We discover what makes great traders tick! My ‘10 Trading Questions With…’ guest today is Robert Carver. Until 2013 Robert was head of fixed income at AHL, one of the worlds largest systematic hedge funds. For the last couple of years he has been managing his own portfolio, using a fully automated trading system which he developed himself. Robert also writes and blogs about finance and investment. His first book, Systematic Trading, will be published in September 2015.

What is it about trading that gets you up and motivated in the morning?

Because I trade systematically, I spend very little time ‘trading’. Just a few minutes each day checking various reports and diagnostics. Much more of my time is spent writing and thinking about trading, and finance in general.

So I’ll answer a different question “What is it about the financial markets that gets you up in the morning?”
Finance, and economics in general, is all about how people interact. However unlike most other forms of human interaction we have an awful lot of data as those interactions happen. So to understand the markets you need to know about psychology, you need to know the economics to model those interactions, but you also need a good grasp of statistics to analyse the data.

This multi-disciplinary nature of financial markets makes it endlessly fascinating.

How did you first get involved with the financial markets?

I first became interested in finance in the late 1990’s, when I was working in a different industry, I found a dog eared copy of “Liars Poker” in a second-hand bookshop. A lot of aspirational traders got encouraged by that book; ironic since Michael Lewis wrote it for quite different reasons. I got myself on to an Economics degree course, which the book recommended as the appropriate qualification, and I ended up specialising in finance.

I also worked as a summer intern for AHL, a large systematic hedge fund and CTA (Commodity Trading Advisor). After graduating I worked for an investment bank (Barclays Capital) as an interest rate options trader, mainly customer flow, hedging and book running, but also doing some prop trading.

What was the turning point that really propelled you towards trading success?

It turns out I wasn’t cut out to be a discretionary trader, so I left Barclays and the industry for a while to work for a research think tank. At the same time I did a part-time Masters degree, again in Economics.

I got my lucky break when I was looking for a job just before my final exams. AHL were looking for someone with an Economics Masters and finance experience. I had exactly the right background, and I got the job.

I spent 7 years working at AHL. If I hadn’t done that I wouldn’t have the skills and knowledge, or the capital, to do what I do now: systematically trade my own money and write about investment.

What are your personal trading goals?

When I left AHL I decided to build my own automated trading system from scratch, as I’d never built an entire system before. So I’ve already achieved that goal.

From a very long-term point of view I’d obviously like to make money from my trading. However I don’t look have a goal for how much money I’d like to make on a day by day, or even year by year basis. These figures are just random draws from a distribution of returns – there is no point agonising over them. In terms of what metrics I look at every day when evaluating my trading, I mainly focus on realised versus expected risk, and on execution costs versus expectations. I also look at other statistics over longer periods.

As the portfolio manager of my own trading account, my main goal is to avoid meddling with my system and to let it run unimpeded.

As a writer about finance my goal is to try to educate as many as people as possible so that they can take control of their own investment and trading decisions.

What trading mistake have you learned the most from?

There are so many…. if I was to pick one out, whilst at AHL I inherited a trading system which had some flaws. Firstly it was very complicated – nonlinear and path dependent. Secondly it traded far too quickly. In the end we shut that system down, but we should have done it sooner.

That experience has made be obsessed with creating systems that are as simple and transparent as possible, and with keeping trading costs low. Like all competent traders I’m also obsessed with risk management.

Keeping these three obsessions constantly in mind is a good way to design trading systems that have a good chance of being profitable. They apply quite well to discretionary trading as well.

Don’t use complicated indicators. Don’t trade too often. Finally, don’t take on too much risk.

What are the main trading strategies and markets that you trade?

In my main fully automated mechanical trading system I trade about forty futures markets spread across all the main asset classes.  I’ve found that you get more benefit from diversifying across different markets, than from developing a large number of ways to try to predict one market better.

I use just a handful of very simple, purely technical systems: a few variations on trend following, breakouts, and a couple of systems that look at a measure of contango (also called rolldown or carry).

I also have an investment portfolio of ETF’s, and some UK equities that I trade on a semi-discretionary, semi-automatic basis.

What 1-3 trading books should every trader read?

Naturally I’m excluding my own book…But this was the hardest question to answer!

I read a lot of books, and there are at least 100 I’d put on a reading list.

Seriously, the first book would have to be something by Jack Schwager, who you’ve also interviewed. Even picking one of his books is very difficult. If you put a gun to my head I’d pick A complete guide to the futures markets.

The second pick would be Trading systems and methods by Perry Kaufman. If there is a trading rule that isn’t in this book, then it’s probably no good (or it’s so good that only one guy has found it, and is keeping it a secret).

It’s much harder to pick the third book. For sentimental reasons I’m going to go for The Predictors by Thomas Bass. Liars Poker got me into finance, but this book got me interested in systematic trading. I wouldn’t be where I am now if I hadn’t read it.

[Editor’s Note: Robert’s First book “Systematic Trading” will be available very soon and you can preorder it now to get your copy earlier. Check out Systematic Trading here – A.R.]

If you had 1 minute with someone who wants to learn how to trade in stocks, what would you say?

I see a lot of people on internet forums asking “I want to become a trader, how do I do it?” That’s not like answering the question “I want to become a doctor, how do I do it?”. Trading isn’t really a profession like medicine, with a set route into the job, a governing body that awards certificates for specific exams, and so on.

However like being a doctor I’m not sure most people are best served by trying to learn by reading a few books (even the ones in question 7) and then trying to learn to trade with a thousand bucks they’ve borrowed on their credit card. Nearly everyone who tries to learn this way will fail, unless of course they’re just running a good out of the box system which they aren’t going to modify or deviate from in any way. You are better off getting some proper training.

Specifically for systematic trading there are a number of different disciplines that are involved. I’m a jack of all trades in programming, economics, statistics, finance and the practical aspects of trading. If I was starting out I’d first get qualified in one of those areas, from the best university I could get into. Then I’d get a job; with a career plan to put myself in a position where I’d ultimately be managing money, either my own or other people’s.

There are several advantages to this approach over the self-taught route. Firstly it means you will have started to learn some of the skills you’ll eventually need if you end up trading.

Secondly hedge funds tend to hire people who are qualified in programming, economics, and so on rather than people who’ve privately traded, even if they’ve been successful. The demarcation lines between front office jobs – programmers, researchers, execution traders and portfolio managers – are quite porous. So once you’re in the building, if you’re good and you learn fast, you can easily end up in the right place.

Also most of these fields pay pretty well, so you can raise capital you’d need if you decide to become an independent trader. Finally you’ll still be qualified to do something else if trading doesn’t work out.

Sorry, that’s probably longer than a minute…

What separates the average from the very best traders?

There are two things you need to be profitable – the ability to pick the right trades, and the discipline to manage them properly. It strikes me that there is a relatively small set of people with both the discipline and the understanding of what proper management is, but a larger set of people who can pick good trades. At the intersection of these you have the best traders.

I’ve done computer simulations that shows that using a completely random entry rule is still pretty profitable, if you combine it with the correct stop loss levels, right holding period and risk target. In other words position management is more important than finding the right positions. This is why relatively simple systematic rules can beat the vast majority of discretionary traders, because they do a little better again than completely random rules.

I’ve met plenty of traders who usually manage to come up with one or two good ideas a year. If they managed these trades properly they’d make more money from these good ideas, than they lose from the bad; they would do better than a random rule. But they do silly things like put on positions that are too large, take profits too early or trade too quickly; and end up doing much worse than random.

Now there are some incredibly good traders who are able to come up with many more good ideas in a year, but they are very rare. I’m not sure it’s helpful for most people to look at these guys, since you can’t easily replicate what they do. As a systematic trader I’m thinking of people like Jim Simons or David Shaw (or more accurately their respective firms).

Even some of the most well-known names have had a small number of massive wins. I’m thinking of John Paulson who made one really good idea – shorting subprime. But he put the trade on so it had limited downside and huge upside, and it ended up being the biggest winning trade of all time.

How do you ensure your trading will continue to be successful in the future?

I don’t think you can ‘ensure’ your trading will be successful as that requires some luck, but there are things you can do to make it more likely you’ll be successful.

The main thing a systematic trader can do is not meddle with their system. You should put a lot of work into designing a really good trading system. However once the system is finished its imperative that you don’t do any more work, since that will probably lead to you making changes to the system, or overriding it in some way.

So it’s important I spend as much time as possible not thinking about how to improve my system, or the positions it has on, or what could happen to prices.

Bonus Question: If you were not a trader, what would you do?

As I said I’m not sure I spend enough time on trading to be classified as a ‘trader’. In an alternative universe I might have become an academic researcher.

But in this universe I haven’t the patience to spend three or more years finishing a Phd on some obscure dark corner of finance, and then a decade or more trying to get slight variations on my Phd thesis published in the right journals so I could get tenure, at which point I could do some genuinely interesting research.

Robert Carver’s Bio:

Robert Carver worked in the City of London for over a decade. He initially traded exotic derivative products for Barclay’s investment bank, and then worked as a portfolio manager for AHL, one of the worlds largest systematic hedge funds before, during and after the global financial meltdown of 2008.

He was responsible for the creation of AHL’s fundamental global macro strategy, and then managed the funds multi billion dollar fixed income portfolio before retiring from the industry in 2013. Robert, who has bachelors and masters degrees in Economics, now systematically trades his own portfolios of futures and equities.

Robert also writes and blogs about finance and investment. He is the author of Systematic Trading: A unique new method for designing trading and investing systems, which will be published by Harriman House in September 2015.

For more information on Robert and his new book, check out www.systematictrading.org

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