirty way to see if the market's balanced. And so from we know from a balanced position the market has has doesn't mean it has to, but it has the ability, can go keep going, be balanced forever, but it probably won't be. But it can go vertical. And then I keep a daily chart with the longer term moving averages, the two hundred and the twenty one day
Thank you.
Just'cause I have the space for it.
I don't want to gloss over the point you made there about how You know, I I th did you say eighty percent? Either way, it was the bulk of your trading is reversion to the mean.
Oh, on the statistics, right? The breakouts only work what did they say, fifteen percent of the time, twelve to twenty percent? Something like that. Around fifteen percent breakouts are only successful fifteen percent of the time. So if you're looking to do you know, a successful job, create a s you know, small positive cash flow over time. You need to be first a reversion trader.
Okay. So ultimately what that means is you're buying weakness, selling strength. What kind of signals do you look for? Like what would be a strong signal for you to actually take action and, you know, do one of the above, either buy weakness or seal strength?
Let's just look back at at um you know, where are the flaws in that strategy? Just so it's like first do no harm, right? Understand when you're using a reversion to the mean program, the mean the mean can change fast on a news event, right? So So we understand that It is a tool. It is not it and it happens to function 80% of the time. But again, it is not God. It can be wrong. And so um with that in mind.
The understanding is that you need to know where you are in the cycle of is the market if the market's balanced. If the market's balanced and you can do that by you looking at this the 30 minute chart with the 65 and 33 minute m uh 33 period moving averages. on a thirty minute chart, if the lines are flat, then the market's balanced. If the market's balanced, the reversion chart is not the tool for the day.
Right? Because the market's gonna go vertical and there's gonna be no retracements because that the only person who knows how far it's gonna go vertical is the person with the biggest order. And they're not telling you how big it is. Once the lines get separated on that chart, the markets had a vertical move, the reversion. Trades, tools that you're making, right? You're building bands around a moving average of EWAP, whatever it you may choose to use.
um is the tool. And so given that the breakouts only exist 10 to 15% of the time, that means that 80% of the time that reversion chart's gonna work. But you just have to make sure that you don't get caught in a vertical move.
¶ Executing Vertical Breakouts & Reversions
What are some ways to get caught less in vertical moves? Is this where your analysis with volume profile comes into play?
Yeah, right.
There's some other nuances to it.
So w in a market profile. If you were, if you were looking at a market profile, we we would define the balance point as the wide spot of the profile, right? the fattest part of that profile, the you know, a standard bell curve distribution smack dab in the middle, right? So when a market or or in the case of that 65 and 33 moving average on a 30 minute chart, when the lines go flat, it's not a crossover system. When the lines come together and the lines go flat.
Right, that's telling you that the market participants have decided this for whatever reason, this is a fair price, right? And so our strategy. is diametrically opposed. It's completely 180 degrees, the opposite of a reversion. The understanding is that when the market's balanced, it's going to go vertical from that balance point. Always does. Okay, any vertical move is coming from a balanced position, generally speaking.
So the way to trade that would be you could literally if you sense the market balance and starting to break out, you say it's gonna break to the upside and you're expecting a a vertical move. Not a reversion, you know, a dislocation of inventory. You could literally buy one and wait thirty seconds.
if it's not in if it's not in your favor, you get out. But you could literally write a program that would say buy one and then 30 seconds later, buy another automatically and then buy another thirty seconds later and then buy another. And then as soon as the next thirty second entry level is below your most recent entry, you just get a box that shows up and says, Would you like to exit the trade? This entry is no longer at a higher or lower, you know. in the direction that you're trading.
And just hit exit. And that would be the way you could trade and exit. Or they are doing it in the high frequency shops. But that would be the way that you would trade the market from a vertical uh a balanced position expecting it to go vertical. The same thing works to the downside, right? And then the reversion is 180 degrees the opposite, right? You're so now after you've had the vertical move, this is where the art of trading comes in.
How far is too far, right? Does prudence dictates exiting a winning position long before the high. Not every tree grows to the sky. Nobody, you know, there is is there happily ever not everybody has happily ever after. Right. The idea is is how far is too far with vertical and you start to trade the the market's gonna go through this cycle of vertical and then get balanced. Well as the market's getting balanced.
As in other words, think about it this way, as you have spent more time going vertical, more and more people have gotten on board. Which means that the idea is that more and more people will now have that same position, which will lead to retracements, which lead to the market getting balanced. So there is you the best time to initiate with a reversion program is is early
in in the cycle of of the balancing side part of it, right? As you c it's almost like You know, if the market's going up, it's like you're selling them hoping for somewhat of a reversion. before anybody else, you know, that first little dip or something like that. Anyway, the point is is that you switch from a the vertical the market leaving a balanced position and we know that that there is zero chance of a retracement.
because everybody's got a balanced position. Everybody's gonna be trying to get on board. And everybody's, you know, there's no chance of retracement when the market's going vertical from a balanced position. And then you flip completely to selling rallies and buying dips, as you said, for the as the market goes through the finishing phase of that cycle.
You know, in other words, if the price of something is so low you can see this in equities, right? If the price of something is so low, so many people want to buy it, it moves away from there quickly. Right?
Uh-huh.
And if the price of something is too high, it moves away from there quickly, right? Leaving a tail, which mean which means that the true opportunity at the low is a finger snap. And the true opportunity to high is a finger snap. Which means that if you think something is the low and you buy it and it gives you a second chance, it's not the
Yeah.
Right. And if you buy if you sell something at the high and it comes back there, the it's pretty good chance it's not the high. Right. So in trading, you never want a second chance at something.
¶ AI And The Future Of Trading
That's that's uh that's a that's a good thought.
Right. I mean think about it, right? W in other words, we don't you don't want a collective ambivalence.
Yeah.
about something, right? You want certainty, right? And you wanna know, right? Like if I bought them I stuck me because in game theory, if you operate with the least amount of information and you're right, that is a really significant reference point. So if we're operating in a situation, if you're taking a stab on a trade where you think it's the higher or low, And it's only up there for a second and you happen to be right.
Then you know that there's more to that trade than you thought about because everybody else is waiting for confirmation and they're not going to get close to the price that you executed at.
You use the word program a few times there. Um, I'm just curious as to To what extent your trading is uh automated or kind of assisted by technology versus is it purely um click trading?
I'm working with a team of developers on artificial intelligence. It's the future, no question. And I think everybody needs to know what tools work because and what tools you use where.
Because
uh artificial intelligence is totally the future of trading and it's it's out there and it's available. Um I post it up on my Twitter, uh, which is Chris C Katie uh and uh Uh take a look at it. I post it up for free. Um N no question. Um forward looking indicators are better than backwards looking indicators. Um in this case the development that I'm uh and again I have no financial interest, no equity stake in this project.
The idea is is that there is artificial intelligence programs now where you can literally choose whatever indicators you want to use and then the thing goes back and will read twenty five years of data on whatever time segment you're using. There's even artificial intelligence the programs that that I've seen that are it will choose the indicators for the particular market.
Um, what's what's interesting is that it hasn't as the artificial intelligence I've seen has yet to understand the difference between vertical and uh you know, where the markets balance and about to go vertical and then the the reversion thing. The the most artificial intelligence I've seen is for reversion trading. And um but I d the the technology I'm using is essentially uh artificial intelligence.
um predicated on uh Stadelmeier's data segmentation, right? It only creates a new segment and then a cr the artificial intelligence. then predicts the range of the SP for the next six hours and the finishing price or the widespot of the profile. And then um you can find it on my Twitter. I post it up for free. It's pretty cool.
Okay. Um and your Twitter is at Chris underscore C underscore KD.
Yeah. Yep, and you can ask me any questions there. I'll try and get back to anybody. I'm not and but you know, as you are, right? We're not trying to sell anything here.
Right.
¶ Market Profile Learning Resources
So Chris, if someone's interested in finding out more about market profile, I think you may have already suggested it, but just uh please repeat for convenience. Um
Apple.
Walk on market profile.
Pete was, you know, these teachers, some of these teachers are tough, right? You know, real you know, I used to go to Pete's classes and he'd be like, you know, people show up and ask questions.
Thank you.
And he would say stuff like, Look, you haven't been here, I'm not going back. just for your, you know, benefit, you just have to learn from where we're we're learning today. Pete, of course, doesn't teach anymore. Steve Hawkins, his partner, um, occasionally teaches and has written a book with Steve. Um so I've written a book with Pete um on market profile. It's the fourth edition, I think, that is out. Uh it's Pete Stadlmeyer, S T E S.
I E D L M A Y E R and then Hawkins, which oh no G, it's right H A W K I N S. Um, once you read that, you can definitely call up Steve and he will talk to you. He's in Chicago. and uh is working with a bunch of also artificial intelligence guys. But we'll gladly talk to you and um or find me and I'll I will certainly um answer any questions.
Okay. Chris, I uh well, I should s address the um people listening to this podcast. Um, I'll pop a link to the book that uh Chris has just mentioned and a link to uh Chris's Twitter in the show notes. Um and you can find that at chatwithraders.com slash two three five. As this will be episode two three five uh
Yes, and we have no royalty interest in the book.
Of course. Yeah. Chris, one last question and then we'll call this a wrap.
¶ Secret To Long-Term Trading Survival
You've been in the game forty years, there's very few who can say that. What's the secret to long term survival?
Well you you really have you have to want to do it. I mean, you're competing against the smartest people in the world. And it's the ultimate game. I mean, if you're You're never bored. you you have an incredible sense of humility because you can never be right, yet you're still out there trying. I mean you can't be right you can't be right forever, right? You can be right short term. You have to change.
If you're interested in a path for personal growth, I mean I'm not trying to be cheesy, but Let's put it this way. If you're stiff minded, if you think you're hot stuffed. If you aren't flexible, if you're if you lack courage, And you want someone to be your boss and tell you when you can go on vacation, then fine, right? You live in the w in the uh the rest of the world, right? If you want a job that offers freedom
That requires you take risks and change th the way you think all the time. If you I mean it's obvious that you don't have a boss, but you know, it's I think it's the best path to self-discovery I've ever seen.
Yeah, I mean from the sounds of it, it sounds like a lot of your success is some somewhat reliant on your ability to be flexible in the way you think. Do you think that's fair?
It's very fair. W the the the blown out people are have all been people who just had a stick up, you know, had a bone to chew the wrong way. And and, you know, we live in this system that is infinitely more complex than we can ever grasp ourselves. But there are moments where y they hand out thousand dollar bills. And so the idea is is to stay in business in this gigantic organic system that we have no control over to be there when they hand out thousand dollar bills.
All right Chris. Well on that note, let's uh let's call it a wrap, huh?
Thanks, Aaron. That was super fun.
Maybe we can link up in another year or so and we can chat a bit more about your AI endeavours, but For the time being, let me say thank you very much for coming on the podcast. It's been um a super interesting chat and I think uh the folks listening will um thoroughly enjoy it. So yeah, I appreciate your time.
Thanks Aaron. Um good luck to you and I'll I'll make sure to pass on the good word.
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