298 · Christian Mayer - The Power in Fixed-Sized, Non-Compounding Plays

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Trading in the financial markets involves a risk of loss. Podcast episodes and other content produced by Chatwith Traders are for informational or educational purposes only and do not constitute trading or investment recommendations or advice. Yeah, that's right. This is Tessa, co-host of Chat With Traders, and we're on episode 298. How's it going for you? Thanks for tuning in to one of the first few original trading podcasts from way back, like 10 years ago.

My co-host Ian Cox and I are honored to keep it going still due to your listenership. So thank you so much for your continued support. Today, my co-host Ian speaks with Christian Mayer, a systematic forex trader who has worked on the institutional trading side in the past. And we don't get many Forex traders on the show, and I'm not exactly sure why, so maybe we'll have to change that. So Christian transitioned from equities to Forex, focusing on fixed size mean reversion strategies with

some fundamental correlations where structural edge is statistically likely. His initial losses led him to a research and systematic driven approach and back testing as well. He trades with fixed position sizes, wide stop losses, and avoids compounding to minimize exposure to fat tail risks and black swan events. emotionally disciplined yet honest about the psychological strain of prolonged drawdowns. Christian

Blends rigorous quantitative methods with thoughtful strategy design. With a successful track record, including a second place finish in one of the World Cup trading championships in the forex category. He also created globalethicsanalytics.com to respond to the demands of traders wanting to understand more about his forex strategy and view his strategy's performance. Ladies and gentlemen, all the way from Munich, Germany, we're pleased to introduce Christian Mayer.

Hey, Christian. I'd like to welcome you to Chat with Traders. Hi, hello, thanks for having me

So where are you now? And where did you grow up? Um I'm in Germany right now, actually in Munich, uh south of Germany, uh where I also grew up. Uh-huh. And um so tell us about a little bit about your early years. When did you first start having interest in the financial market? That was probably um my last year of high school and first year of uh university. So I I I studied um economics with a minor in informatics.

So I also learned how to program. And that was when I realized that I think I learned that I'm not sure. People from my generation pr probably many learned how to trade at the very beginning by simply Googling how do you trade? And then usually the first thing um that that comes up is some sort of technical analysis very often. At least that that's how it was for me. And and that's when I when I thought, well, I'm also learning how to program.

So nowadays there's a lot of historical data out there that you can get for free and you could uh potentially backtest. these uh strategies that you can find very easily when you just Google um technical analysis, for example. So that's that's how I I first got into into trading and and my interest peaked there. Yeah. Uh did you know anyone else in the field? Uh or did you just strike it off? Did you go solo, so to speak?

Uh I did go solo actually at the beginning. So I didn't I didn't really know anyone else um who who wasn't trading. I think actually in in Germany uh Yeah. It's um people are people don't like taking risk, so there's also not uh such a large in industry as in in all in other countries. So yeah, I was definitely um I d I didn't know anyone else in the industry. So when did you actually open up your first trading account? Uh that was uh that very first year uh at university.

Uh it was a very, very small account. I think it must have been something around 500, 600 euros. So very, very small. Um, but then again it was my first year studying and I wanted to a strategy but I didn't back test yet, but I read about uh on the internet. That was uh a technical strategy. That was basically the I'm sure you you've heard of the RSI, which is a technical indicator that shows oversold and overboard signals.

And I tried that one out um on equity indic uh indexes, which that that was my very first experience with it and um That was probably one of the worst first experiences you can get because It worked at the beginning, but I but I obviously didn't now I know that I didn't quite understand what I was doing. Um but at the same time you get rewarded. So that's why that that's why I think that's um one of the worst combinations.

combinations that you can have at the beginning. So it did work for a few months. And that's when I started thinking, wow, I found something incredible here. Until um as many many mean reversing uh man mean reverting strategies, it works until it doesn't. And at some point the market started to trend and um that account unfortunately went to zero. Yeah. What uh year was this? Uh that was uh year twenty twelve. Yeah.

Two thousand twelve. So the market was uh trending up rather steadily at that time. I see. So the RSI showed overbought the whole time. Is is that Yes, yes. And when you when you uh short it then um and it keeps on training up, uh that doesn't work so well in in your account. At the beginning it was working for a few times and that's when I started um Yeah, trading more size. And that's exactly when it stopped working.

And so did you uh dive into any other uh kind of technical indicators or change up your strategy in some way? So uh that was a very valuable lesson because I blew the whole account. So um the next time I decided that I'm first gonna do the research and really gonna back to the strategies, uh think about what I'm what I'm gonna be trading before I actually put in uh real money. And that was uh when I really put in more time to learn how to back test the strategy.

Um I did that using R and MATLAB. That's um uh th those um Yeah, just uh programming languages and they're actually quite useful because they have a lot of uh libraries with which you can um back test a lot of uh strategies um very easily. That's what I use. And I started back testing a lot of strategies.

So I was looking um at the beginning mostly it was mostly mean reverting uh strategies. So that was the RSI uh Bollinger bands I've heard you can you can use. I I use them for mean reverting um signals. It's also possible to to use them for trend following obviously, but um in my case I use them for for mean reversing uh strategies.

Then also the Larry Williams percentage, the stochastics index, all of those indices that are very, very similar, actually. They're all mostly mean reverting indicators. And that was what I was uh backtesting at that time uh the most. And that was also when I realized that for equity indexes They didn't work as good as for some foreign exchange pads, for example.

Why is that? At at that time I I didn't quite know why that is the case. I was just happy having being able to find that out and and not not to do the same mistake again. Then afterwards I started also researching more fundamentals together with the technicals. That was when I realized uh that A lot of these currencies uh were

whether it's AirS I or Bollinger Bands or or Larry Larry percentage uh and so on works. Uh th those are usually economies with um that are that are highly how do you say that are highly Interconnected. In this case, for example, um an expert that I that I found that was very uh profitable with this with these strategies was for example uh the Canadian dollar versus the Norwegian crown. And that Mostly because they, about both of those economies, oil exporting economy.

They they export a lot of oil. So as a result, they have a very high correlation to the price of oil. And since both of them export a lot of oil, you can also plot one currency against the other and you will have um a so w what I would call a mean reverting time series, which means it's basically um Data that mean reverse. Which makes fundamentally sense because both currencies should be going roughly into the same direction when the oil price goes up or when the o oil price um goes down.

When you noticed anomalies in this when it didn't track oil for some reason, were you t more tempted to increase the size of your positions to take advantage of it eventually catching up? The first version of the strategy was uh was quite simple. So I was just looking at these technical indicators and I didn't even know about

the possibility of um well I didn't think of it at that point in time that you can average in and average out of your trades. It was still very new to me and uh the first uh strategy was very simple. Uh when you get the signal, you go all in. And when you get uh the the take profit you get uh you you go all out. So there was no averaging in or any sort of variable um lot size that that I was using.

So did you switch basically to from stocks into foreign currencies? Exactly. The the basis for this was really the back test that I was doing. I I saw that um mean reversion tends to work on certain FX pairs. With time when I was doing more and more fundamental analysis, that was also the time when I also started to get to know some people in the industry.

I started to reach out to people um on LinkedIn especially a lot. You know how it works. You you you you text especially at the beginning when you're just a student, you text a hundred people, maybe one or two reply. Um but that worked and uh and then and that helped a lot. How long were you uh doing this for? Were you making did you have a other job on the side or were you making money just from trading?

Uh that's a little bit difficult to answer because I was doing that since the beginning of my studies and I'm doing it until now. So I've always been running this strategy. Uh-huh. So so in other words, you uh you didn't need to work a job on the side or or you were doing this you were doing trading full time as your full time profession? From the beginning.

Okay. Okay. Now I understand the question. So uh I I wasn't doing it um all time. This is a little bit that that's difficult to to answer because The strategy basically works in a uh on a very long term timeframe. So it does on average about ten trades per year. That's approximately one trade per month. So you can perfectly combine it with uh your stu uh whether full time studying or a full time s uh full time job. Uh d did you end up uh getting a job in the financial industry?

Yes. My first job out of university was an investment fund that traded l a long term strategy on equities and bonds. And it was a very much um a very risk parity like strategy where you basically try to invest less in the asset that is currently highly volatile. and you try to invest more in the assets that are currently less volatile, um, simply because history has shown that volatility often has a very high so called autocorrelation.

Which means if volatility starts going up, the probability is high that it will keep on going up for a certain time window. And uh the other way around. Yeah. That's that's the theory behind it. And that was that that that's what the what the fund was doing, basically. When we look at the VIX index, which m measures volatility on the S P five hundred, it uh looks like the

the amount the times of v volatility or when the VIX is high is actually pretty a narrow window. And so and most of the time the VIX is uh fairly low and steady. Uh just curious how how did what was your role there at the at the fund? And tell us a little bit more about how how they did the strategy.

My my role was uh I was part of the investment management team where we um basically had to uh check the strategy that it's working correctly, uh rebalance also the the assets. Um as I said, it uh when when the volatility changed of the assets, you had to rebalance it. And um that was that was mainly uh the job. Uh that was a team effort. So we did that as a team. And it was also a systematic strategy. So there was no intervention from our side in any discretionary way.

Uh-huh. So so this was what, you had some sort of system that would tell you or you had m metrics to go by like um If the realized volatility of the underlying asset was going over a certain threshold over a certain period of time. you would stop investing in it and instead uh trade out of it and trade into the other assets that show less volatility. I I see. And the other assets are what, bonds or something else?

Bonds, exactly. Yeah. W is the goal here to try to um really reduce the chance of being hit by a black swan? Because what you're talking about sounds very s similar to uh I don't know if you heard of Naseem Tal Talib. Uh he he wrote the book on uh black swans and he mentioned this as

one of the strategies, the barbell approach. Yeah. Overweight uh very conservative investments like bonds and then uh maybe eighty, ninety percent and then the uh ten to twenty percent you put in um much higher risk uh assets. Um that that that's very much the the theory behind it. You also this this um fund also tried to uh keep the drawdowns low.

Um simply because of the because of the mathematics behind it, right? Because if you have for example a fifty percent roll down you need a hundred per you don't make a hundred percent just to get back at break even. Exactly. So what were some of the assets uh that you were that the fund was investing in on the riskier side of the equation with with a smaller portion of the the total assets? Like individual stocks or options or what high risk uh type assets?

So this fund was quite straightforward in in terms of assets because this was um basically just the fund was just investing via ETFs into equities. and into fixed income also via ETF. So there were no uh leveraged um products involved or derivatives. During this time you're also able to trade your personal account without any restrictions?

That was one of the reasons why I why I joined um this company, because it was possible. Uh for many other companies um it wasn't possible. So they they already tell you this during the interview that you cannot trade um any of your positions or you sometimes also have a a minimum time horizon. For example, you have to be invested for at least thirty days in in an asset uh in an asset and uh you cannot hedge it.

um and so on. Uh but he was possible. That was uh one of the reasons why I yeah, I joined I joined the company as well.

Did you learn anything uh at the company that you later incorporated into your own personal trading? At this company, not too much, because it was a very long term strategy and it was mostly in equities and bonds. Where I worked later, I worked also at a proprietary trading company where they uh did quite a few um yeah, short term strategies. And that was um That was a little bit of an eye opener for me, especially um in terms of my uh with regards to my my own strategy that I was using.

Still. Tell us why why was it an eye opener? It was mostly an eye opener because that's where I learned what it means to have there's no official technical term for it, um, but mostly they refer to it what it means to have a structural edge, which I would define as understanding your asset. in in such a way that you know where it's most likely going to go in in the midterm and long term especially. And what does that mean? Uh when you look at

equity index uh in the uh indexes for example, if you look at the whole history, you will see that they mostly in the US uh tend to go up over time. If you take a very, very long term view on the Canadian dollar versus the Norwegian crown, for example, and you plot the chart. uh you will see that it's h highly mean reverting, which also fundamentally uh makes a lot of sense. Or when you look at the volatility futures, you see that over time because of the of the futures decay

It's basically just a line that goes down on a chart. And and this is this is something that um they would call a structural edge. Where you just know where long term or midterm the price of the asset is most likely going uh gonna go, completely independent of what the current fundamentals are. And and that's something where I re where where I really learned it's not gonna make sense to try and trade a mean reverting strategy or indicators on a trending asset.

It's it's just not it doesn't matter. You can tweak it however you want, but it's in the end if you find something that is profitable, it's likely um over optimized. That was that was basically the most valuable lesson that that I really learned. Um that th there's there's nothing more important to than than to have a structural edge than to really understand the asset that you're trading.

In our pre call, you mentioned about part of the strategy, I believe, for yourself or at the fund was to not reinvest the um the earnings, uh, so as to help reduce the likelihood of getting blown up by a black swan by continually compounding. Could you go more into that? Some strategies um when you back to them.

And you use, for example, uh a portion of your portfolio size as trading size. For example, you say you want to only risk one percent of your portfolio in every trade. The good thing is that you compound your return. Uh the bad thing is obviously your strategy always has to work. very well in order for you to not um have a very large drawdown of which you cannot come out or you blow the ac or or blowing up the account.

if you try and trade a purely fixed size strategy. So you you trade with every uh in every trade you trade you you take exactly the same position size. Let's take um let's let let's talk about an example. If you have a strategy that on average per year um can make you fifty percent. But it can also lose a hundred percent. This is obviously a strategy that you cannot implement.

However, if you trade this strategy over two, three, four, five, ten years, let's say, after the first two years, if you make two times fifty percent, you already Uh one hundred percent. And since you are not increasing the trading size. Even though your back test showed that maybe once every ten years um your your strategy has that one hundred percent drawdown, you're already up one hundred percent. So even if you have that drawdown, you will just be back at your initial equity.

And you can trade out of that drawdown quite easily compared to if you would compound your returns, in which case Whenever you have a one hundred percent uh drawdown, it your account is gone because you're compounding the the returns you're using every time. Every every with every trade, you're basically risking your whole portfolio.

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I'd like to dive into the subject of black swans. What you know, uh what are black swans uh for our listeners in the financial markets? Why why are why why do they even call that? So basically, um black swans essentially um are quite rare. in real life. And um that's basically all also why why this metaphor is used. Yeah. So black swans are basically just very uh events that are very rare, that can happen every once in a while.

I guess one of the uh most recent uh and best examples is probably how assets traded during uh the corona crisis, where we saw an incredibly sharp downturn, but at the same time uh at at the at a uh Shortly after. as it's rebounded very quickly. So that's that's uh I think a typical example of a black swan event How do black swan events differ from regular periodic bear markets over time? I mean, aren't the end results the same?

The end result can be the same, but the volatility is much higher. Um so that's probably where this uh sentence also comes into play. Um the market can stay irrational longer than you can stay solvent. So this means uh the volatility can be so high for a short period of time that you blow your account even though in the end Uh you get so you get for example a margin call, but in the end your uh trading strategy would have actually worked at the end of the year.

Why would your trading strategy work at the end of the year? Mm-hmm. Because the assets that's obviously the that is the underlying assumption that has to hold. Uh that's because the the underlying asset would mean reverse. Um so for example let's say it um

uh at the example of uh the Canadian dollar versus the Norwegian crown, which uh went up quite a lot during uh Corona. Here that's a perfect example where you would see uh an incredibly high drawdown, uh which in the end ends up making money, but uh you have a in between an incredibly high amount of volatility. So that's why it would end up making money because it ultimately mean reverts. Obviously here the assumption is that it ultimately mean reverts that has to hold up.

When we talk about black swans, is it is it a a news triggered event? Like some some uh unknown or n some uh outside factor that is unknown that hits the markets and then that causes the markets to go down or what? It it it can be. I think it can also be technically related. For example, we did have um in the yen also a flash press.

Um also in in several stock indices uh i in indexes that has happened in the past. I wouldn't call that a a fundamental reason. That was just a a very quick um technical reason, um, from what I know, um, why the the markets basically traded um at a very high standard deviation for a very short period of time. So how do we protect ourselves from from black swans?

So th this is uh the best way. It depends it it obviously depends on the on the portfolio size as well, but the best way uh would be to use stop losses. That's how how I do it with my strategy. So basically I I use a stop loss at which uh that is systematically set.

And then that point I would get out of the trade. No matter what. No matter what the reason is. It could it can be a fundamental reason. It can just be a quick mispricing, a technical mispricing, um, as we've had um a couple of times in the past in several assets. So that's that's how how I do it. Obviously this is very much tied to your portfolio size because the larger it is, the less likely you are gonna get filled.

um at your stop loss and especially if we're talking about some sort of flash crash um or a black swan that happens quite quickly where liquidity dries up suddenly, the portfolio size makes a big difference. Yes. Here, um, luckily when you trade foreign exchange markets. Especially G ten FX, um which is highly liquid. We're not talking about some um emer uh exotic emerging market pairs, um, but about G ten. Uh that's that's quite liquid compared to uh many other apps.

It doesn't really matter for you then, uh, whether the event shocks you or not or whether you even pay attention to it. You just set in set your stops in just like you do in a normal market, uh whether it's um no matter what the market conditions are. Uh did are you dissuaded when would you get back into the position?

Or when would you put on positions if if you believe that a black swan is underway or some some uh news event happened that shocked you, what kind of indicators do you look for to get back in the market? Mm-hmm. In this case, I would need a new signal, which means the market would have to trade back towards where my take profit is, which is um what I use is um the average price. um over a last certain time peri period. And when it comes back to that and again trade Away from it.

and I get another signal, a a new signal, uh, that's when I would get in again. So I would actually so to keep it simple, um I would have to wait for another buy signal or sell signal. So you're you're um you don't find yourself influenced by the news and the fear of of the time. Like for example in during COVID when we had the rapid fall of the markets and then

you know, a lot of uh fearful news about uh, you know, this new event that no one was expecting um and people saying, Oh, the economy's not gonna recover and all that. Did any does that do any of those types of news? uh influence you one way or the other? Are you just strictly looking at the chart and nothing more?

It doesn't really influence because um this is already I've already um The strategy is is back tested throughout several time periods and especially throughout um for example two thousand eight, the financial crisis, um two thousand eleven the the European um the European crisis, then also the the the crash we had in in in in Chinese index uh indexes in twenty fifteen.

So as a result, I've sized the strategy in such a way that um during a black swan you would have a large drawdown, yes, but you should usually survive um your portfolio should should survive this. That's why um I still trade also during uh a black spawn event, so I don't shut off the the strategy. Um I keep it going in this in this case um because I adjusted the the size so that it is highly unlikely um that you're gonna add that the portfolio goes to zero basically.

Uhhuh. So tell us about your uh sizing technique. Basically the way it works, I um as we just uh talked about briefly, uh I use a fixed size trading strategy. So this size does um really does not change. Um of course the downside is that you don't compound your returns. The upside. your drawdown um compared to the egg to the to your initial equity goes down over time.

Every year because you accumulate uh more money, but your drawdowns in an uh in an absolute number stay the same. So, for example, let's say you have a strategy. that uh the way you're sizing it, you have a portfolio of uh one hundred K. You have a strategy that makes on average fifty K per year, approximately fifty percent. Um after two years, for example, you accumulated uh two hundred K.

The max drawdown on the strategy was 100k. So let's say after two years you get to that drawdown, you're down 100k, but you still have another 100k. So you're fine on that. Now after four years. In total, you have made 300K, and now the 100K drawdown is not 50% anymore, it's only 33%. And every year basically your maximum drawdown, assuming that um the maximum drawdown is the historical drawdown.

Um there are some people who also like to um I I read a lot that some people like to assume that the next drawdown is gonna be two times the historical drawdown, which is fine as well. Everybody uses their own assumptions and and ways uh to backtest and and and to trade the portfolio. Um but if we stay in this example, the more years you trade this strategy, the lower your maximum drawdown becomes in percentage terms. Obviously that's a huge um advantage.

But the disadvantage is that you don't compound your return. As long as the absolute return is high enough, I would argue. that it doesn't matter. That's fine. Then you don't compound your returns. But if you have a portfolio with which you make, let's say, a million per year, I think you're still gonna be quite happy. With a million dollar returns, even though they don't compound, they stay at a million for the next 10 years.

Yes. So what do you do with the what do you do with the uh the uh the all the profits that you're taking out? Do you reinvest it elsewhere? Precisely. Yes. You can you can re uh you you reinvest it elsewhere and um you um you

Keep it in the portfolio as well. So because you also you you do want to make um use of that mechanism that in percentage terms your drawdown goes down. But that obviously all only works if you keep part of the amount in your portfolio that you make, keep part of the profits within the within your portfolio.

And um and some part you can also take out and and you can obviously invest somewhere or just save it up precisely here. And that's that's basically what I what I like to do as well. Yeah. So it's a it's a mix of both.

And so you're you're you're doing this just with uh foreign currencies, is that correct? Uh mean reversion strategies. That is currently currently I'm only doing this with mean reverting FX pairs. Yes, correct. Um there's o also some some other interesting uh mean reverting uh relationships in uh for example calendar spread. So that's um futures for example that expire uh on on uh with the same underlying that expire for example in one month versus

in six months, for example. Um, but that's something I'm not I'm not currently trading. Um I'm currently researching. But yes, so right now it is on foreign exchange pairs and only on economies that are uh highly correlated. Yes. Sometimes traders hear uh the phrase about uh avoiding fat tail risks. What what is this phrase and what is what does it mean? This is um where the concept of of the stop loss also comes in. You try to to avoid very large drawdowns.

Fat tails in your distribution of returns, especially for obvious reasons, uh to the downside, because it takes Because once you're, for example, down fifty percent, as we mentioned earlier, on the portfolio, you need to make a hundred percent return on that just to get back to break even. That's why I think it's incredibly important to to minimize that drawdown as much as possible. In my strategy, this happens over time systematically, simply because I trade fixed size

Um additionally uh addition in in addition to that I use stop losses, which helps as well. But here I have to say it is possible, for example, to have a very high streak of um um of losing trade. You can have for example ten trades in a row. And if you if you risk uh five percent per trade, then that's already fifty percent of your portfolio. So so a stop loss doesn't just completely is not necessarily the solution. Your strategy obviously also has to have a high enough hit ratio.

So you can make up the lot. I said well what is that? Uh I mean hi high enough hit ratio meaning percentage of winning trades or what Yes, yes. Precisely. Yes. Percentage of winning trades. Yes. Mm-hmm.

So have have you had any drawdowns that um were significant enough that caused you to change your strategy? Luckily not yet. So the drawdowns I've had so far were all within the parameters. We're all within the historical drawdown. Um that has not happened yet. Um that being said, even though it's highly systematic, um the the the strategy is highly systematic.

It is incredible how difficult it is to trade it during a drawdown, even though you have your historical back test, you have your assumption, you have your um you have your your stress test. You you've checked the data, you've checked the fundamentals, you've done all your homework, um, but you still you especially because in my case uh the strategy really trades about yeah, ten times per year on average, um approximately once per month.

And when when you have a drawdown, it takes especially you the the the length of the trade is still the average trade length of of about one month. You just sit there and you have to look at your portfolio for a whole month um while it's in a drawdown. And especially when it's a a large drawdown, let's say twenty percent, you do question yourself. You do question your strategy. You question exactly what you just said.

You're you're thinking uh you think about should I maybe change the strategy? Should I change the parameter? Maybe this time it's different. Um no, I I I'm smarter than the numbers. I think this time it's different. You have you have this um thought constantly and that's something um that is difficult to to work against, but um so far it has been possible for me.

I I see. And during these drawdowns, uh are these cases where uh the the foreign currency that you're trading um gets more overbought or more over oversold? In other words, it goes into realms that are extremes on the chart. Yes, yes, it does. Um and and this is probably a good part to to explain how I've also changed the strategy over the years. Um the strategy itself stays the same.

But I've changed the way I entry the strategy. At the beginning it was very simple. You just get the signal, you go all in and you get your take profit. Uh you you you get the your take profit level. Um And you you get completely out. Uh now I usually try to trade in in tranches. So I put in first one third of the position side, then two thirds, and then the last third.

Um that's how I do it. And the more it deviates from the mean, the the more I invest, basically. So the the the more you are invested. So that's basically how it works. So it when it gets to extremes, that's usually when I invest more size. The downside of the strategy, if you change it like this, is that if you're right on the first position size, you're going to make less money than you used to. The upside is that you can start.

much larger drawdowns. Yeah. And basically here as well, I back tested the strategy, um, back said back tested several ways to average in And this was one of the things that we're going to do. This was one of the historically the best results and that's why I'm using it currently.

Now, did you find any other um foreign currency pairs that were also good to trade? Or did you just stick with the uh Norwegian um currency? Uh versus the uh versus the d the dollar, I assume? That's uh versus the Canadian dollar. This this relationship you can also see, for example, um with the Australian dollar against the Norwegian crown. You can also see it with the Australian dollar against the Canadian dollar. Both countries also um very heavy uh commodity exporters.

the currencies uh tend to uh tend to be also risk on currencies. So when the when everything is good on the market and and we have positive news uh worldwide on a worldwide basis, um usually these currencies tend to go up and when there's uncertainty these uh currencies tend to go down. So this correlation also um creates this mean reverting tendency of the cross pair. Is any part of your strategy discretionary? Not uh not not really discretionary, no. I would I would say

This is where it gets a little bit tricky. In my opinion, discretionary traders are systematic traders and systematic traders are discretionary traders. Me implementing this systematic strategy is a discretionary decision. I said, okay, I'm gonna do my analysis fundamental uh fundamentally, technically, and then I will decide if I trade this or not.

So I'm doing a discretionary decision when I say I think that these economies are highly correlated and I think it will stay this way for the next, let's say, twelve months. And then in twelve months you reevaluate as well. And and if you still think that for the next twelve months the the economies will stay high highly correlated, then you keep on trading the strategy, basically. The execution itself is completely systematic.

But I think simply deciding that you want this that that you're going to implement this strategy is a discretionary decision. But to answer your question, um it would categor uh categorize it would be categorised as a systematic strategy. It's just my own opinion that it's Also discretionary in a inhabitant. Yeah.

Um, so as we're um uh do doing this interview, uh crude oil is near multi year lows. What are you seeing in the foreign currencies right now um uh with regards to this, uh to these extreme prices? Uh and is it playing out kind of the way um you're anticipating? So that's a good uh that's that's an excellent example. Currently, for example, if you look at the Canadian dollar versus the Norwegian crown, uh you will see that it's trending downwards.

And this in my opinion uh has more to do with the tariff. that uh the news about uh terrorists that we that we get from uh from Trump currently. Um so this is where you see how it's um uh wh why why it's deviating so much from the mean currently. And Okay, so just to interject here, um we're talking about uh the Canadian dollar versus the Norwegian uh crown. Um w which is going up? Which currency is very strong right now? Um Uh yeah. So the Canadian dollar is falling against the Norwegian crown.

And why is that? But both countries are big uh oil producers. Yeah, precisely. But um there's another variable and that's uh currently the the tariff talk that we have. Um that um Yeah. The current uh US president is is imposing the tariffs against Canada and that's also where we where where where we see uh weakness in the Canadian dollar, um which ten w which is now causing the

the F expert to deviate from the mean, which is in my case, it's uh something good because it gives me a trade opportunity. Um so now right now I'm uh I just got a long signal. and I would um put in the first position now and then if it starts deviating more I put in the second and then third position and if I'm less lucky, it just stops deviating immediately, then I still make a profit, but not as much if it would deviate more.

I see. So you're going along the Canadian dollar. Uh is that correct? Correct. Uh Uh-huh, because it's oversold uh versus the the Norwegian currency, correct? Yes. I I see. So these correlations, um what given that the foreign currency markets are extremely competitive, uh What stops um, you know, big firms from jumping in on these uh type of uh correlated trades and just overwhelming the the market um uh with this is

Is there an issue of not enough liquidity? It it sounds like um what you've come across here is is uh a high probability uh play. Uh yes, it is I I would I would call it a high probability. Play as well. Um the issue here is there are one is liquidity. So a large company the the Canadian dollar definitely is is is very, very liquid. Um and in general G ten FX. Um but uh the Norwegian crown

probably within G ten FX is one of the least liquid. Um so this pre prevents very large institutions to trade big sizes in Um that's first of all. And second of all, I also think that it It's it's just no not so no no not very common to to trade these currencies, I would say. Um most most investment funds, large investment funds would rather um

invest long term in equities, for example. The the short term players, the prop trading companies and the hedge funds, um, I don't think it's it's enough size to the strategy from working. Mm-hmm. That's that's what I would I would assume that that is um one of the reasons, yeah.

Mm-hmm. A few years ago I interviewed a uh FX trader who says that um the the sharks in the game uh take a look at all where all the stop losses are are placed, both on the upside and on the downside. And they routinely engage in stop loss hunting. uh to to flush those players out uh and then and then take the opposite position uh after they've flushed them out. Um how how often do you encounter or have you encountered obvious cases of stop loss hunting? In in your experience.

I think I think in in my case with the strategy, um I quite I'm I'm quite lucky because I don't look at precise technical levels where I would say If yesterday's low is taken out, um uh that's where I get out. That's where I set my stop loss, for example. Um, I set my stop loss simply using a multiplier. um of how many in currencies uh we would be talking about uh cents, how many cents um the price is away from my entry price.

And that's where I get out. But that's without um looking at any precise historical level where you would see maybe, okay, here traded a lot in the past, or or there is resistance or support or anything like that. Um I don't I don't use that. That's why I I would say um in my in my case this strategy doesn't um yeah it doesn't affect So uh net net your stop losses are typically kind of what percentage range away from your entry point?

Yes, not a percentage rate, it's an absolute value, so it's a s it's it's a a term of cents. That's that's how I calculate it. Yeah. Oh, I see. But what does it translate to in percentage terms, uh, usually? I mean, are you having really wide stops, typically five, ten I mean, or ten percent or more, uh, or are your stops pretty tight? Yes, yes. They they're they're actually very uh wide. They're around, yeah. Ten percent you could you could probably get to ten percent approximately, yeah.

Uh-huh. Mm-hmm. Exactly. I see. I see. Um To wrap things up, uh, what do you struggle with most as a trader? I think what I struggle with most Trading related would be since So this is this is our um I mean reverting strategy. Which means usually uh you have a very high hit ratio.

Your average drawdowns are larger than when you use a trend following strategy. Um where you often cut your losses very quickly, um and you let your winners run for a long time. Um I think this is something where Where psychologically um it's a little bit more difficult because you don't have you have larger drawdowns and you have to you have them more often. Um overall in the end um you hit the your take profit far more often than with a trend falling strategy. However, in between you have

more drawdowns and larger drawdowns. And that's something where I think psychologically this is quite difficult because you have this constantly So um the strategy does about uh ten trades per year, um so one once per month approximately and you have this every month. Um so I think this is something where I would say um

You it's easy to struggle with a lot. But um once you get used to it and especially when you trust your strategy, you've done your research, um, this helps a lot, I think, um to to use the strategy correctly.

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Mm-hmm. And how long have you been um doing this particular strategy? Um you said since two thousand twelve is when you first started or or two thousand, right around then? Yes, correctly. Yes. Since then. And uh I've been uh trading this strategy where I changed the the entry logic uh for approximately two years now. Yeah. Is there anything else that you're working on, uh, that uh that's inspiring? That's a good question. I've been doing some research especially regarding um I've read

something uh a a very famous page now um from a book that was written by uh Ray Dalio. Um that shows how diversification is the Holy Grail. That you can find because it can help when you find several uh strategies that are not correlated and you add them to one portfolio, that your overall drawdow and you can reduce your overall potential drawdown dramatically. And this is where um

I'm researching as well some trend falling strategies, especially in assets where you can see that they are long term structurally trending. For example, equity indices, if you look at the on on a daily basis, when um I'm not talking about an intraday basis, um, but daily candles. Um you can see how it trends long term upwards, also when you look at a weekly candles. And this for example would be a great complementary uh strategy um with the one that I'm currently w um implementing.

Well, yeah, you can basically reduce your drawdowns, right? So that's that's what I'm currently working on. It's basically um I'm back testing trend following indicators on a trend following asset in a trend following timeframe. That's the basic idea behind it. And um by adding this strategy to my portfolio in the future, um, it will be possible to reduce Obviously here the assumption has to hold that in the future the asset will keep on trending and not become suddenly I mean reverting acid.

Well, Christian, I'd like to thank you for coming on uh Chat with Traders. Thank you. Thanks a lot for having me. Yeah. Uh how can our listeners reach you? Yes, so uh they can reach me easily on on X. And uh my handle is Christian RM underscore five times eight. Great. Fantastic. Thanks for coming on the show. Thank you.

Hey there. There were some additional parts of our chat that didn't quite make it in the main part of the interview. We included it here at the end for those who made it through the end. This is where I asked Christian about the World Cup Trading Championship competition and his thoughts on the strategy he used for the competition versus the strategy he uses in his actual personal trading. I think um these these championships um you definitely on average have to take

more leverage than you would usually do, which implies also a l uh a larger drawdown than you would usually have, a potential larger drawdown than you would usually have. Um why? Because I mean you see it in the returns as well. Um people have in one quarter

three digit returns, like over a hundred percent. Um, sometimes even over three hundred, four hundred percent. Um also on in in the in the in the yearly competitions, you also see um sometimes people having a thousand percent return. So Very often um you leverage more than you usually would. So that's that's one important thing to to consider when you see these results. And there's another thing that that I would definitely like to like to mention.

Without knowing it one hundred percent because you don't know how what strategies every single winner has to use, um, I believe such short term contests are very favorable of mean reverting strategies because usually your wins are more frequent um than with a trend following strategy. With a trend following strategy on average You can have maybe a whole year where you where you only get get stopped out.

with very small losses. So you don't have a huge drawdown, but you obviously didn't make any profits that year. And then the next year, you could have a year where you make a hundred percent. However, with mean reverting strategies, um, the profits are usually far more constant. from m having that in mind. Very likely that most winners of these of of of any kind of short term competitions um use mean reverting strategies.

So that is something that I have seen as well just from my own experience as well, because I also trade mean reverting strategies. Yeah, that's just an additional information that I would like to share, I think. So so so during this contest did you take on um quite a bit more leverage than you normally do? Appro uh approximately uh twice as much.

leverage. Yes. Um so that was that was necessary in order to get uh the the returns. Um in my case I actually also started uh the trading comp uh trading competition late. Um I only had half the time. than the other participants. So as a result that also um was a reason why I had to use higher leverage. Yes. Did you um uh learn anything uh from this competition and did it impact the way you trade normally? Uh I think it's uh what I definitely realised is that

I I I I think it depends also on the on everyone's personality. Um some people thrive in competition, uh some people less. Um but what I've learned is that I was far more comfortable with taking larger position sizes. once I was already in profit. There's a there's a huge difference between starting the year, you are you you have zero percent returns, and then you take on a position that could potentially cause a ten percent drawdown.

Um so there's this scenario. You're zero p you you you're not you have zero performance for the year so far, and then you could potentially use ten percent on the next trade. Um or you're already up twenty percent. And you could lose Ten percent. Then you would still be up ten percent overall. Um and and this is where especially in this in these competitions, you tend to say, okay. I'm up twenty percent.

Let's risk these twenty percent for the next trade. So you can potentially make higher a higher amount, um a higher return. But if you lose it, you just break even. So this is something where th that that I really that that I usually don't do with my own systematic strategy because it's highly systematic, also the position size. But in this competition you have to do in order to get to the

to the high returns that um that are usual that you usually see in these competitions. Um so this is something that that I that I definitely that I that I learned. during the competition I really started to applying what I previously read about um some discretionary traders that they tend to increase the trading size when they have had Winning traits?

That's something that you have to do in these c and these comp uh uh um competitions in my opinion as well, um, in order to get these huge uh returns. to win the competition. Okay, so where uh what what's the interesting part about this? Psychologically, I traded simply by looking at my focusing on my equity that is at risk. So once I was up Thirty percent.

I was completely fine with uh taking a larger risk. If on average, let's say my my trade, I I can I I risk ten percent of my portfolio, but I'm already up thirty percent, in this competition I would say, okay, um so I'm already up thirty percent. I'm fine with just breaking even. So let's risk those 30%. So my potential. profit is much, much higher. It's three times higher than my average trade.

the loss that I have. Yes, in percentage terms it's higher. It's thirty percent. It's also thirty of um three times higher than usual. But in if you look at your equity You're gonna break even. And that was something that that I that I was focusing on. That I usually don't focus on my on my systematic strategy. But in this in these competitions, um I think simply from my own way of trading. Um I can imagine that many other people also um trade like this during these competitions.

I see. And so would you you would you apply these to your real life trading? I wouldn't in my case, um, simply because I, that's, that's, that's actually, yeah. uh the psychological part of myself, I do like having rather consistent small returns. than having every now and then huge returns, which is more um like a trend following or or swing trading uh approach. Um but that's just j that's just psychologically how I like to trade.

Question for me. I'm just curious. So you came in second place for that championship. What prizes were there? Did you what did you win? What did you get out of that? So um in in these um this this uh trading competition Th th this is basically the most famous trading competitions. There are several also for FX, um, but this is the the most famous one for futures in FX.

And um that's why many people participate in it. Um I mean it's also the the one that uh for example Larry Williams uh won. Um Paul Tudor Jones also was um participating. Oh the US uh championship one? The US I see. I know that one. Yeah. Yes, exactly. But not for equities. That's the one for um FX and futures. Yeah. Oh I see. What kind of prizes were there for for winning? Ah yeah. Um th there's no official price that you get. So there's no um what you get is the trophy. Mm-hmm.

Yeah, but especially also you get to a pool of recognition and also you get to to a pool of of previous um winners that you can exchange ide uh ideas with or um simply network with. Yeah. Awesome. Are you gonna join again this year? Probably, yes. Um, but for the I will I will I will be joining for the third and fourth quarter um championships again. Okay, and and just for the audience, what's the name of the contest again? It's called the World Cup Trading Championships. Before I

For Forex in this case, yes. When you go to um to the standings you can see that there is uh a a futures table and uh a foreign exchange table where you can see the traders for foreign exchange and the ones for futures trading. Awesome. Well congratulations for last year's and good luck for this year's. Thank you. Yeah. And here I also asked more about the reasons behind his website, globalethicsanalytics.com, for a little bit more content. I've worked institutionally in FX Trading and

I've seen that there is th there's quite uh there there's quite some offering for long term equity strategies for the for retail traders. There th there are some good um uh online courses that you can do, um the a a lot of groups as well um that have a great historical track record. When you look for foreign exchange, uh especially for retail, um, it's not very easy to find anything.

And with my experience, um I thought I can share this um in a format as uh of a of a of a course for example or a or a telegram group um that is currently also very popular that that

format um and just share my knowledge and my trading strategy in foreign exchange. Especially because I saw that It's very difficult to find uh somebody who is offering um our profitable strategy with a track record in foreign exchange that also Knows about fundamentals, knows about technicals, actually understands why the strategy works the way it works.

that's quite difficult to find. Um in equities not so much. There the there I actually was able to find relatively quickly quite a lot of offerings, but um for a foreign exchange it was almost impossible. And um that's why that that's where the the the idea came from that I would like to Share my knowledge, share my strategies. Um especially because my s the the type of strategy that I trade um luckily doesn't if if a lot of people would implement it.

I don't think it would just suddenly stop working. Um the currencies wouldn't simply stop deviating every once in a while. And um and that's why I think there's no there there's no problem um to To share. Exactly. Yeah. Yeah, precisely. Um yeah, so that's the idea behind it. And the initial thought was um to uh to offer it um via copy trading. Um Now I've also extended it to a telegram group.

And I'm very likely going uh to to also implement this with a with a with an with a course. Why? Um because I'm simply I'm getting so many questions on the strategy that I think it would make a lot of sense to to also offer a course here. Yes, yes, but the good thing is since it's a long term strategy, um it's not uh that time consuming. So you can you can really run the strategy um easily with just a few hours per week. So that's...

That's a good thing. Ver very much like um certain swing strategies, for example.

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