292 · Laurens Bensdorp - Running 55+ Systematic Trading Strategies Simultaneously

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Free delivery on appliance purchases of $396 or more. Offer valid 11-5 through 12-3. U.S. only. See store online for details. Trading in the financial markets involves a risk of loss. Podcast episodes and other content produced by Chat with Traders are for informational or educational purposes only and do not constitute trading or investment recommendations or advice. You know, you can maybe create a couple of systems that have a huge compounded annual growth rate, but...

There will be times where you're going to pay the price for that with a very large drawdown. If you blend in all those different return streams and therefore when one part of the strategy is not doing well. but the other part is doing well, you do create a smoother equity curve. But at the same time, you also create something that is more robust because you're not depending only on one.

specific equity curve, but you've got a lot of different return streams at the same time. So if four or five of my systems are not doing great, I don't really care about it at all because I've got other stuff that is working at that time. When you have a lot of those different systems, you have a larger trade frequency of course. The larger the trade frequency is, that is also something that gives you more of an opportunity to climb out of a drawdown. faster than if you only have a few systems.

And we're so glad to have you join us for episode 292. I'm Tessa, co-host and producer of the show alongside my awesome co-host, Ian Cox. I also happen to be a trader. I should say developing trader to be accurate with the goal of trading professionally. And oh man, has this journey been extremely challenging to say the least. And at times.

You just want to go crazy and self-doubt can sometimes creep up inside your head. For those who have been at this for a relatively decent amount of time, I think you know what I mean. You find yourself grinding and grinding, trading day after day and showing up consistently and putting in the work diligently and wondering, when is all this going to pay off?

Or maybe you feel like you've fallen back instead of forward. Yeah, I have those experiences and thoughts and have to find a way to snap myself out of it and remind myself that this. is normal. We're supposed to go through this. If it were easy, then everyone should be successful in trading. And that would be impossible, almost ridiculous. So in a way, I like that it is hard. That trading is hard.

All right, now let's get to today's episode, which I think will be a nice treat for those interested or curious in 100% systematic and automated trading. And I'm not talking about just one trading system. Do you know of any traders running 55 or more trading systems at the same time to give them an edge in bull and bear markets? Well, you will today, Ian Cox interviews Lorenz Benzdorp. He's the author of Automated Stock Trading Systems.

Maybe it's not as mysterious as you think once you understand the concept and approach to Lawrence trading and why he advocates for trading multiple systems. Well, I can tell you that I am a total discretionary and... manual trader at this point, but I just love learning and being aware about what other traders and professional traders are doing. And I hope you do too. Well, without further ado.

Ladies and gentlemen, we're so pleased to present Lorenz Benzdorp, originally from the Netherlands. Lorenz, I'd like to welcome you to Chat with Traders. Thank you very much. Good being here. Yeah, yeah. So where are you now and kind of where did you grow up? Well, I'm currently living in Portugal. I grew up in the Netherlands, but I've lived in...

12 different countries my whole life so i've been around quite a bit actually my original background was for a long time i was a team instructor and a whitewater rafting instructor So I did in the winter the ski instructing and in summer I did whitewater rafting instructing and kind of travel around the world with that. And I didn't really have a deep interest in... any of the other financial stuff at all. Then at some point I started my own adventure tourism company in Mexico.

But at the same time, my family, they had a small boutique venture capital investment firm that was in big trouble. And my father, he asked me like, listen, I need somebody to come over here and to help me with this because I'm basically losing money. every year and I can't really trust the people that I'm working with so I really need to have somebody who I can trust with that so I went back from

Mexico to the Netherlands, and that was back in the year 2000. And I immediately kind of had to dive deep into everything that was related to So not only venture capital, but also stock trading and everything. They had a large stock portfolio, which was managed by the normal banks, basically. with a buy and hold approach. And this was in April 2000. So basically right at the beginning where everything started to fall down and we entered into a three-year bear market.

And that part immediately grabbed my attention that I said, like, OK, this is something that really is something that I'm interested into to find out. how I would be able to crack the code and actually create profitably for a living. And first of all, of course, to make sure that I could save the venture capital business for my folks. I cleaned that part up, and then I kind of moved more to focusing my interest like 100% towards educating myself in getting skills in investing and trading.

What were some of the things you learned while looking at your parents' portfolio and how did that formulate your early trading and investing philosophy? I think the main thing that I learned is that it's probably not always a wise idea to just rely on a bank and a portfolio manager. Those people are hired.

at their bank and they have a specific objective to make sure that they keep their clients on board and as long as they can be a point above the S&P 500. But if the S&P 500 is down 50 percent. and they are down only 45%, then they can say, well, we actually did a good job. So what I learned is like, okay, we cannot rely on this. kind of style at all. It is basically a business that is very good for them, but it's not something that is of the main interest for us.

That was the main thing for me that I said, okay, we cannot rely on people that call themselves so-called experts, but do not have any kind of system at all. So from that point on, I needed to start to educate myself, actually, because I don't have any financial background at school or anything. I didn't go or I didn't study math or anything like that.

But I've got a good set of brains, so I worked very hard to basically get all the skills that I needed. And that eventually led, and then we're talking about seven years later, more or less. until I finally got to the style that I'm trading right now, which is completely a systematic style and everything 100% on automation, only using technical indicators.

So you started getting into the markets right around the time that this nasty bear market, three-year bear market or so, unfolded in the year 2000. Did you do any trading during that time? And if so, kind of what did you get into? What I did for my folks was I basically needed to convince them to close out all their positions and go flat because I said we have no.

reason at all to be in a position if we don't know why we're in it and it's losing money every day. So that was the first thing that I did. I said, okay, we need to liquidate and being flat. and then actually see if we can come up with a strategy that actually has an edge. At the same time, I started to trade myself as well with my own account, with a $30,000 account.

um it's interesting when you start with that so that is when you open your brokerage account and i thought it was fairly easy to like okay i could probably easily make like 100 per year just buying low and selling high and didn't have the skill at all. So the first couple of years were very, very painful and I lost money.

every single year. But I think every trader that eventually becomes successful, they kind of need to go through that phase where they lose money because the market really teaches you there. how hard it is to actually make money so i didn't have a real strategy i was jumping from one strategy to the other strategy but i was educating me at the same time so i was starting to get

at least a little bit of a feel for it. The one thing that I was good at, I think is risk management. I always respected the fact that there is a risk of blowing up. I never blew up completely my accounts. I was close, though. So you had more of, what, a death by a thousand cuts instead of one big blow up during those years? Yeah, that's perfectly said. It was basically the first two, three years I was losing consistently money. I had no idea what I was doing.

And the interesting thing is, although one is working very hard, you can work 10, 12 hours, 14 hours a day with trading. That is no guarantee at all that you will make money, actually. But I never blew up, but I was very close to that. What were the early signs and indicators for yourself that catalyzed you to...

show some interest in a systematized approach? And what was your early investigation into that? I started reading a lot, of course, and then eventually... I came to a document about the turtle traders. So the famous group of turtles in the 80s that made so much money, of course, by using a systematized approach. I read everything I could about that group. And I eventually then figured out there was some information about the way how they were trading and what was...

Surprisingly to me is that it was a very simplified approach, but it was very clear and easy as far as when to enter, when to exit, how to size your position. and everything and that to me made perfect sense because it immediately showed to me that okay this is where one can have a system but also you can have the statistical feedback if actually what you're doing has

an edge? Is there an edge in the system? And that's where the whole backtesting part came in. So I started to purchase software to backtest and hired programmers to code ideas that I had. And that kind of moved me more into the systematic trading. For me, it was all about the fact that I wanted to see that the idea that I had, if there was actually a statistical edge.

that it could make money and probably about seven out of ten ideas that i thought were very good did not have an edge at all but it was the turtles and their rules that basically showed to me like okay This is something that suits me perfectly. So could you give us an example of some of your early types of early versions of a systematized approach and what did it attempt to accomplish?

started with simple trend following systems, very easy breakout systems. And those were systems that generally they had an edge. Didn't know yet at that time how hard it is to actually consistently trade something, although it has an edge. I mean, trend following has. a clear edge but there are many times when you are in large drawdowns basically so that was something that i found very hard to deal with but i wasn't losing really money at that time again

But eventually, I also found a lot of research that was based on a style that is very opposite to trend following, which is mean reversion. That is basically the opposite, that you buy the fear, and once it reverts to its name, you get out of the position again. And that approach, especially at that time... really made to my personality a lot more sense. I was a lot younger than I am right now and a lot less patient, I would say. And when that happens, I think a style like Mean Reversion.

when you're only in for a couple of days, is something that can resonate a lot more. There's a lot more traits, of course. So that's where I started to discover, like, that is my real... style that back in 2007 when I had worked with various programmers and various software developers, I actually came to a suite of four different systems.

too long and too short, all based on mean reversion. So you just did mean reversion strategies early on or did you combine it with trend following? Did you expand? fewer the number of strategies that you implemented early on? I did. I did. Eventually, yes. So I started with mean reversion only because I thought, okay, this is absolutely for me the holy grail.

But then I started to notice that there were times as well where mean reversion doesn't work. And actually, trend following would have been doing incredibly well. But I needed to learn that lesson first. 2007, 2008, and 2009, my mean reversion strategies did really, really well. So that gave me the confidence that systematic trading with the mean reversion style.

was very good but then came some years where it started to be a lot harder and I also saw that there were just flaws where basically you can have that negative goo that people talk about in mean reversion systems where you have a lot of small winners, but once in a while you get a lot of big losers. I noticed like, okay, well, if I can combine this and actually have also a trend following approach that trades long and short at the same time, then I could offset.

those bad results of the mean reversion systems but also at the same time many times when the markets were really trending the mean reversion system would do okay but they weren't catching all the trends, of course, because you were getting out fairly fast. And then if you have a trend following system, of course, that really helps them to completely ride that trend when there is a big trend.

So what happened in 2008 when the market melted down? You were running just a mean reversion system at the time? So I ran at that time two mean reversion long systems and two mean reversion short systems. I think for quite a long time, I actually thought like, okay, mean reversion long is working in bear markets as well because I did make money on my long system in that 2008 period, which generally...

led me to kind of a false belief that mean reversion long system will always make money in bear markets, which is not the case. But in my case, I think I was a little bit lucky there. in hindsight, but I followed my rules and everything. Of course, the short selling systems did phenomenally well during the bear markets, but even the long systems, there were transfer filters in there.

When the market really started to drop down, those systems were basically flat. And then the mean reversion short system, they made money. So 2008 was my best year in trading. I did have a higher risk tolerance that I have right now. So my position sizing at that time was definitely different than it is right now. I mean, I had a lot less equity. So the dollar swings were...

a little bit different as well. And I think at that time, when you're younger, you kind of look more to wealth accumulation. And when you start to get older, there comes more of a focus to also wealth preservation. So you start to look more to the risk as well. Have you ever watched a stock explode and thought, if only I had the capital?

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iPhone 11 or later required. So given that you did well during the 2008 meltdown, what was the catalyst for you to want to expand the number of systems you have and the strategies to include? trend following because you could just keep doing the mean reversion, right? At what point did you decide to add trend following to what was a very successful system up until that point?

I think the main catalyst was definitely August 2011. So August 2011, there was some news message from the Fed that made the markets drop. like a stone and at that time all my long mean reversion systems they showed losses that were at least twice as large as what my back test ever showed so that was like a huge wake-up call for me that I suddenly felt like, my goodness, the back test that I have looks great, but I actually can have times where the losses are bigger than what my back test shows.

That made me realize like, well, if I would have had at this time a trend following short system that would have captured that breakout to the downside. in the beginning of August 2011, I would have been completely hedged and I would have completely being able to cover that big drawdown that I had during that time. And that was a fast drawdown. It was like two weeks of continuous pain where I probably learned the most about trading my own systematic system.

that I saw like, OK, I need to have different approaches as well, because there are just times where long mean reversion only is not working. So up until 2011.

How often did you need to or feel tempted to tweak your system to try to get it even better? I did that quite a bit in the beginning. I read about it, that you shouldn't do it. But I think especially in the beginning, one has that tendency of perfectionism. So there's always like the tendency, like I want to make things better. So I did.

weak things, but not that much. What I started to realize that every time when I tweaked something, I kind of was running behind the facts because it was based on a recency bias. where for the last, let's say, six months, the system didn't work that well. So one would over-optimize then. One would optimize for the recent six months of data and say,

OK, this and that parameter would have been doing a lot better and the whole back that would have done better. So let's move over to that specific rule set then. Well, guess what? then suddenly you get a drawdown in that specific rule set that you have. So once I started to see that and I saw that my older systems with... the previous rules actually were recovering very nice. At that time, I said like, okay, what I read and what I learned from other people was actually true. You just need to...

accept the fact that there will be times where strategy works and other times where strategy doesn't work. So instead of tweaking, and this is incredibly important. So instead of tweaking. What I did, I added more different systems to my suite of systems. So this was the start where I started to expand on my suite of... Because I saw that, okay, there are times where a certain strategy doesn't work. That will happen with every single strategy. If you take a trend-following approach...

There are times where a short-term breakout strategy could do very well, but other times when a longer-term breakout strategy could do very well. Now, what if you combine those and you say you have... One strategy that looks for a short-term breakout, another strategy that looks for a medium-term breakout, another strategy that looks for a long-term breakout. The same for mean reversion. You say, okay, you can have...

systems that look for a strong pullback, systems that look for a teller pullback, and systems that look for a weak pullback. So you use different indicators to make sure that you basically create different return streams. And that really helped to kind of smoothen my equity curve because you always have some of the systems that will not work, but that is part of the trading process.

I see. So how many systems did you end up creating to try to smooth out your equity curve? Well, I currently trade a suite of 55 different systems, long, short, mean reversion, trend following. some other styles as well mainly on u.s stocks but also futures commodities and everything so it's a large blend of a lot of different things that all trades together basically

Just curious, how do you have the bandwidth and the time to manage all these 55 systems? That's quite a lot. Yes, and it wouldn't be possible to do that without my own software. uh my my uh my business partner we built a software basically for that the trades and everything gets executed uh completely on autopilot so the software runs the back test

And it then spits out the orders that you need to buy for the next day. And then another part of the software connects to my brokerage platform and buys and sells the instruments that my software tells it. to do so um it is a hundred percent automated style that i do and and that is absolutely crucial as well if you trade 55 systems i think it's it's possible to

manually get up to maybe 10, 12 systems or so. I know people who do that, and you could do that in probably less than 30 minutes a day. But I think the other thing that you need to be careful for is the factor of human... Like the more strategies you trade, the more orders you need to place. And if you do that manually, so you look at your screen and you say you need to buy.

stock XYZ at $50.21, sooner or later, there will be a fat finger mistake or something like that when you do everything manually. and then of course to have everything automated that helps it a lot and then you can say okay now i can really expand the amount of systems that i trade because i don't have a limit anymore as far as what my brain capacity can deal with for order placement and execution so early on you had success with just a mean reversion strategy uh and then you went um

a trend following, just curious in your quest to eventually arrive at 55 different systems, were you solely focused in on getting that equity curve as smooth as possible? and getting the drawdowns as smooth as possible. So were you, was your thinking such that, hey, I'm willing to give up upside potential just to have additional, lower my risk profile?

Absolutely. Absolutely. That was, for me, the key to everything. You know, you can maybe create a couple of systems that have a huge compound at annual growth rates, but... There will be times where you're going to pay the price for that with a very large drawdown. I would not be very comfortable having a drawdown of 50%, losing half of my equity. If you have a fund, you can continue to trade because your customers...

pay you a management fee or whatever. But if it is your own money, it is a lot harder to deal with those drawdowns as well. So if you blend in all those different return streams, And therefore, when one part of the strategy is not doing well, but the other part is doing well, you do create a smoother equity curve. But at the same time, you also create something that is more robust.

because you're not depending only on one specific equity curve, but you've got a lot of different return streams at the same time. So if four or five of my systems are not doing great. I don't really care about it at all because I've got other stuff that is working at that time. And when you have a lot of those different systems, you have a larger trade frequency, of course. The larger the trade frequency is.

That is also something that gives you more of an opportunity to climb out of a drawdown faster than if you only have a few systems.

So could you give us an example of some of the different systems that you have and kind of what markets are they in? As far as trends following, a good example would be... a simple nasdaq 100 system that captures the trends of the nasdaq 100 stock and you can have very simple rules then that measure a trend you choose them

The 10 stocks that are based on a certain rule, which could be the highest rate of change. It could be that you want to look for the stocks that have the highest dollar volume, but they must be trending. Then you place the stop loss and you have a trailing stop.

That's it. Very simple and straightforward. Now, that style, if developed in a robust way, should create very nice compounded annual growth rates when... there are big bull markets like 2023 in the nasdaq for example but what is a drawback of a strategy like that with trends following there will be time because you have that trailing stop that you need to give back a part of the profit of course so you will have times where you have to deal with large drawdowns now if those drawdowns happen

They basically happen on the trend following side when you start to give back profits. What you then can do if you then simultaneously trade a strategy that would focus on mean reversion shorts. Meaning that you sell short, overbought stock that have a statistical likelihood larger than 50% that they will revert within the next.

let's say five days or so, then you can kind of offset that drawdown that you have with your trend following system. And that immediately... make sure that you increase your risk adjusted return.

In your 55 systems, are you looking at other, say, uncorrelated or less correlated assets like, say, crude oil or gold or currencies or anything like that? I mean, I also trade. commodities and metals and stuff like that and those instruments they could be non-correlated to the equity market but it is not a guarantee i mean There can be times where everything goes down at the same time. That doesn't happen very often, but there are times when that could basically happen where both stocks...

Gold and bonds go down. But generally what you do, you add a lot more diversification in your suite of strategies, and that increases the odds of having more robustness. in there as well. And again, having different return streams as well. I also trade those instruments both long and short, but instruments like commodities. I do not do any mean reversion on that. For me, it's only trend following both long and short. And so right now, of course, I'm long gold, long silver, et cetera.

I mean, if you see, for example, when we had the COVID crash, every kind of trend following style would have been short crude oil, for example, that went negative at that time. When it comes to correlations, do you look at, I'm just curious, what kind of timeframes do you look at?

going back because i notice like when i compare different asset classes say the last three months could look one way and then if you go back six months or a year or two years and each time period can have its own correlations And just kind of curious if you look at multiple timeframes or do you just stick with one or just a few? For the correlations or just for the strategy, you mean?

Yeah, yeah, for the strategy too. When you look back at a period of time to see how these different strategies and assets compare to each other to balance out in your 54 strategies. Well, I think... I like to have as many different time frames as possible. I think there are times where short-term strategies do very well. So I have strategies that are day trading.

And I have strategies where the average trade duration could be more than a year. And that is exactly how I like it as well, because there are times. where you can make money within that more of the noisy market with the day trading strategies, but other times where you've got those longer, sustained trends. So I try not to... be biased at all as far as time frame so for example my my trend following strategies on my stock portfolios their strategy

that have a 25-day look back of when to enter, and that could be a Darnchen channel, a Keltner channel, or whatever. It just needs to measure a trend. But I've got other strategies that have...

a 300-day look back. And that's how I completely spread it around. On the short side, it is a little bit different. I tend to focus a little bit more, especially with the equity, on not... too long of a look back because the short side has more of a different objective as well to make sure that it helps you when the long side starts to lose money. So there is, of course, a positive bias in the stock markets over the last 100 years or so. There's a 7% compounded annual growth rate.

But you do have severe drawdowns, 1929 to 1932, close to 90% drawdown. And then I don't know how many times the market had a drawdown of around 50% 2008 S&P 556%. So you want to have those short selling systems as well, but they're generally a little bit.

shorter in duration than the longer term ones. So how do you handle kind of risk management for each one of those? of your 55 different systems, do you set the same kind of stop-loss levels and exit points, or do you vary it? It's different for every system, for mean reversion. I make sure that I have a stop loss. It needs to be far away because it is only in there for my risk management so that I know.

When I get stopped out on my mean reversion system, I know that I lose X percent of my equity. And with 55 systems, it's a very small percentage or so. But very often, you need to give those mean reversion systems some space. before they start to revert to its means. Because often you kind of catch like a falling knife or so and to expect that it immediately will move up to the upside. No, you need to be in that pain a little bit more.

before it actually can turn into a profitable strategy. But trend following strategies, I do have strategies that have a very small stop loss of, let's say, one average through range. I have other strategies that have a stop loss that could be very large of 25% or something. Again, what I try to achieve with that is a lot of diversification.

amongst the different market structures that you have there are times where it's been a great idea to jump into a stock but when it's not working boom you get out but what happens often is that It's just whips going and then it moves up again. Now, then that strategy would be getting in and out a couple of times. Now, if I have another strategy that has a 25 percent stop loss, then.

I have a complete different profile for that specific strategy. So again, I look a lot to make sure that every strategy is completely different in nature and put that all together. So do you equally weight each one of your 55 strategies with the same amount of percentage investment, or do you vary them? I do. Yes, I do. I do not want to have any kind of...

bias towards what strategy would be best. So what would be dangerous, for example, is if you look at the backtest of all the 55 systems and you say I'm going to allocate the most to the strategy. that has the best backtested return. That would be very dangerous to do. I think every specific strategy that I have has a specific objective. So it's all built that they work together.

Now, there are people, for example, that are more geared towards mean reversion or are more geared towards trend following. And so it's totally fine as well to say. Well, if your personality is more a trend follower, it's totally okay to say trade 75% trend following and 25% mean reversion. In my case, I say I don't want to make any difference of it because what I...

What can happen is very easily a recency bias can jump in that you start to reallocate things based on recent performance. And so I just say I keep everything completely.

equal and let the thing run. In previous interviews, I heard you mention about the hidden risk. And you said... that what you don't see in your strategy is the big risk. So how can we find this big risk? Yeah, it's a good question. And it's so super important because... I think with all the software power and computer power that there is today, it is very easy to come up with a back-tested system that shows a phenomenal return.

and a very low drawdown, right? But if you look at the trade distribution of any strategy that has a phenomenal return, You need to ask yourself, like, okay, what haven't I seen in here? What actually could happen? So a good example of that is, for example, with the mean reversion strategy, let's say you've got...

a tested strategy with a 30% compounded in your growth rate and a 10% maximum drawdown. And what you do then, you start to look at the trades. If you see it, your whole trade distribution. that the majority of your trades were big fat tails that you make money of that's not supposed to happen with mean reversion you're supposed to make money

on a lot of trades and grab a little profit here and there. And if you then also see that the losing trades that you don't see the big losing trades in there. Then you can say, well, conceptually with mean reversion strategies, you will have that risk that you short a stock at $10. And the next day it opens at. $30. That risk is there. And what we human beings tend to do is we try to filter those bad traits out in our backtesting.

Which, of course, only leads to a false representation of what the strategy really is. So if I test the mean reversion system, I want to see. some bad stuff in there. I really want to see that. If I don't see it, then I get very critical to myself and say, okay, something must be off over here. Because I've been through that in 2011, where my drawdown was so much larger, and I got all those big fat tails moving against me. If I see that it just looks too good to be true.

Well, it's most likely that the big fat sales have been filtered in as winners. And there's no loser that should have been there. And then immediately, those are big alarm bells then. And again. It's okay with every strategy to have those big losers as long as you have a lot of different strategies trading at the same time. You've also mentioned previously, you said that...

The system you use needs to be your own brainchild. Could you go into that? It's incredibly important because we can buy a system. There are system vendors out there. But what eventually happens as well is that, let's say you have a complete set of rules of a system that has great backtested returns and everything, and you really...

like that. But if you haven't developed it from the ground on, if it's not your brainchild, you don't know the pros and the cons of that strategy. And there will be a part in you that Immediately, once you start to trade it and you see how it behaves, you won't feel comfortable with it because you see all kinds of movement that you would not. So what would happen next is people then start to tweak it and they change the parameter to a set of rules that suit better.

their personality. It's incredibly important that people understand that it is the concept that is a lot more important than the specific parameters. If the concept is clear to you, then you can create something around that concept. But if you use a 100-day Keltner channel or 120-day Bollinger band... or a 95-day Donchen channel to enter your position. There's no magic to any of that. But the concept is.

I think Richard Dennett said that as well. The person who taught the turtles, he said, I could publish the rules of my strategy in the Wall Street Journal and nobody would follow this. And when I first read that... No, that can't be true. But indeed, that is absolutely true because if somebody hasn't developed it, it won't suit their preference as far as the style.

as far as the indicators maybe as far as the position sizing maybe for some people it's not aggressive enough for other people it's it's it's too aggressive so you need to find something that you build up from the ground that you are comfortable with because then you will understand as well why there are times when it loses money and that part is incredibly important when you're winning

With your strategy, everything is easy. We get a big ego then because everything goes incredibly well with trading. Oh, this is great. But when you're losing, when you're in a drawdown, those are the hardest periods for traders. But most of the time we actually spend in a drawdown, meaning we're not making a new equity high. And at those times, when your strategy is not making money, if you know the why.

Then you can deal with that drawdown. If you don't know why you're in that drawdown, which would happen if you would use like a signal service and you're suddenly in a drawdown and you don't know why. You will suspend it immediately. But if I get in a drawdown that is larger than my simulated drawdown, I would see that as completely normal. I would understand why it is in a drawdown.

And I would be comfortable with it. Is it nice? No, it's not nice. But the whole key is that you want to be consistent and not giving up on your strategy. Because when do people... suspend their system at the worst possible time. Not when they're making equity high. They suspend their system when they are in a drawdown that dollar-wise they cannot deal with anymore.

When a person designs a system and they say, well, according to this system, I expect a drawdown of potentially up to 20 percent. But don't they have to also look at the type of market that they're backtesting in and how markets change over time? And so that in the future, perhaps we enter a new type of market where the drawdowns could be even greater. than what they had backtested. And how does one, how often have you found that to happen?

What does one do in that? Is there a certain cutoff point where you say, well, it's now down 5% or 10% more than my worst drawdown calculation, so I got to cut and run. I've got to have my own stop loss on ejecting this system that I developed. It first of all has to do with position sizing, that you size your position in such a way that you can deal with the drawdown.

Secondly, you need to expect that your live trading drawdown will be at least double the simulated drawdown. Third, the market will... always change you need to expect that they will always be changing and that's why i advocate to trade a lot of different systems i have systems that by themselves if you look at them They're not that great, but they could be very great if there comes a certain market event where that system is designed to do very well. So I expect...

the markets to be different. I expect market moves that I haven't seen yet. And I expect then that a part of my strategies would not do very well, but other strategies that could actually do better. than what would be expected. So the awareness that the future will be different must be there 100% because it will be always.

And hence, this is the reason for you developing 55 different systems, right, to just in case we enter in a different kind of market. And so with 55 systems, you feel very well covered. Exactly. I mean, I have a system, for example, that is designed for a very sharp sell-off in the market while it is still in a bull market. So the market is actually still going up and suddenly it sells up three, four or five days in a row, three or four percent. And that is a time where generally.

Your trend following strategies all lose money. Your mean reversing strategies will also lose money because it keeps going down. Your mean reversing short strategies are not in the markets anymore. because there's no pullback to the upside. And your trend following short strategies possibly are not yet triggered because there's no specific downtrend yet. And if you then have a strategy that...

Most of the time, when you enter it, it loses a tiny little bit of money. But when you get that big sell-off, that's the one strategy that will make big money. 1987 crash, which for many people, they can't include it in their sample size. I mean, it's a little bit hard to test mean reversion strategies going back to the 80s because commissions were... completely different um the pricing of stocks was different so what

What we trade now in that style, we couldn't have traded at that time. The edge was just very different. But if you would get like a 90-87 crash or whatever, what kind of event it is, I want to make sure that I have some strategies in place. that are specifically designed to make money. And I'm willing then to have that strategy in there in my suite of systems, although every year it loses a little bit of money. So how much time can...

the average investor expect to spend in creating a system or enough systems that give a sufficient diversification? It depends on a lot of different things on what your skill level is. I would say if you start with a simple base of one long-term trend following system, one mean reversion short system, one mean reversion long system, one trend following short system as a head.

and maybe a trend-following system on a basket of commodities. And those could be futures. It could also be some commodity ETFs, for example. I think you can keep it then. very simple, but the exact amount of time spent, I think it very much depends on the individual. Some people are very experienced with this and they could do it maybe in... one or two months or so, other people would need a lot more time. Other people would decide, for example, to get help and get a mentor.

to actually develop those strategies and with software and everything because it's a lot of different parts in there and there's a lot of traps as well with the whole system development because it's so inviting to creates wonderful back-tested returns. So that's a trap that one needs to be very, very careful for. So in your view, do you think systematic traders deal with a different kind of trading psychology?

Yes, everybody has a complete different psychology. There's overlap as far as the fact that I think position sizing is something that... Often people trade too large of what they really can handle, which is all good when the system is going in your favor. But when it's not, they kind of suspend it.

But there's all kinds of other psychological issues that we deal with. And that's why you kind of need to find what really suits for you as well. And that is different for... everybody there's not one style suits all um i've worked with with people that decided i want to trade trend following only because i don't like mean reversion totally fine nothing wrong with that

Other people that say, no, I like the short-term duration of meme reversion systems. Also fine. Both have pros. Both have cons. But that's where you need to find your style, what you are comfortable with. Take for example, a fund manager who needs to deal with clients, who needs to deal with scalability. Let's say they have a billion under management. They can't even trade the same.

as a private trader with $500,000 in his account who can have access to a universe of stocks that can offer a significant edge over the institutional investor because they cannot access. the low liquidity stocks of course but for everybody it is completely different yes Excuse the last interruption here. This is Tessa. We hope you're enjoying this episode so far. If you love the podcast, please give chat with traders the best review you can on whatever platform you're listening from.

This will help us to keep the episodes coming. Also, if you haven't subscribed to our email list, please hop on to chatwithtraders.com and click on subscribe so we can keep you posted of information that may be of importance.

Thank you. Now back to the chat with our guest. So to wrap things up, are you working on anything now that you're looking forward to developing? What's up? What's next for you? I'm always developing new strategies. My main focus right now is developing more and more strategies for the unexpected, developing strategies to lower the corporate risk as well, but mainly...

That's about it that I focus on. And besides that, yeah, I'm working on my third book, which is all about IRA accounts, which somewhere in the first quarter of next year will be coming out. And meanwhile, letting the systems do its thing and enjoying the ride with that. Fantastic. What's the name of your upcoming book? I don't know yet. Oh, OK.

We're not there yet. So the title is still a little bit of a secret, but it will be known soon. Great. And how can our listeners get in touch with you? They can go to tradingsystems.com. dot com. And over there they can see the links of the books over there that I've written as well and my business partner as well. You can see the software that I personally use and that is offered for my mentoring students as well.

And if that is something that people like, they could always fill out an application and we can talk. And if there's a fit, if we could work together. And that's basically it. Fantastic. Well, Lawrence, thank you for coming on Chat with Traders. It was my pleasure. Absolutely. Thank you very much for having me. You've reached the end of this episode of Chat with Traders. But rest assured, there are more episodes loaded with real market insight and zero hype on the way soon.

So to stay updated with each great new release, subscribe to the podcast on iTunes. And we'd love it if you'd leave a rating and review. We'll catch you next time on Chat with Traders.