Brent Donnelly on What It Takes To Be a Winning Trader

going to ignore the subtle dig at crypto. There this idea we haven't been talking about markets except for crypto. But yeah, no, you're right. So it feels like so long ago, but really it was only six or seven months when we had the game stop phenomenon, the big whom in retail trading and Wall Street bets and this idea that everyone was suddenly pouring into meme stocks. It

feels so so long ago. It's weird. Yeah, And of course, you know, like so I personally first started getting interested in markets just as the thing I was interested in like in the late nineties and high school, and there was a dot com bubble going on, and at that time it was just trading. Retail trading was really take off, but also just really became like part of the culture. People were talking about the stocks they were trading and

what they were bullish on and so forth. And then it went felt like that basically went into like a twenty year hibernation, and then when everyone was locked in their homes with the coronavirus crisis for the first time, it really came back. Yeah. So I remember writing about this earlier in the year, and I think the way

I framed it was flows before pros. So this idea that if, like, if you have this immense buying moment tom from retail traders or retail investors, then maybe like if you're a retail person, you're in a better position to judge that momentum than someone with a professional background, you know, say a self side analyst at a large bank,

someone like that who's looking at fundamentals. And I think that was kind of borne out, at least temporarily by some of the meme stock price action, but it does beg the question of what exactly is the difference between a retail trader versus a professional trader. Absolutely, and there's also the question and of course you know, we've had all these people come into the market. Probably a lot of them have done really well, Like probably people have made a ton of money and made multiples of what

they make of their daily salaries. And because it's been this bowl market, which means some are going to be tempted to like go pro on some level, not necessarily go work for a bank or a fund, but it's like, oh, like I made a ton of money, I could do this, Why would I go back to my job? And so some people will be thinking about do they want to make trading their full time vocation? Yeah, And again the question is whether or not the past six or seven

months have been extraordinary in one way or another. I think we all agree that the experience of COVID and the markets during that time have been somewhat unusual. Um and whether or not their success over that short time frame can carry on longer term. Right, So people are gonna be asking themselves a do they have what it takes to be a trader and be if they do,

how to win? So today we're going to be speaking to a guest who knows a lot about trading, a long time veteran, and he can he will tell us, whether you have the stuff, whether we have the stuff, whether the listener has the stuff to make it as a pro trader, and if they do go into it, how to win at it. All. Right, let's do it. I'm excited and I'm very excited. We're going to be speaking with Brent Donna Lee. He is the author of a new book, Alpha Trader, The Mindset, Methodology and mathem

Addicts of Professional Trading. Is a long time veteran for over twenty five years. He's worked at HSBC New Mura City. Very excited to learn from Brent. Brent, thank you so much for joining us. Hey, guys, great, great to be here. I'm a huge fan, so thanks a lot for having me on. So I guess, I guess the first question I have is what is a trader? What do you How do you define a trader? Because some people invest, some people sometimes reallocate, some people are moving in and out.

I guess day trading. But when you talk about a trader, what does that mean? Well, so that's a great question. So in the course of writing the book, Um, one great thing about writing a book is you get to talk to a lot of random people because people DM me a lot on on Twitter and LinkedIn. And your question is a really good one because a lot of people, I can tell by their questions to me, don't really

know themselves whether they're an investor or a trader. And to me, I'm unbiased because my whole experience has been trading. But my belief inefficient markets is that on short time frames markets can be kind of inefficient, and on long time frames they're pretty damn efficient. And there's a lot of research that supports that, as you guys know, a passive versus active, I mean, Charles Ellis was writing about that in the seventies, um with data showing that that

passive beats active. So then I think you really have to know what you're doing and know that you're what you're doing is trading, and then you might have a specific edge. And I think really the difference is, I mean, the obvious difference is time frame. You know, to me, trading is is something probably less than one or two months, and then you can call it kind of call like two months to one year swing trading. But that's getting

closer to investing and much more fundamentals. But I would say that the definition of real trading is something that's that you're doing that short term where you have a solid risk management process and you have an edge that you can identify and you can explain to somebody who's not an expert in the business. I definitely want to ask you about the risk management aspect and also the idea of an edge in trading, But before we do, just because I think this will help maybe um conceptualize

the idea of a trader. But over the past ten or twelve years, basically since the two thousand eight financial crisis, would you say that's been a good time to be a trader or a poor time? Because we've sort of

heard it both ways. So there are people who argue that valuations are completely based on momentum and inflows, and the more money that's flowing into something, the more valuable it gets, and it doesn't really matter about, you know, things like price to book ratios and traditional measures of fundamentals. On the other hand, there are plenty of people who say that markets have been skewed by central banks and you don't really know like where anything is going anymore,

and nothing makes sense. So I'm just curious, like if you could characterize the past decade or so um, for a trader, sure, So I would say anything related to valuation doesn't matter for traders. Um, that would be my opinion. And so I mostly trade currencies, but I have a lot of experience trading equities and that if you're trading, if you're a trader in my in my definition, you don't really care about valuation. And so one concept that I get into a lot in the book is the

idea of adaptation. So anyone that's saying like this is a bad market, this market is a joke, this is manipulated. That person is not adapting and they're not playing the current game. So my question is always like, do you want to live in a world of you know, the current reality and play the current game or do you want to play a game that you wish existed? And then the subsequent question is do you want to make

money or not? And if you want to make money, I think the key really is to first of all, understand what game you're playing, um, and then number two, adapt to that game. So I feel like the just the idea of saying like this was a good period to trade, this was a bad period to trade, isn't a great mentality for traders, because what you really should be doing as a good trader is adapting to the

current environment. Now obviously that's not like as easy as just saying, okay, today, I'm going to do this, because it's obvious what the environment is. Regimes change in a subtle way, but then sometimes it's pretty obvious that the regime's changing, like for example, when the algos started two

thousand four. Two thousand five is the first period when I really remember the algos, the algorithmic trading really becoming a forced in currency markets, and I remember there was a really sharp split on the desk um so at that time I worked at Lehman Brothers and talking to people in the market, not just the traders at even but just in general that there was a split between people saying, this is bs these algals are it's not a real market. Every time I put a bit in

it comes in one point higher. And then there was another group of people that were like, this is weird, Like the market the texture is different. I wonder, how how can we beat the algals? What are the algals doing? Can we mimic them, but do it's smarter, you know? Can we figure out what they're doing and reverse engineer

and then make money off of that. And so I feel like that was a real eye opener for me because like that was whatever fifty and sixteen years ago, so I was still kind of like transitioning between junior and senior trader, and it was really obvious that some people were adapting and some people were complaining. And so that has been consistent throughout my career is you see that people that adapt tend to do well in the long run, and people that don't tend to maybe have

periods of success and then fail. So going back to your original thing about, um, you know, a lot of new traders have come in. Another thing that I've I've witnessed from conversations with a lot of retail traders is that a lot of people did really well in and are struggling now. And so an obvious explanation for that would be if you're if you were buying calls around earnings, Let's say that was a really good strategy. However, this

hasn't been a good strategy, especially recently. So, UM, what I tell people who are new is that you you need to become an expert in one market, which could be a security or for me, it's G ten f X, but really it could be any kind of narrow part of capital markets. And then become an expert in that, but don't become an expert in a particular strategy like I'm a breakout trader, or like I buy options before zooms,

earnings or whatever. Um. Like, the more narrow your strategy is the less chance that you're going to make money in the long run, because it's all about adapting to the new regimes. Um. Not that there's a new regime every single day, but certainly new regimes come their cyclical ones and their structural ones. So the structural ones being like retail kind of you know, was huge in ninety from ninety nine to or ninety eight to O two,

and it's getting huge again. Algorithms came in, and then there's cyclical ones that are more about volatility, like is the VIX at ten or is the VIX at forty? Your trading strategy has to be different in those two regimes. And generally, I would say a lot of people are good at specific strategies, but in order to be good to to have a you know, multi year or multi decade career, you need to be able to identify regimes and then adapt and trade the regime and trade what works.

And that's kind of the philosophy of like do what's working and stuff doing what's not working. That reminds me always, of course, you know poker advaceive owing the table that you're at and all the good ones to talk about the ability to shift gears. If you're going to make it as a professional trader, you have to have an identifiable edge, something that you can articulate. All right, So you've been a trader for over twenty five years, what's

your articulate to us non professionals? Well, your edges that allowed you to have such a rare and durable career. My edge, in a nutshell, just try and keep it relatively short, is that I look at the macro world. So I'm my if if if any of your listeners have read my stuff, I tend to talk like fairly macro in terms of macroeconomics, fed policy, you know, Australian

cp I, all that kind of stuff. And so what I'm trying to do is understand the current equilibrium where price is the sum of all the information that's in the world, and then as new information comes in. I think my edge is understanding what that information means in the context of the current or slightly in the past equilibrium, and entering trades into currencies before they move in order

to capture the momentary disequilibrium from the new information. So that doesn't necessarily always mean like an event comes out and then euro goes up and I buy it after

the event and sell it after the event. It can also mean something a lot more subtle, which is that as a narrative starts to get really really fully subscribed, you start to see positioning by metrics, but then also by because I have a pretty good network of people, I get a sense of not just what positioning is, but also like there's like an emotional edge to positioning sometimes, like if I send out a Barish AUSSI piece and I get like seventeen angry emails all like with pretty

weak rebuttals, then I'm like, Okay, I'm definitely onto something. So there's like a more subtle aspect of positioning that that I sometimes can tease out as well. But then also the on the other side, it can be something like say news comes out and um, it's a New Zealand housing number comes out, and so in that example, I know the markets really interested and really cares about

Kiwi housing. But then say another number comes out, and I'm like, I know the market doesn't isn't really that fixated on that, but you know, currency moves twenty pips on it. Then I'll take the golf fade and I'll

take the other side. So I think my edge is understanding what matters and what doesn't, because that's one thing that's really frustrating for a lot of people is and actually for financial journalists as well, is trying to understand sometimes why things move when it doesn't always totally make sense.

So if you, for example, like the classic example is current account deficits, so generally currency markets don't care about them, but every five or ten years will trade off of them for like a year, and then we stopped trading off of them. But the current account deficits themselves are pretty sticky. They don't change that much. Kind of knowing what matters as well is an important part of that.

So for example, like if you trade a lot of correlation, which I do, knowing which assets people care about and which ones they don't, So like if oil has been in a forty five range for eight weeks. The correlation to dollar cat probably isn't that significant. But if oil is like on the front page of Bloomberg every day and it's breaking to new i'll, you know, new three year highs, then the correlation to cat is probably going

to pick up. And so I have a good sense of like, Okay, I gotta have oil on my radar because we're you know, it's all over Bloomberg or or not. So then sometimes, like if you don't know what you're doing, you might see like the oil has been in a range for six weeks, and the range is and it goes from forty one to forty four, and people are like, how come dollar cats not moving? And it's like, well,

because oil is not front of mind right now. Um So, so my age is understanding the current narrative and then surfing the move to the new narrative. What does an edge look like for retail traders? Because you're talking about you know, professional experience, maybe some insight into flows and positioning, which your average retail investor is not going to have. Sure, so I don't want to overstate positioning just to be clear, because actually, oddly enough, I think that's one of the

most overrated variables. My view on positioning is that it kind of matters at the super extremes, and it can be like the only thing that matters at the super extremes, but most of the time it just doesn't matter. Um Like macro and stuff tens and and flows and all that tend to override positioning. But as a retail in person, I can answer that easily because that's what I did

from us and three that's what I did. I was trading my own account during the nasdack bubble, and at that time my edge was first of all, I didn't have very much money, so I would risk management. My risk management was really good. I worked at a place called Swift Trade, which was like a place where you go in and sit down and it's you have it's a trading floor, legit trading floor, and you pay commission.

I think it still exists actually, um Like people kind of call them bucket shops, but this was like a professional place. It wasn't a bucket shop. And whenever people walked by my screen, people used to always say, how can be your Your P and L is always green, And essentially the reason was so that obviously if you're up, it was green, and if it was if you were down, it was read. Was that I just cut my losing

positions really really fast. So everything I did was momentum based, essentially looking at futures, and I had the future squawk on, and then when futures started to you know, you could get a sense of there was some electricity in the futures. Then you would get on the bid in six stocks that trade super wide, and then try and get given by other retailer, by whoever, and then ride it up a little bit. But I always cut my losses really fast.

So one edge can be really good risk management, and the other one was I was really fast on the keys, which sounds stupid, but in those days there were so many ridiculous things happening. Like somebody would go on CNBC and say, hey, my stock of the week coming up after these commercial messages. It's a optical network maker in Texas or whatever. So you just frantically google like optical maker, you know, and find the three biggest ones or in that case there's probably only one. You buy it and

go up four percent and you sell it. So there were so many trades like that that essentially almost felt like zero risk. But then I can give you the rest of that story, which could because that again relates to my my adaptation thing is that so what I was doing relied on pretty wide bid offer and then just catching brief momentum and kind of catching the the

wide bid offer on a lot of these stocks. So every morning I printed out a sheet or a list of all the stocks over a hundred dollars, and it was around four pages long, and those are the ones I focused on because you need like high nominal value to have wide bid offer. And in two thousand two, when I printed out that thing, there were four stocks on it, so went from four pages to four stocks. And then in the meantime in two April one it was either April one or O two, I can't remember,

but stocks went to decimalization. And so when the nominal value of stocks was way lower and then there was decimalization, the bid offers size collapsed, like so instead of some stuff was trading like fifty cents wide tons of stocks at that time, we're trading like one one cent wide. So what I was doing stopped working, but I just kept on doing it. So my account went from like twenty five thousand to three D fifty thousand back down to like seventy thousand by O two oh three. And

it was as I never adapted. I just kept on doing the same thing. And so one thing I say in the book is one of the reasons that you really have to have an edge that I don't think people fully understand, and I try to lay it out in in with some graphs of gross and net, is that you can be gross positive and net negative and that's not going to pay the bills. So generally what happened to me was throughout my whole time when I was day trading, I was always gross positive, so I

always made money. I had some kind of edge. But there's commission, right, So as I was trading more and more shares because the value of the stocks went down, they're my commission was slowly rising, rising, rising, until the point where a lot of days I was net negative, even though I was still mostly gross positive most days. And so people have to understand that, Like people think, oh, it's a zero sum game. I'm a smart person. I cannot smart. You know, I'm smarter than average, which is

that the classic bias. But anyways. But the thing is it's actually a negative some games. So you have to be able to whether you're paying you know, visible commission or not you are paying attacks every time you trade. Even as an institutional trader, there's still brokerades and prime brophees and bid offer and all that, so you have people have to understand it's it's a negative some game,

and so that's why it's so difficult. So anytime people bring up dot com your stories, I get excited because I was a small retail trader around then too, and you know, I definitely saw exactly what you described, especially with friends who like made a ton of money in early two thousand and it didn't they didn't realize that the market had shifted for like two years, and so they just kept doing the same thing, and so that really resonated. But actually, so I graduated from college and

O two and I got a job offer. I was kind of a job offer at one of these like trading shops, and like two people applied and they gave four people offers, and it was like one of these places where they would like start you with X amount and if you did well, and it was you know, I actually got one of the offers, and I didn't take it for whatever reason, because I was young. I want to party and I didn't. I just I didn't

feel ready and I ended up not doing it. And I, you know, twenty years later, almost twenty years later, I I sometimes think back and I like, did I make a wrong choice? I Could I be a billionaire? You know, could I be like a huge hedge fund mogul now if I had taken that job and really gotten into trading. So which raises the question I'm I'm guessing the answers. No, I don't think I would have been good. What does

someone have to know about themselves? How can I like, if I think back to that moment, is like, did I make the right choice in two thousand and two to either to not take this offer? What should I know about myself to determine whether that was the right call or not? Sure? So, I think the first thing that that successful traders who I mean, what you're describing is someone that kind of comes in and pretty much

does well right away. And and generally most people don't do that because there's a lot of painful lessons, which is kind of what my book is about. Like I'm not saying I'm the holder of absolute truth on trading. It's more like here, I made all these mistakes and and saw other people make mistakes, and then train people who made mistakes. So a lot of success in trading

sometimes comes more from like having adequate runway. And that's why I like going to a bank or whatever, you have more runway, whereas coming into a day trading shop, the problem, the biggest issue really is that you just don't have a ton of runway, usually because you have a finite amount of capital or you have like a

you know, pretty tight stops and all that. So the point that you have to get to is you pretty much have to start from the point that that a lot of people get to eventually, UM, which is being rational. Um is the number one thing. So what tends to happen is people can be rational when they're invaluate, when

they're analyzing the market. But then what happens is as soon as you put on a position, you're like just like the steaming hot pile of bias because you have emotional attachment to the to the position itself and the new information. You're kind of generally a bit more white knuckling, so new information, you tend to overreact to the new information to the conmon and two verse. Key stuff kind of goes into this, but a lot of that is

in an experimental setting. So what I try to do in the book is also relate a lot of the conmon divers key stuff to trading, because all that stuff that happens in an experimental setting obviously happens in real life. And then I think you also have to be really conscientious. So it's funny he said you wanted to party and all that. And that's one thing that kind of hurt me in in the two era was that, you know, I was twenty two three. I had a lot of

other things that I wanted to do. Besides, I wanted to go and trade for a couple of hours and make my money and then go have fun. And that's just not how the world works. Like so I think conscientiousness again, And so I did a little bit of

research for the book. Most of it is my experience watching watching people and watching myself, but I did some research as well on what are the fundamental underpinnings of success in the world in general, and conscientiousness is the is the one that generally in athletics, academics, business in almost all domains, the research shows that conscientiousness is the number one driver, and interestingly, conscientiousness is the one trait in the Big five that goes up over time throughout

your life. So again, I think that makes it really hard because you have to do the work. Like there's so many people out there trying to compete. It's it's very similar to like you mentioned, poker, professional sports, trying to be a professional fiction author. Is that the barriers to entry are so low and the rewards are so massive that it just attracts a lot of people. And obviously that means there's a lot of competition. Plus there's transaction costs, so the negative sum game with a ton

of skilled individuals. You have to do the work. And so if you are trying to like make make your money in three hours trading the open and then you know go back to bed so that you can go club until three am or whatever, that's that's not gonna work.

And I think, you know, fundamentally, a lot of people, including myself, didn't really I never was very conscientious as a as a young person, I was the opposite whatever the opposite is so unless you have that really strong mentality of coming in and doing the work and grinding every single day. And actually it's the same with poker, right, The people that really find success at a young age are the people that can grind and grind and grind. And then the last thing I would say is the

right level of confidence. So I call it calibrated confidence. So generally, you know the poll or the survey or the research that says of people think they're better than average drivers. Um, that sounds like a joke, but it's true, um, And that the research shows out in every every area. The problem with trading if if you're overconfident, you tend to blow up, and if you're not the a right amount of confidence, then you just tend to not be

able to pull the trigger. Or the other side of that is every time you get into a trade, you just see danger everywhere and you just want to get out. To come in at three years old and be rational, conscientious, and have calibrated confidence, Man, that's a huge ask. Like, yeah, there's a few people that are like that, but that's a huge ask. And then the other thing that that we kind of talked about is adaptation. So doing something and making money that doesn't mean that that thing is

going to work next year. So having one eye on the horizon and saying okay, and I mean that takes a lot of humility to um to say okay, I'm not a god, because you feel like a god when you're twenty two and you you quadruple your account, you know, so to be able to say okay, and to be able to admit admit, okay, I was in the right place at the right time here, but next year might be different. So I'm going to be have one on

the horizon and get ready to adapt. So just on that note, you know you talked about identifying regime changes earlier. How do you actually go about doing that? Because you know, it's one thing to say, like, well, obviously you have to adapt, but in order to adapt, you have to actually spot that something is changing. So how does one do that as a trader? Sure, so that's one thing that it's it's also really hard to you can see

something changing. So for example, I trade a lot of correlation. Um, so I see like gold rallying, that's generally bad for the dollars. So if you're on a super short term trader and you see yields lower, gold up and dollar hasn't moved, then you know, you might think that gives me a clue that the next and the dollar is probably down. That's kind of like a basic framework of

how correlation works. Pre two eight, that was a huge edge because a lot of people didn't even have live feeds to stuff like even working at an investment bank, there were traders that sat too over for me that didn't have live feeds to gold and oil and stuff like that, which is mind blowing now. So then oh eight brought all that into focus because correlations went to one between every single asset class. So a lot of algorithms obviously plugged into that, but then every human being

as well did. Oh and the other thing is too, is that the blog is fear exploded at that time. So the overlays. So what I sent out an overlay of um, you know, kiwi and against SMPS in two thousand six. That was kind of a novel thing and people be, oh, that's cool. Yeah, risk appetite kind of drives both of those things. They should go up and down together. And now I mean those things, those overlays are are so common that. Um, there's there's just not

a lot of edge left with that. But because I started trading that way and it was a huge edge for me, and including a way, it was a huge edge as correlations went to one, it's really hard to give up on that because you kind of have some owner ship in it and that thing kind of paid your bills for a long time or did did well by you, and so to throw it in the garbage

feels bad. Um. So there is a challenge to saying okay, first of all, identifying that things have changed, which I think I was doing at the time, but then I stuck with it way too long just because it was such a good strategy. I was kind of, I think subconsciously, to go maybe it'll come back. One really obvious way, sorry, to answer your question more directly, Tracy, to identify regime

is using a Volve filter. So if vix is below fifteen, that's one regime fifteen another forty, and then above forty. That's one really simple way. Um. And I think if you have any experience trading, you do that a little bit um by intuition or you know you do it just because you know you feel it. But doing it more systematically and adjusting your position size based on current volatility is something that people generally don't do very well.

So you'll see in a bank, you'll see a trader that just always is longer short, twenty euros twenty million euros, and that makes no sense of fall goes from six one month, year of all goes from six to twelve. You shouldn't just always have the same position. Like that's pretty much trading one on one is adjusting your position to volatility. Yet a lot of people don't do it.

So that's one way you can identify regimes. There's a lot of quantitative ways um looking at you know, rolling twenty day correlation of assets against each other and things like that. But then also I think part of it is is just paying attention and and listening to what people are saying and being thoughtful about it. So I think if you're if you're not in that mindset of adaptation, then when new things come along, you're just more fighting it.

So you know, the classic example of that is I remember in two thousand and ten, I might have the year wrong, but around there David Tepper went on CNBC and he's like, there's a lot liquidity. You've got to own stocks, and a lot of people were like, that's so simplistic, like it's just not that easy, dude, And it was that easy, So you know he was. He had an open mind too, like I don't care what I wish FED policy was, or I don't care what I wish how how stock markets work, this is how

they are currently working. And he was correct. And you know, I know one anecdote of of of sort of a friend of a friend of mine who opened a hedge fund in and the first trade he did was sell SMP futures and they closed in because performance wasn't very good. And the last trade they did was covering an SMP short. So not to say they were short the whole time, but you get the idea that that that not looking

at what regime you're in can kill you. You know, I remember that the Temper call, and you know what struck me about Temper at the time was and you know, not overthinking it. And I feel like again, I'm like thinking about my own temp were meant in life and why I don't think I would have been a good trader. I feel like the people who go into journalism it's like, well, you know, technically speaking, when the FED expands the balance sheet and that's not really at a liquidity and it's

a nasset swap. But we like to think like that, and we like to explain why some white white people are wrong, or we explain why some popular conception doesn't actually the mechanics of something that everyone's talking about doesn't actually work that way. And I feel like there are times, and maybe there are times when that's called for, but I feel like our times in Post two thousand nine was one probably uh you know, last April was one

where overthinking and it can really really not just following momentum. Sorry, no, that's all right. I mean I think it's I don't think it is, because I think it's more understanding what matters and what doesn't. So looking at your framework if you're if you're more of a so like I'm a

combination of fundamentals, technicals, and positioning. But when I say fundamentals, it's more about narrative um in the kind of I don't know if you guys read Ben Hunts stuff, but um in that kind of vein of not necessarily the fundamentals as a weighing machine, but more as a voting machine, so like, what are people voting for? And I think so, I think if you have the right framework, then that's what what it. So it doesn't necessarily mean always being

long stocks. In fact, right now you might start to think, Okay, now we're in the transition period between additional liquidity and reduction of liquidity. So maybe now for stocks, if you were using that framework, that that temper framework. And I don't know if this is the case because I haven't heard from him in a while, but um, in that framework, you might be now thinking about selling calls or something like that, because we might be more in a chop

period now where it's not clear. I don't think which way liquidity is going. It's certainly not as clear as it so to me. No, I don't think it's a momentum strategy. It's it's having the correct framework and then using that framework to to trade. And the way that I kind of describe it is you want to be more concerned about what's happening and less concerned about why,

because the Y is important. But the like you said, Joe, you can kind of get bogged down and the Y and the thing is it matters, and you have to have a framework that makes sense. But in the end, the what is what matters And I think that's the the useful part about technical analysis is that it's been shown in a lot of research that technical analysis is not a good forecasting tool. It doesn't back test very well.

If you back test head and shoulders are any kind of patterns, generally systematically, they don't back test very well. And yet there's also research that shows that people that use technical analysis outperform those that don't, and that sounds like a disconnect. But I think the reason that, um, it's not is that technical analysis a great risk management tools.

So it tells you, you know, if you if you breach a certain level, then you're going to admit that you're wrong, and it forces you to admit that you're wrong UM And I think that's the real value of technical analysis as opposed to using it as a forecasting tool.

So I think a good framework is to have your fundamental view, but then or your narrative view or whatever you want to call it, but then you overlay technical um parameters around it so that you have reassessment triggers or or exit or action triggers based on technical analysis. So a slightly random question here, but you bringing up technical analysis reminded me of this. With your background and

currency trading, what do you think about bitcoin? Because to me, like trading bitcoin is sort of it's sort of like the ultimate expression of this of the idea that you know, it doesn't sot so much matter why stuff is happening. Um,

the focus should be on the what. And I have to say, as financial journalists, you know, every time there's a big surge or fall in the price of bitcoin, we're all sort of scrambling to try to figure out a reason, and often for most of the time it doesn't even really matter, right, The only thing that matters is the price move. So I'm just curious whether or not that's something you're looking at and how it kind of relates to your overall trading strategy. Sure, so I

watch it closely. I actually think that bitcoin is slowly becoming a pretty good proxy for the whole dollar d basement and and fed liquidity trade. So when for example, bitcoin peaked the nights, Elon went on sn L and that was actually a decent indicator for for the currency market. So if you look at what Aussie did, or or or the more reflation oriented currencies that peak, and bitcoin was a pretty good signal to get short those currencies. Dollar Canada made a low at that time as well,

So I think it's becoming an important proxy. And the other thing that I think is interesting is it does look to me like there's a pretty clear substitution effect between gold and bitcoin, where the gold there's a lot

of on Twitter, hey, what why is gold underperforming? And to me, it seems like it's Bitcoin is becoming a competitor to gold, right, And some people might believe that or some might not, but it doesn't really matter if you don't believe it, because you know, thirty eight percent of people do believe it and they're buying bitcoin instead

of gold to hedge the dollar debasement story. So to me, I think it's it's becoming like I don't really have a view on price at current levels, but as an asset class, I think it's it's just becoming a new asset class. I know the way commodities really weren't that much of an asset class at one point. Historically they were. They were you know, good that got transacted and hedged and then uh, they're a financial asset class and that

that can happen once in a while. And that's what I think crypto UM specifically bitcoin is becoming and and more narrowly, it's becoming a meaningful competitor to gold UM because you get a yield on bitcoin and you don't get one on gold. And and then depending on your age and and you're kind of not political orientation, but you're like money monetary systems orientation. UM. Again, it doesn't matter if I believe or not. UM, if a lot of people believe, then that's where the price is going

to be influenced. So that's again, Yeah, that's a good example of the the what, not the why. And uh, it is definitely interesting trying to find a framework for bitcoin, I think is one of the great challenges right now. UM. Like obviously a lot of people use technical analysis, but I think there's a really interesting behavioral aspect as well. Uh. The SNL elon stuff being one of the most intriguing ones where it was the biggest by the rumors cell

the fact. And just to be clear, I was taught writing about this like a week before it happened, so and I'm wrong all the time, I'm just saying in this case, I was right, and it was really obvious. It was like the greatest by the rumor cell. The fact trade in history was to be long does or or long bitcoin into SNL and sell at eleven thirty and it was like tippy top was eleven thirty or eleven forty five. It's it's amazing. So there are some behavioral things I think that you can kind of unpack

in in the crypto space. Um, but yeah, mostly it's technicals and flow that seems to be what dominates. And then there's this whole ecosystem of fundamental analysis going on in the alt coins, which is interesting. But that scenario that's you really have to spend so much time to become expert. You know, you said something interesting earlier on and you're talking about uh, sentiment or positioning and how

positioning is not always the best indicator. But sometimes if you overlate with sentiment and you mentioned if you say, put out a note about the Aussie there was bearish and what you've got a bunch of bad anger responses that might tell you something. Do you use can you use social media that way? Can you like put out a tweet with some idea, some trade idea, some theme with the express purpose of trying to gauge the sentiment

of the reactions. Well, you know what, I have thought about that, but generally I would say no, And I've tried to get my feed to be as balanced as possible. But the problem is that there's so much bias I find on Twitter, Like, just in general, Twitter tends to lean very bare stocks. For example, it's more like UM, going to trip Advisor to check out the hotel, and you're going to see like a lot of piste off people in there. So generally I don't find it to

be that great. Maybe it's just like the mix isn't good enough, or that there's too much biased, But I just find you just generally tend to either tweak some like tweak a specific topic that gets people kind of angry or or annoyed, or you don't and you just get a couple of like weak replies that that are supporting you. So it it's more like is your view

a trigger? Yes or no? If yes, then you get a ton of responses, and if not a trigger, it doesn't go viral enough, and then it just you know how the Twitter Elgo just kind of drops it and and nothing. No, you don't get any really meaningful reactions. So so I guess my answer would be no, Maybe it's more because of Macro, Like maybe if you're in single names, there might be more balance, um and more people interacting with your tweets. But I would say on macro,

you either trigger people or you don't. So I guess I'm wondering. You know, for all the people that sort of got into retail trading over the past year or so, what would be or advice to them going forward? Like you're one big piece of advice. Sure, so my definitely, my number one piece of advice would be be humble. It's easy to make money in a raging bull market, um. And there are specific things that happened in that may or may not ever happen again in our lifetimes. So

I would say, be humble. Um. And then just behind that, like we were talking about, is be sure to adapt as things change. Don't just get stuck in your one strategy that worked last year, because it's probably not going to necessarily work this year or next year. So if you want to trade for the rest of your life, be humble and adapt. One last question. You know, again,

you have this new book out, Alpha Trader. Obviously, if someone has been a professional trader for twenty five years, there's presumably extremely rare, especially if you sort of start from the universe of everyone who thinks about getting into trading. But what do you just was a little bit more about your background, and for someone considering the book, like why should they why should they listen to you? I guess the main thing that I have, as you mentioned,

is experience, But then my experience is pretty broad. So I tried to write the book not just for new retail traders, but also so that one of my peers who's been trading for twenty years at a major hedge fund would also get value from the book. That's that's the way that I tried to write it. So the three stages of my career were or my my real career in trading were trading professionally as a currency trader

for a bank was the majority of it. But then I also spent about four or five years trading my own money on the nazdac as we mentioned on Nazak Bubble, and then I was also at a hedge fund for three years, so I have one thing that that really that that taught me was varying your risk size and

really having proper risk management. Because a lot of people read a lot of trade selection books like the those books are fun too, are more fun to read market Wizards and and the John Murphy books or whatever books you're reading, most books are about trade selection, and there's

not that many books about risk management. So I try to cover that in a in a pretty easy to understand way, but a few I have a few chapters about risk management because I think that's a really important thing that gets left out of of a lot of books,

and especially young traders. But even you would be surprised because at a bank, there's so many other things that you're doing, like market making and all that that that risk management isn't always taught either, so you tend to learn it more about osmosis, So I think my range of experience UM and then also the way in the book I try to go through everything from understanding the meta game, which we kind of touched on two specific here's how I make my my choices of what to

trade correlation. I cover a lot of topics UM. So I think people that whether they have experience or not. The whole idea of the book was to try and add value to people across the spectrum, right from somebody who's never traded before right to um, someone who has

a lot of experience. And one cool thing that or the thing that I found cool or validating was Ben Hunt wrote the foreword to the book, and his takeaway at the end of the forward, and the interesting thing was a couple of other people that like were early readers before the book was published, said the same thing was that it's kind of a book about understanding the game that you're playing, and and it can relate to

the areas outside of trading as well. So there's a lot of stuff in the book about self awareness, UM and adaptation obviously, and discipline, conscientiousness, doing the work, how success transpires in the world in general. So there's a lot of subjects that that aren't super specific to trading.

And so Ben says in the end, this is the kind of book he would buy for his uncle or for his niece or whatever who aren't even in trading, because hopefully it can teach you some of the things that I've learned about, you know, playing the bigger game or or other games like poker and things like that. So I think it has some application outside of trading.

Um from the feedback I got, that's what people said, and that's kind of what I hope UM that that people also get out of it is some application outside of trading. Brent Donnelly, thank you so much for coming on Odd Lots and congrats on the book. Thank you. That was awesome. Thanks, thanks very much, thank you. Obviously, I always really like those episodes. I mean I really do.

I always go back in time to like two thousand and two and whether I could have been a trader, and I actually think no, I really think I went I made the right decision to not pursue that. I'm sure, like I think, you know, oh, I could have made a bunch of money, but I just have a feeling I wouldn't have been a wain. Why don't you set up one of those like fantasy football type portfolios and

see how you do? Although actually that's that's a terrible idea, because if you lose loads of money, you just feel bad, and if you make loads of money, you feel bad

because you haven't actually made loads of money. Yeah, well, I thought it was interesting his point about like sort of runway and risk management and if you like to enter the game at like some like day trading shop where you're on like really really sort of tight stops and so forth, versus say coming up through a bank where you're a market maker and you have like a lot of time to learn and you have like a

lot of liquidity behind you. Like, I just feel like that's such an important lesson and it just seems so easy to get chopped if you don't have like a you know, a really good risk management framework and you don't have a lot of cash behind you. You's just got to be so easy to get like chopped out at the beginning and be out of the game day one before it even gets started totally. Um. The other thing that's struck me was this idea of not worrying

about the why and focusing on the what. And to me, that just kind of characterizes the past, you know, certainly the past ten or twelve years since the two financial Crisis, where we had so many people who were talking about markets being artificially inflated by central banks. Nothing makes sense anymore. Everything is distorted, but in the end it might not actually matter. Like the thing that matters is what people believe in, Um, the actual flows in the story that's

behind those flows. And so how do you bet on you know, stocks in two thousand eight or two thousand nine, you'd be doing phenomenally. Well, Yeah, I think that's really hard. And again I really do think that, like my mind is not like and I really believe I don't know about you, but I really believe a lot of journalists would not make for good traders because I truly believe that, like, well,

they tend to overthink things. It's two different skill sets. Yeah, yeah, and it it's more important to be right, you know. It's like the classic thing, it's like do you want to be right or do you want to make money? Journalists, I want to be right, and we don't want to make well, I mean with good reason, right, Like, the whole point is you're trying to build up credibility so that people believe in your journalism. Um, you're not trying to make money obviously as a journalist, you're not trying

to make money. No one goes into journalism to become rich and famous. Okay, shall we leave it there, Let's leave it there. Alright, this has been another episode of the All Thoughts podcast. I'm Tracy Alloway. You can follow me on Twitter at Tracy Allaway and I'm Joe Why Isn't All? You could follow me on Twitter at the Stalwart.

Follow our guests on Twitter. Brent Donnalley, He's at donne leye Brent, and he's the author of the new book Alpha Trader, The Mindset, Methodology and Mathematics of Professional Trading. And be sure to follow our producer Laura Carlson. She's at Laura M. Carlson. Followed the Bloomberg head of podcast, Francesca Levy at Francesca Today, and check out all of our podcast at Bloomberg. Unto a handle at Podcasts. Thanks for listening.