This second Bear Market Survival training for stock traders covered how to manage your risk to survive a bear market. The video below is the live recording of the session in which I covered stock market risk management, capital allocation, drawdown and diversification.
I also discussed the risks of entering the market using a value driven approach in the current volatile bear market conditions and reviewed the scenarios that can play out after a dramatic correction.
Many traders new to short selling have rushed to short the market exposing themselves to large risks because of the potential rapid adverse moves that can happen when trading individual stock on the short side. These can be managed as discussed in the video.
The video is long, however you can play it on double speed so you get all the bear market stock trading lessons as efficiently as possible.
Show Full Transcript
So welcome to this second urgent bear market training on bear market, risk management and survival. For those of you who haven’t heard me before, my name’s Adrian Reid and I’m the founder of enlightened stock trading and I wanted to run this session because we’re now a few weeks into an extremely volatile and risky market. I want to take this opportunity to spend some time with you before the markets open for this next week. There’s a lot of interesting, an wild things happening in the markets right now and I wanted to just give you a chance to hear m talk through it, voice or questions and concerns and also I just wanted to give you some perspective to help sort of think through how to trade and manage your, your activity in the coming weeks and months as we move through this, um, this market.
Before we get into all the market stuff, I just want to say, I hope you’re all safe and well and healthy. Number one priority for everyone is your health and your family’s health. The markets and trading is absolutely secondary. So I would say if there’s anything that is demanding your focus and attention outside the markets particularly for your family and your health and your family’s health, please pay attention to that. The markets are not going anywhere. They will be here in many years into the future. Thankfully, we got to play this game for a long time. But to the extent that everything else is okay in life and you can spend some time focusing on the markets. I really wanted to bring you this session to share with you some risk management principles and ideas to help me survive and actually thrive and make money in this bear market.
I’m going to talk a little bit about long term market perspective and just to share some ideas and some perspective just to put all of this into context because it’s very easy to get stressed and emotional and worried about what’s going on in the markets right now when things are so volatile and changing minute by minute, day by day. But if we can step back a little bit, I’ll, I’ll share a few thoughts that will help you with that.
We’ll talk about where we are and what comes next or what could come next. Obviously there’s a crystal ball, but there’s certain things that could happen and I want to make sure that all of you in my community are prepared for that. It’s very important that you have some perspective about what could happen and you, you manage your risk and your exposures accordingly. I spent some time on the key differences between bull and bear markets. Some of those are obvious, some less so. I will also cover how to think about risk management right now. This is very different than the market was two or three months ago and, and the risk management principles, while you may have some sound risk management principles for a bull market we need to look at those portfolio wide risk management principles that we’re using in our trading right now and make sure they’re really appropriate for what’s going on and what could happen.
We’ll talk about next steps and then I’m going to leave a bunch of time for Q and A. Now, one big difference between this session and the last session I ran a couple of weeks ago is I don’t have a big formal presentation for you. What I’m going to do is I’ll be on camera and I’ve got a few slides that I’ll, I’ll share with you but mainly what I want to do is have a conversation with you because it’s really important to make sure that you’re all comfortable and you understand what could happen and what the implications are. So I don’t bombard you with stats and information, but I’ll share what I have to and then we’ll have a conversation or open up the microphones to allow you to ask your questions.
So that’s what we’re going to cover today. Now first the disclaimer, like the main principle here is that this is not financial advice and certainly doesn’t replace any sort of professional advice you would get from your financial advisor, accountants, attorneys, and so on. You must make your own decisions about how to how to trade and invest if at all in times like this and indeed at all times in the markets. So just know that what I’m, what I’m sharing with you is some perspective to help inform your decisions and to allow you to stimulate your thinking so that you can improve your trading decisions. But I’m certainly not proposing to tell you how you should be trading, what you should be buying and what you should be selling.
What I want to do is just share with you to start with some long-term perspective about the markets. Because when we’re in a market like this right now, there is a boom, a constant barrage of news flow. There is you know, articles every other minute about the market being up, the market being down. If you watch the markets last week, you know, one morning the U S futures went limit up the next morning, then went limit down the next morning they will limit up again.
I mean it is gyrating like, like nobody’s business and it’s very easy to get sucked into the urgency and the intensity of this moment of, of this minute in the markets. And that’s, that has a couple of major problems and a couple of major challenges that are presented for you. First one is it’s intensely emotional when you get, when you find yourself trapped in that in that flow of news and that that constant monitoring of where the market is right now. We get immersed in the stress and the emotion and that emotion is absolutely the enemy of profitable, sustainable trading. You know, for those of you who are students of mine, you’ll know that I’m, I’m a systematic trader. Pretty much all my trading decisions are made driven by a, a system which has been back tested over 20 to 30 years of past data.
I love to trade that way because it removes you from the stress, the emotion of volatility, the craziness that’s going on right now. And if you’re finding yourself being overwhelmed and stressed about what’s going on in the markets, then what I’m going to invite you to do is just step back from that and take a longer term view. If you look at the markets over the last two weeks, it’s been a hell of a ride down. But if you step back and you look at the markets over the last 20 years, it really just does put it into perspective a lot. The market spent a lot of time going up. They spend a short amount of time going down and you’ve heard this before, but you need to hear it again because this will pass and this moment that we’re in will pass so you don’t have to panic about how do I make money right this instant.
If you don’t have an edge in the market right now, that’s okay. Just stand aside because it will pass and when it passes better, calmer, less volatile times will return eventually and that might be next week. It might be next month, it might be next year, but it will come back. The markets will still be here and so our number one job as a trader and as the provider for our families in the wealth builder and all of these things, our number one job is to survive what’s happening now. That’s the first priority. And if you step back and look at the market over 20 to 30 years, you’ll say, well, if you could just survive those panics and downturns in the time in between those panics and downturns, you make a huge amount of money. So I, you know, I’m getting a lot of questions right now about well what system should I use and, and when is it going to start signalling again and, and how should I, you know, allocate my money and what stock should I buy?
So just calm that down and take a step back. Worry first about survival. Keep your count, keep your account alive so that you’re ready for the next wave up. If you have a system with an edge and you can make money on the way down, great. You know, do that because you’ll make, you can make some money, you can make some, some very good money very quickly. But if you don’t have that edge or you’re not confident to do it, that’s fine too, because the same stable long-term bull markets will eventually return. You may just need a little patience. So the, the, the long term perspective that you’ll see when you look at a 20 or 30 year chart of the S and P or the ASX ordinaries or any of those indices is that bear markets a short, fast and Volta bull markets are long, slow and grinding.
Now, which one do you think is easier to make money in? Drop it in the chat for me. Long slow grinding up markets or short volatile erratic bear markets. Yeah, absolutely. Bull markets buy easier to make money in. Now if you happen to get on the correct side of a move in a bear market, you can make money very quickly. You can make high returns in a very short space of time, but you also have to be prepared for the fact that there’s a lot of volatility. So those trades can all go in exactly the opposite direction. You know, I had a I’ve got a short system which is got some positions in the market right now and some days they are doing amazingly well and some days every single position is going against me. And that’s okay because I know that’s the way the system behaves. But you’ve got to be prepared for that. That, yeah. Okay. If I, if you’re on the right side of the move in the bare market, yes, she made a lot of money very quickly, but it is a wild ride. Make no mistake. And again, if you’re not comfortable with that or you’re not prepared for that, stand aside, absolutely no problem with that because the same stable markets will return.
When you think about your trading, what I would in the way, the way I think about it anyway is that this is not just a hobby. It is a hobby for me, but it’s not just a hobby. It’s a vocation that lasts a lifetime for me. And I suspect given that you’re here it for you too, and if it’s a vocation that lasts a lifetime, you need to treat it with that sort of timeframe in mind. You know, we don’t need to rush and act with urgency and reckless abandoned to try and take advantage of some fleeting opportunity. Now we need to treat it with the respect and caution. And kind of control that it deserves.
So again, when you’re, when you’re looking at the markets and you’re seeing things gyrating and you’re looking at a stock going, Oh my God, this is 90% down from all-time highs, is this the bottom? Is this a good value? Should I jump in here? You know, is this, you know, is this going to set me up forever? If I just get this, this trade at exactly the right moment and catch the [inaudible]
Bottoms like no, it won’t. And it’s probably not the bottom. Anyway, step back from all of that urgency. And remember the markets are going to be here on volunteer time and you’re going to be trading a long time. One moment will not make or break you. Okay? So this is a principle or perspective that I want you to go into the market with next week and for the next six months or however long this labs, because the more you can kind of detach yourself from the urgency of the moment, the calming your mind will be, the better the decisions you’ll make and the more money you’ll make. Are you with me? Does this make sense? Come on, let me, let me know in the chat. Is this making sense? Are you feeling this? I mean, who, who else has looked at the market and gone,
There’s an opportunity to [inaudible] what you do.
Is any of that happening? Is this happening with anyone else? I mean, it happens to me. It must be happening to you guys,
So if I need to kind of consciously breathe and step back, and I’ve been doing this for over 18 years, I’m sure it’s the same for you. And David says it’s a great time to be in cash. Absolutely. If that’s, you know, if that’s where you feel comfortable and that’s what you that’s where you’ve got an edge right now is just to stand aside, then that’s perfect.
If you’ve got an edge to be in the market, good being the market too, but there’s no urgency to participate. Okay. Let’s talk about some principles to survive by, because if you don’t survive this, if you block your account, what’s it all for? You know, I mean, just think about the math of two guys, two guys who are relatively new to trading. I know a lot of you on the call have been trading for a long time, so some of you will get this and a lot of you are already students are buying as well. So you will have got this to mention. The first guy saves up $10,000 and goes and starts trading in the market without any real edge and you know, throws a few things down on some hot tips and some advice and tries a few different ideas and you know, training for a couple of months and pretty soon the $10,000 has gone always up to account for a number of basically no edge, no risk control, no discipline and realize, okay, I did something wrong.
So that guy goes away, saves up some more money, another $10,000, spends a little bit more time learning and then goes and goes into the market again with a new account, new $10,000. And this is six months later because it took some time to say save the money up for the account, starts trading, you know, uses some different approaches, a little bit more discipline this time. You know, starts following some rules but still doesn’t have risk control. It doesn’t really have that much discipline blows up the second account just sounded familiar to anyone. Anyone blowing up a couple of counts that raise your hand. It’s okay, I don’t want to embarrass you, but it happens, right? Lots of people blow up accounts. And if this happens, this happens to a lot of traders, two, three, four, five times. And I mentioned this trader who spends 12 to 18 months blowing up accounts and then finally it clicks and they get an edge.
They get a system and I start following consistently and they build their accounts slowly with discipline consistently over time. And there are whites off to the races, you know, from, from then on. They’re a trader, they’re going to be profitable, they’re going to survive. But it took 18 months to get there and three blown up accounts. Now. What if that guy instead took a different approach with the first account? They went into the market cautiously with a set of factors, rules and started trading with a low position size, very little leverage, very conservative with discipline. Gradually builds that $10,000 at the same time, saves another $10,000 and add to that the account and then keeps gradually building that and it saves the other $10,000 and adds that to the account all the time. They get to the 18 month Mark when the first person was just getting started with their third or fourth $10,000 account.
The second person already has 50 maybe more $50,000 or more in their account because they took it slow, traded with an edge, didn’t trade when they didn’t have an edge and controlled their risk. Now, if you’ve traded for years and you go through a massive drawdown now or you blow up your account now because you’re trying frantically to make money in a wild, volatile band market, that’s exactly the position you’re going to be in. Everything that came before is wasted. Everything is wasted because you have to start again with that small account and build it up. So this is why from our perspective, the first principle to survive in a bear market is you do not need to trade. You can sit in cash. It’s at, it’s absolutely okay. I’m, you know, in 2008 I was very comfortable to tell people I’m a trader and I haven’t taken a trade for six months because my system has not given a signal. It’s okay, I wake up, I update my daughter, I’ll run my scan, no trades, get on with my day. Next day,
Do it the same, do it the same, do the same thing, wake up, update my daughter, run my scans, no trades, okay? Get on with my day. So you can be a trader with discipline following your system, but not take a trade through the whole bear market because you’re waiting for the good conditions to return. Okay?
So that’s the first principle you don’t need to trade. Second principle is only trade and you have and age. And if you look how many, how many would you spent? Who’s in isolation? Absolutely. By the way, can you just tell me in the chat if you’re in isolation, if you’re allowed to leave your house or if you’re if you’re stuck somewhere and you can’t you can’t go about your normal daily life. I’m stuck on a farm in Northwest new South Wales and it’s pretty cool. It’s a worse, there’s worse places to be isolated, but can’t really go anywhere. So I’ve got a lot of time to sit and think about the markets, look at Facebook and play with the kids and drive motors and all that sort of thing. So one of the things I’ve noticed in my isolation looking at all the Facebook groups that are focused on trading is that a lot of people are saying, is this the bottom, you know, is this stock good value? How do I know when to get in? You heard these sorts of questions before. You know, when should I start buying [inaudible]? Will Boeing recover? Is the bounce real all of these questions. When you’re asking questions like that,
You don’t really have an edge because what you’re doing is you’re trying to get advice from someone. You’re trying to get someone else to tell you what you should be doing. And I believe at all times, but especially now in this sort of market, it’s critical for you to only trade when you have an edge. Now that means
We need to be strong and avoid that. That temptation to buy a stock because there’s good value. It looks like good value compared to where it was because we don’t know if it’s going to go down another 50% or more. We don’t know if it’s going to bounce. We don’t, we don’t really know what it’s going to do. And if we just go trade on a whim because something that looks cheap, then chances are we’re going to get nailed. So you must have an edge for every trading decision you make. Now I would say, okay. For most people, having an edge means you must have a back-tested trading system that is profitable through a bear market. And that’s a good way to have an age. There are other ways to have an edge. You know, if you have some fundamental research in a company that you’ve done that is really is good.
But you’ve got to remember that the market fundamentals and the price are very dislocated in a market like just because it’s good value. It looks like it’s good value at this point, at this price. Doesn’t mean it can’t go down another 50 or 60%. So for most people, having an age means you must have a system. And you know, one of my one of my systems that’s working in the bear market is called slippery debits. And the trader success system, it has, it doesn’t signal a lot. It only signals after a rally when the market turns down and it gets in short. All the weakest stock rides them down until they hit their profit target. That system was in the other week. And then all of those positions basically hit their profit targets. Now it’s in cash waiting for another decent size rally.
So it can get short again. One of the most challenging things for me is to just wait. You know, we’ve got to sit on our hands and wait for the signal, wait for the edge to appear. And if there’s no edge, there’s no trade means you have to do exactly nothing. Sit on your hands and wait. I did a video about it today about patients in, in bear markets. It’s one of the most important characteristics. I haven’t managed to upload the video cause maintenance so slow, but it’s coming. It’ll come out tomorrow probably. And so if you’re not getting signals from a proven backtest and trading system, then just wait. Enjoy the time with your family, enjoy the time at home, spend time on your health and fitness, all of those things. But don’t take frivolous trades when you don’t have an edge. How do you know if you’ve got an edge? Well, you know, you’ve got an edge if you have a set of rules that you’ve backed, tested that make money in this type of market, in a volatile down trending market.
And if your system is, if you don’t have a set of rules that make money in those conditions, you don’t have an age, you shouldn’t be trading my perspective. Okay. yeah. What’s the next principle? Okay. all right. The next principle to survive by in a bear market is we’ve already had, don’t need to trade. We’ve had the second principle was only trade when you have an edge. The third principle is don’t allow any one trade to hurt you. Okay? No single trade should be able to damage your account so much that it limits your long-term survival prospects. And what do I mean by that? Well
If every trade that you take is so small that if it gaps substantially against you, blow through your stop loss by twice and then you exit because there’s a massive gap and it still doesn’t hurt you so badly that you’re freaking out and I’m quivering in a corner, then you’ve probably got it about right. One of the interesting things about bear is the rallies. So if you’re short, particularly the rallies in a bear market us so sudden and so strong and so fast and there are a lot of gaps to the upside. Strangely, the biggest up days always happen in a down market. You know, the other day we had the biggest update on the down since 1933 and that’s incredible. We’re in a bear market, but that always happens. The biggest volatility, the biggest updates always happen months. The chaos because people are still hopeful that it’s over, right? The optimism takes over and people loading, trying to catch bargains before, at, at the bottom. And you have these big rallies, but so if you’re trading short, when you’re sizing your positions, you need to be aware that these big rallies happen very, very quickly. Market-Wide and in individual stocks. Let’s talk about individual stocks first because if you’re short a stock,
What is the worst thing that can happen? Any ideas? Talking in the chat for me? What do you think the worst thing that can happen if you’ve got a short position on an individual stock or equity, what’s the worst that can happen? Infinite boss. It stopped. Yep. It could go up. Yup. Absolutely. The price can go up. Yeah, so the worst thing that can happen is of course the price can go up. How far up can the price go? If you short a stock at $10 per share, the worst that can happen is it could go, it could keep going up in, in infinitely. Right? Now in reality, you’re going to get out before an infinite loss, right? But
You could very easily lose 50 a hundred percent 200% 500% of your position if something really bad happens. Now, from my experience, some of the worst things that can happen when you’re short and individual equity is a takeover because there are, you know, it’s not just individual traders looking at the market going, Oh my God, there’s some bargains here. Is it? How many companies are massively cashed up? How many countries are cashed up looking to buy assets now when the price is right and when those people, those companies, those countries move into the market to try and take over whole companies. If you’re short that position, all of a sudden, a takeover offer at a premium can really hurt. So you need to keep your individual position sizes fast, smaller than you think if you are to survive and thrive in this bear market. Okay. I, in 2008, I had a short position and it was going well until a takeover was announced at a 200% price premium. And I think I told this story the other week and course there was no overnight
Gap. I couldn’t get out. And instantly my position was, was weld down after being in profit overnight. No chance of getting out my stop loss was blown majorly. So when you’re sizing individual positions in this market, type in volatile bear markets, I want you to think not just about the distance to your stop loss, cause that’s great if your stop loss can get executed. But I actually want you to think even more about your total exposure on that trade because the total exposure really is the extreme risk that you’ve got. You know, if you’ve got a short position and your position is $10,000, that position could go 100% against you, 200% against you or more. So you need to be sizing your trade so that doesn’t hurt. So if you’ve got a $100,000 account, I’d suggest to you that a $10,000 short position on an individual equity is probably too big because if something dramatic happens, then you could end up with a 15, 20% loss in your account from one trade.
You can ask an interesting question here. Do you use guaranteed stops? It depends on I don’t personally I don’t trade safety’s contracts for difference. I trade straight equities and so you can’t really get guaranteed stops on those. Guaranteed stops are okay, but they’re also incredibly expensive because if you think of if you run a 20 year back test, including the cost of guaranteed stops and compare it to a 20 year back test without that extra cost of guaranteed stops you’ll probably find that the insurance is definitely profitable for the broker more than for the trader.
I like that. Thank you. So when you’re sizing positions and managing your risk in this market, you must think more about your exposure and the worst thing that could happen then just the distance to your stop loss. In a bull market, the most common way of sizing of trades is to say, okay, well this is my price that I bought at. This is my stop loss. That and that difference is my risk, right? That risk is how you slice your trade. You equate that distance between your entry price and your stop loss to half a percent of your account or 1% of your account or whatever the numbers that you’re using. But in a bear market, yes you do that, but also have the other overlay of your total exposure. In the worst case scenario that could happen because stops get blown far more in down markets than they are doing up markets. Unless you happen to be coating a long position in a crash of course. But really the, the, the risk is far greater now. So the third principle was survived by is don’t let any one trade hurt you. The fourth
Principle is don’t let any one system or strategy hurt you. And this is, this is really, really important because again, under normal market conditions, when you have 10 or 20 positions a trade in your portfolio, what does that give you? What’s the word? Starts with D someone write it for me. If you have 20 or 30 positions in your portfolio, you’ve got what? Compared to one position. Diversity. Yeah. Diversity. That’s right. Thank you. Anthony. You’ve got diversification. And on some days some of those positions will be up, some of those positions will be down, but they kind of even each other out. And over time, you know the account is fairly smooth. If you’ve only got one or two positions in your portfolio, what happens to your account? It’s very volatile, right? It moves up and down. With the whims of those individual one or two trades that you’ve got on. Now, let me ask you this. In a bear market, how much diversity do you really get from holding multiple positions?
Has it ever, I haven’t looked at the correlation within the stock market correlation between stocks in a bull market verse in a bear market, in a financial crisis versus in normal times in a health crisis, a health induced bear market verse normal times. Yes. I’m getting a few if you come and see it. David says, not much. Phil says not much. Almost none. Joachim says cause they all go down together and it’s exactly right. So the next print, the principle to survive by is to remember that many positions are probably highly correlated, which means many positions are actually acting as one position
And so you’re going to look at your total exposure on that one position and think, okay, am I comfortable if this goes against me? Now the great thing about diversification is you do remove or reduce stock specific risk obviously. So that stock that gets a takeover, that becomes a take of a target and the price spikes if you’re short. Okay, you’ve got diversification. That’s only a small party portfolio. So it’s it doesn’t hurt you too much. But the market as a whole moves up and down in tandem. I mean, as I said last week I had probably 15 short positions on late last week and there was one day where every single position moved against me because the whole market rallied. The correlation in the market is close to one, everything is moving together. So the survival principle is to not fool yourself. That just because you’ve got many positions, you’ve actually got a lot of diversification. Diversification in this sort of market. Doesn’t come as a, from many
Positions, as much as you’d like it to. It actually comes from multiple directions, long and short, and multiple strategies and multiple timeframes. If you’re betting a hundred percent of your account at once, one system or one strategy, chances are you’re in for a very volatile ride right now. So I would say be cautious how much capital you allocate to one strategy, one direction, one timeframe. And, and we’ll get to capital allocation towards the end because there’s some really important things that you can do to help protect yourself. The next survival. So is that, is that making sense? You know, you’ve got, so don’t let any one trade hurt you. This is the primary thing. So if there’s a takeover announcement and so on, you don’t want to let that that wipe you out. But also your, your positions are correlated. So don’t let anyone system hurt you.
Limit your exposure on every single system or approach or direction so that it doesn’t, it can’t hurt you if that system starts losing money. Because let’s face it, sometimes now you know, in this sort of extreme conditions we can get bigger drawdowns and we expect and so we need to keep our exposure small so those big draw downs don’t hurt us. The next principle I think I covered this in the introduction is that survival and capital preservation is more important than profit. So you know, we all want to profit, we all want to know what’s working right now, but the most important thing is to keep our account balance up so that when the next market comes along that we can really make a lot of money in the next bull market. We’ve got a good base to grow from. If we’re our account drops down 50%, we have to double our account before we can reach our previous equity high and start making money in an export market.
But if we only have a small draw down or no draw down and we just go sideways cause we’ve been conservative or because we’ve had a few good short trades or cause we’re sitting in cash, when the [inaudible] comes along, we’ve got a much higher base to grow from. And at the end of that bull market, we’re way better off. So what I want you to do is think another market cycle ahead of where we are now. And this is going to help with perspective. Can other markets go down now because we want a good capital base to grow through that whole next market cycle. And that’s really where the long-term wealth is going to come from. So again, no urgency for right now. Cash is the safest place or a system with an edge that’s making money right now. But no, no, no need to, they need to trade if you don’t have an age where you shouldn’t be trading if you don’t have an edge. And the last the last Prince survival principle that I’ve got here is that risk is determined by your exposure, not your stop loss. And I covered that before, but it’s worth coming back to think about your exposure at multiple levels. What’s my total exposure and what’s the worst could happen on this trade? And then what’s my total exposure and what’s the worst that could happen on this system? And then what’s my total exposure and what’s the worst that could happen in this direction, long or short.
Now you must be aware of what your exposure is at all times and make sure that if you think through the scenarios of, okay, another market crash goes further down, or the market suddenly rallies because you know, the market thinks $2 trillion of fed money is enough to save the world and it just rallies and goes into a new bull market. You’ve got to make sure that either of those scenarios doesn’t hurt you too much. You’ve got to survive to trade another day. So think about the exposure you’ve got, not just the distance you stop losses. Okay. Jonathan queen has a question here. How do you survive? Okay. After in the rallies with 15 open positions, every position is small. That’s the key. And total exposure is also small. I’m going to talk about capital allocation a little later on. And it really, the capital allocation is a key, Jonathan.
So that’s what keeps you alive. It’s okay if every position goes against you. If your capital allocation model is sound. It doesn’t, I mean I can guess it’s annoying cause you get drawdown, but it’s not terminal. You know, it doesn’t really, it doesn’t really hurt. And on the question here, could you diversify by trading ETFs? Yeah, you can absolutely. To the extent that those ETFs non-correlated, you know, I have one system which trades ETFs and you know, it’s gone short a bunch of ETFs and those positions are very highly correlated right now know in a more quiet bear market, there’s more diversification, but they kind of going up and down together. But there’s other types of ETFs. You know, there’s, there’s inverse ETFs, low and short and so on. So, if you trade different strategy ETFs, you know, that benefit from different types of market behaviours, then yes, you can, you can diversify by doing that.
As long as you’ve got an age, this is the key. So, in the trader success system, there’s a trading system, which I really like, which hasn’t yet kicked in yet, but it will soon called bear defiance. And what bear defines does is it trades, it buys ETFs that are inversely correlated with the market when the market is falling. And, and that’s really cool because you don’t have to be able to short to trade this system or you need to be able to do and it, it will typically trade gold bond gold ETF bond ETFs inverse index ETFs and things like that when the market is falling. So you can make money in a bear market by going long instruments that are not correlated to the market. So yes, you can definitely do that. Sarah has a question. The question is if we keep a position of small when will and millions, good question. The, the answer is eventually. And I, you know, I guess the key thing for traders success is patience because there, there’s pretty much no traders who are in a hurry to make millions who make millions. But there’s plenty of traders who are in a hurry to make millions who end up broke.
Let me say that again. There’s pretty much no traders who are in a hurry to make millions who end up making it. But there are plenty of traders who are in a hurry to make millions who end up broke because when you’re in a hurry, what happens? You know, you tend to trade more frequently, you tend to trade more aggressively, you size your positions bigger. And when, yes, you, your account may have a very fast run up, but as soon as the market moves against you, and it will, because we know in volatile markets there’s very big updates and very big down days when the market moves against you, you get wiped out. So the money will come. If you have a system with an edge and you follow the rules consistently or you have multiple systems. And the allocate your money sensibly between them.
So I don’t want you to be in a hurry to make millions because that will stop you from achieving that goal. What I want you to do is be in a hurry to be a great trader. You know, be in a hurry to build confidence in your system but in a hurry. No. Learn to back test properly, be in a hurry to think through all of the scenarios that could happen in the market and pressure test or risk management to make sure you survive those scenarios. You know, be in a hurry to monitor your trades correctly according to your rules, being in a hurry to place your stop loss. If your system has a stop loss, you know, do all of those things right, be in a hurry to be a good trader and the money will come.
But the only traders that make money are patient traders in the long run. I think it’s Henry says in your systems, how does it work? Do you send back to system? Oh, okay. Let me get to that at the end. Henry, I’ll talk about how the system worked, but basically the trader success system teaches you how to Baptists and gives you a bunch of fully disclosed trading systems that you can run for yourself. Basically, it helps you become a fully independent trader. So I’m not giving signals. It’s, it’s just a rules that you can back test for yourself and an implement for yourself in your own trading and you can be 100% in control of the process. Okay. Let me, let me get onto the next the next step, which is where are we now and what could happen next. And I’ve got a slide that I want to share which I shared in the last session as well.
But it’s, it’s important and it really warrants coming back to, can everyone see [inaudible] if you could say the market system map, just put a comment in the chat role, let me know. You can hear me. Let, let me, I can see it. Okay, great. Thanks Anthony. So where are we now and what could happen next? Well, right now, obviously we’re in a bear market and the market is definitely trending down. But late last week there was quite a rally. And so I would call that a shock against the trend. But if you look at the candles the daily candlesticks on any of the indices you’ll see it’s basically red, green, red, green, red, green, red, green, increasing volatility downtrend. And so in a bear market, it’s characterized by lots of shocks against the trend. So what could actually happen from here on, well, there’s really three scenarios.
The trend can continue down for quite some time. And in 2008, I think we ended up about the overall market went down, but like 50% or something by, by the end of the bear market at the absolute bottom in 19, in the 1930s and in great depression, it was down even more. So then for yourself into thinking that just because we’re down 30% or 20% that it can’t go any further. It absolutely can go further. So one scenario is the market just keeps going down. The virus gets more out of control, more people, you know, get sick. The hospitals get overwhelmed, businesses fail. Big corporate start to announce bankruptcy. You remember we haven’t really had high profile bankruptcy’s yet. It’s just coming. So there’s absolutely a scenario when there’s more market panic to come. And so that’s one possible scenario. Another possible scenario is that, you know, stimulus and medical treatments and isolation start to get this thing under control quickly.
And the market just kind of Rangers in a volatile sideways pattern for some months before settling down and then starting a new uptrend that’s possible. And then a third possible scenario I believe somewhat unlikely but still possible is the stimulus and health interventions are so effective that the market turns around and basically starts to rally from here in a sustained ways. The market changes change. [inaudible] And this is what the market system map shows. There’s only several, there’s only a small number of scenarios that can happen. You know, we can have both sideways and bear markets and in each of those we can, that trend can continue. There can be a shock against the trend or they can be a change of trend. And when you’re thinking about they do is think about where are we now? Okay, bear market going down, trending down and what could happen?
Well, it could continue to go down, in which case, what will happen to your existing systems? It could turn around, it could go sideways in a very volatile fashion. What would happen to your systems under that circumstance or it could turn around and go straight back up. What would happen to your assistance under those circumstances and the pressure test, because we don’t know. We don’t have a crystal ball. We can’t tell you exactly what’s going to happen. Now there’s going to be people out there who are forecasting and saying, this is the bottom, or you know, it’s going to be down 50% from here or next week there’s going to be, you know, Dow XYZ number, whatever it is. But it’s all horse shit. No one knows because we don’t know what the data says yet. You know, we don’t know what companies haven’t reported that they’re on the brink of bankruptcy.
You know, we don’t know whether the vaccine is going to come to market quicker than we think. We don’t know a lot of things. So in your trading, you need to be prepared for any of those scenarios, not necessarily to, yeah, to make money, that’s great, but absolutely as a first priority to survive. If you’ve got 100% of your account and it’s all short, that’s great in one out of three scenarios, right? But if a market turns around and rallies hard, you’re going to get nailed and it’s going to be very painful to have a very steep drawdown. You probably capitulate and dump your short positions at the point of maximum pain. And then what do you think is going to happen? Someone type into the chat box for me, what’s going to happen at the point of maximum pain where the person who’s 100% short dumps all of their positions because they’re all moving up and rallying against them, what’s going to happen?
Crash market will turn. Absolutely. Because these things, you know when you, when you are forced out of your positions, when you finally basically throw your hands in your hair and dump everything because you don’t know what’s going on, that’s the point of maximum pain. That’s when the market turns and you’ve got to avoid having to dump your positions cause you can’t stand the pain and you have to be able to avoid that. Whether the market, you know, in any of those three scenarios, if the market keeps going down, if it goes sideways or if it goes, Oh, so look at your current portfolio systems or your current position and what happened to my portfolio. If the market dips and another 20% next week, what will happen to my portfolio if it just ranges sideways in a very volatile fashion, hitting stops left, right and centre and what will happen to my portfolio if it rallies hard for a couple of weeks or a couple of months from here, think through that
And make sure you’re comfortable with the drawdown that you might be in as a result. And this is how you start to form your risk management, your capital allocation plan. Now back to the question earlier about how do you make, how do you stand it when 15 positions move against you? You know, if your capital allocation is sound, it doesn’t hurt so much, so it’s not a problem. So I’m just going to stop sharing this now and go back to video so you can all see you guys hearing this. Is this helping? I mean, I, I, I hope this is useful perspective. So just give me some comments in the chat. Let me know if you’re kind of picking this up, if this is kind of helping you with your thinking. Okay, great. Good. Few yeses. Awesome. Good. Okay, thanks guys. Great. okay, so we’ve covered the three scenarios that can happen from here.
Now if you’re 100% short and the market goes down from here, you’ll make a lot of money. Great. What if it doesn’t? You know, what, if the market rallies, and this is the, yeah, the really the most important thing to consider is the scenarios that could happen and the behaviour of each of your positions or each of your systems under those scenarios. That’s how you start to decide how much you should risk on each position. Okay. So the differences between bull and bear market, right? Again, risk management requires you to understand the different dynamics. Okay. In a bull market, price tends to follow through. With momentum. You get lots of up days in a row. Yeah, there’s some pullbacks but generally it, it persists. But if you look at the, if the price, if you look at the price action last week, you know, it’s basically red, green, red, green, red, green. It’s very random. And then it picks a direction and just hammers down for several days in a row, red, red, red, red, red, red, red, red, red, red, and then jumps back into this volatility. It’s much less predictable, much less predictable. So, you got to be mentally prepared for the fact that your positions are going to jump around a lot.
And so Henry’s got a question. He had to decide a proper stop-loss then. Okay, well the first, the first principle is that you must back test it and see how it works in a bear market. You know, typically you’ll find that a much wider stops more helpful in a bear market than in a bull market. You know, very important to have wide stops because the volatility will just kick you out. Otherwise you know, if you, if you’ve got a good short position and it makes them money in the next day, there’s a rally and you get stopped out, chances are the day after it’s going to hit your profit target, but you’re not in a position anymore because you got stopped out. So all of my short positions have quite wide stops. I’m like a one short, short system that has a 40% stop.
I’ve got one short position, has a 90% stop, so I’m talking really quite wide stops. But the most important thing to do is to back test it and in the back test run an optimization that gradually increases the stock width and observe what happens to the equity curve and the system statistics. And if you don’t, this is the sort of thing that we do in the trader success system. So if you want to learn that, join the system during the train to success system because it’ll show you how to back test and play with these ideas and, and work out things like the stock list. And if your stocks are based on ATR, that’s good too. What you’ll find is the, obviously volatility expands dramatically, so your stop losses will expand with that, which is great. Some systems work well with ATR stops, some systems work well with percentage stops. And you know, I know there’s a lot of, a lot of literature on this as well. Your system should adapt to the market volatility and so on. So therefore you use ATR stops. But don’t take that as dogma. Okay. Test both because for different systems, sometimes one is better than the other and it’s worthwhile just
Checking it out. But either way, the stops are typically wide and with ATR stops they’ll widen up naturally because the volatility increases. So thanks for sharing that, Anthony. That’s good. Okay. So back to the differences between the bull and bear markets. The first difference was that price volatile, that press follow-through. Volatility is obvious. You know, if you look at the S and P chart from two months ago, the candles were really tiny. And then if you looked at it over the last couple of weeks, there’s these massive big candles on the chart. And so that’s why the stops need to be wide because you know, we just don’t know where it’s going to trade on any one day. The, the, the volatility expansion is just so dramatic and we’re going to be careful not to get hurt by that. That means small positions, wide stops.
And if you don’t have a system that has an edge stand aside correlation is the other key difference in a bull market. We already talked about this a little bit. In a bull market, you get much more diversification, much more low correlation between different stocks, but in a bear market particularly one is Savage is this and it just average, it’s, it’s, it’s a very volatile, very aggressive bear market. The correlation within the stock market is very, very high. So a lot of things are going down together. So you want small exposure because many positions are still correlated so they can all move against you at once. And then the last difference is speed. In a bull market you got, you know, you get used to these kind of grinding up days. You can’t just kind of makes new highs and new highs all day at new highs.
But in this pocket, that’s not what happens. We get, you know, very sudden moves in both directions and we, you know, we’re going on this rollercoaster, so we don’t want to think about how much of that rollercoaster in our account we can stomach and moderate our exposure accordingly. You know, if you’re finding yourself sick to your stomach, nervous about how much the dollar value of your account is fluctuating day by day, then reduce your total exposure, you know, trade smaller, trade less on each system. You know, my, my account is moving up and down at the moment by, you know, not the most it’s ever moved up, but the, the dollar volatility is pretty high. But my total, I’ve got, I’m mostly in cash. I have probably 60% cash, 40% positions, and yet my account is still fluctuating in dollar terms at about the peak of my comfort level. So that’s one indication about how much capital should have in the market. Have a look at how much your account is fluctuating and are you comfortable with that? Can you tolerate that? Can you keep, can you sustain that level of dollar volatility? Because if you can’t keep trading rationally, keep following the rules while that’s happening for the next couple of, then
You need to take, you need to reduce your exposure and that’s, that’s, that’s going to really help you survive. This. Suraj has a very excellent question. I turn hacker space along without even drinking water. I am very dry but also don’t survive. Raul has a good question. How do you measure correlation between your systems? What you want to do is, you know, when you come back to us to system what you get is the equity curve of that system. As if you had traded it real time, you know, so you get over 20 years, you’ll get the, the equity curve of that system and you can look at the daily changes in that equity curve. And if you back to several different systems, then you can take those equity curves and put them into a spreadsheet and look at the correlation of daily price moves and you’ll see that, you know, launch short provides very good diversification.
If you’ve got some long, long systems and some short systems, that correlation tends to be very low. But if you’ve got Hey, look, my amazing wife is bringing me some water. So sure. I want to say thank you to Stephanie. Keeps me saying I’m very grateful. So when you’re on the back test and you export the equity Kirsten to Excel, you look at the correlation in daily percentage price changes of your equity, charisma, all of those systems. And you’ll see that the long systems become very highly correlated in extreme market conditions like we’re in now.
And the short systems amongst themselves become very highly correlated. So what you want to do is make sure that your portfolio of systems has sufficient diversification. You know, don’t just be all long. Yeah. If you’ve got five different long side systems and nothing on the short side, you know, the, the, those positions are going to be very highly correlated. And if the market tanks, again, your account is going down. So if you’ve only got long positions, long systems rather, make sure that you’ve got some money in cash because if those, if the market tanks, you don’t want your whole account to go down. Yeah. You can diversify by having cash. Right. if you’ve got long and short, make sure you look at the total, the net long and then the total long and short exposure and work through the scenarios of what will happen to that account in those three different scenarios we talked about earlier.
Ricardo has a question here. If you want to have not many systems, how many would you suggest? Three in a long to in short what would make sense? Look, you don’t actually need many systems. I traded with just one system for many, many years. But the key is when that system went to cash, I was comfortable being in cash. And so when the, when, when it went through a bear market, I did sit in cash for a wall on time. I favour at least three systems, a long-term long side system, a short term, long side system and a short system. If you have those three systems, those three types of systems, the long saw, the long-term long side system will make money over the long run. It will really be your wealth generator. But if you give all of your capital to that long side system, then if there’s a market crash or if there’s a solid bear market that’s going to have to have a very big drawdown.
But the short term long side system will tend to go to cash more quickly. And so if you’ve got a little bit of cash in a longer term system and a little bit of cash in a shorter term system, your overall drawdown when it goes into a bear market will be less. And then if you’ve got a short system as well that turns on as the market goes down and you start making some money, then you’ll smooth your equity curve much more. So I like kind of three systems as a general principle, but if you don’t have any systems, start with one. And if you don’t have any systems at this point, you know, the way I would approach it, if w if I was stunning again would be to spend this time to develop or find or back test a system that I’m comfortable in for the next phase of the market.
You know, trading, starting off, trading in a bear market is hard if you’ve not traded before, but use this time to prepare because there is going to be, you know, a hell of a bull market at some point. All right so start preparing for the next phase and maybe worry less about right now, but if you’ve already got systems, if you already got long side systems, then work on some short-sighted systems. And this way, again in intro to success system, I include that and enrolment short, long term, short term so that you can get some ideas about how to train and you can use those systems or adapt them for yourself. So a couple of other questions here. Can you explain how to establish a system? Look, I mean a, a system in it’s in in principle is a collection of trading rules that that has an age.
You need a trend filter, an entry trigger some filters to select the right stocks, like you know, whether you want low volatility, high volatility and enough liquidity and then you need exit rules to get you out with a profit. To create your own system from scratch is actually quite some work. You know, you need to come up with a, you need to start with a strategy, come up with some rules. Convert those rules to code back, test them, optimize and refine a quicker way to start with pre-existing systems that already work. You know, take a system like, you know, some of my systems for instance. And then learn to back just those systems. So back to some so you can build some confidence and then just implement those. Maybe you tweak them a little bit to suit your personality. But I’m taking a complete system, build confidence in it. Implemented with strict risk control is probably how I would I would establish a system. The process of creating a new system from scratch is,
Is it’s quite a challenge. So if you, if you’re not systematic yet, my suggestion would be to take baby steps and start with a system of mine. There’s other systems around. I’ve got a bunch of good bones in the collection. But you can, you start with nose because it shortens the learning curve cause all the coding work is done. All the hard work is done. The training, the strategy is done, the conversion to the two code is done. All you need to do is back test and build some confidence in it so that you can implement it. Okay. So I hope that helps. David says, would a good mix be one weekly long, one daily long and one short system? Yeah, absolutely. It could be. I mean there’s no, there’s no one right answer for this. It could be, you know, the longer term one could be a weekly system, or it could just be a very long term, just the one daily charts.
I mean, most of what I trade is on daily charts. But you know, if you want to do a, I have a weekly long side system, a daily sheet, a long sound system and a short-sighted system, then that would be a reasonable mix as well. I just don’t like to have 100% in any one. One system wants one strategy or direction. I’d prefer to have diversification between directions and between durations and strategies. I’m just going to pause the questions just for a minute to make sure I get through all of this and I’ll, I’ll, I’ll keep going with Q and a, but don’t worry, I’ll get to everyone’s questions. Make sure that you’ve, you’ve covered everything that you need. Okay. So how do we think about risk management and again, some of these concepts which I’ve touched on already. So I’m if I’m repeating myself it’s only cause it’s important and I really want you to hear it.
The first one is if you are short, be very cognizant conscious of how far that position can move against you. If there’s a short squeeze or a sudden rally or a takeover, your short position could move a long way against you very, very quickly. So you need to have wide stops in small position, small exposure so that you don’t see, you don’t get hurt. I didn’t, I generally size my short side trades using a percent of equity position sizing model rather than a percent risk position sizing model because I’m more concerned about how much capital I’ve got in that trade than I am about the stock with.
Does that make sense? You know, because I know that if there’s a gap, if there’s a takeover, if there’s a short squeeze, it’s my total position size that’s going to get me in trouble. If it blows through the stops, unless of course you happen to be able to use guaranteed stops and a good at a good price. If you can do that, then the next great user space, position sizing. We talked about correlation. If the correlation in the market is basically one, how much diversification do you really have? So don’t just think about the risk on one trade. Think about the risk on your whole system. I’ve got a, you know, I have a short side system that I’m trading right now.
It’s, I’m basically fully allocated and fry, you know, the late last week was a little bit painful cause every one of those positions moved against me simultaneously. But that happens, right? Because the markets are volatile. So how do I stand it? This is Jonathan’s question from earlier. Well, what I did was I looked at that system and the maximum drawdown that the system incurred in back testing, and I used that maximum drawdown plus a margin, Farrah to say, right, well if I allocate $100,000 to this system, how big could my dollar drawdown be if I allocate $200,000? This is some, how big could my dollar drawdown be if I allocate more money to the system? How big could my dollar drawdown be? And basically I, I decided how much to allocate to that system based on how big a draw down in dollar terms I was willing to stomach given the rest of my portfolio.
So if all of those positions moved against me, I’m not too stressed because I only allocated enough capital that the maximum drawdown wouldn’t stress me out. I guess. I don’t like losing money, but winning and losing is part of trading, right? You’ve got to be willing to take the losses and the volatility, otherwise this is not the game for you. So I allocated enough capital to that position, that system so that it could make meaningful money and it could provide meaningful diversity from the long side systems that I’ve got, but also not so much that the maximum dollar drawdown that I would incur is going to hurt. Because if a system breaks and Volta markets tend to break systems, sometimes not, you know, a lot of a good well designed system, we’ll trade through it. But sometimes you do get bigger draw downs and you expect if a system breaks or gets a bigger draw down, you expect, you want to make sure it doesn’t break your account.
So I look at the total exposure, the maximum historical drawdown, and I saw, I allocate the capital to that system. So the maximum historical drawdown wouldn’t be a problem for me quite. It’s got to be comfortable and in very volatile markets or in bear markets. What that usually means is I’ve got cash sitting on the side now, why do I need cash? I need cash because when the market turns, I want to have money to buy stuff with, with my long side system, with my trend-following systems. When, when the leaders start coming out of the bear market and, and share prices are going start trending up, I want to be able to buy into those and benefit from that op suite. So I don’t tend to have a 100% short allocation for a couple of reasons because I want cash for the recovery. But also the markets are so volatile that dollar drawdowns gets so big. You know, I don’t, I don’t want that. I just want enough diversification to make a little bit of money and in the bear market and come out of the bare market with the same or better capital than I had with cash ready to buy stocks that are trending out. So Jonathan and answer the question if you’re still on a call. That’s, that’s basically how I think about it.
Okay. So if the market is unclear on its direction, how much capital should you allocate to one strategy? Now he’s back to the three scenarios. You know, it could go up sideways or down from here. So do you want to allocate 100% of your money to a recovery or 100% of your money to a main reversion strategy that trade sideways or 100% of your money to a bear market system? No, absolutely not. You know, you’ve got to spread your capital between those. And one of the things that that really helps at the end of a bull market when it turns and goes down into a bear market, like a couple of weeks back, is if you’ve got capital allocated to different directions, long and short different durations on term, short term. Because you know, I’ve got a couple of long side systems which are very good and I’ve got huge confidence in those systems to make money in the long run.
One of them exited the market quite some months ago and has been sitting in cash because the market that it trades has not been making new highs for a while. It’s a system on the Hong Kong market. Some of you who are in the program would know it’s the, it’s the firecracker system and it’s one of my favourites. That system stops taking new long side signals when the Hong Kong index stops making new highs. So it stopped taking signals in those positions gradually wound down. And so I had a big chunk of my account sitting in cash when the market collapsed. But I have another system which is the freight train which has long side Australian stocks and that was still fully invested when the market turned. If you know, having 100% of your money in either one of those is not necessarily the best idea. But if you could spread it between the longer term and the shorter term one, then you’ve pitched a bit, a little bit and so your draw down ends up being lower if you’ve got some capital allocated to each of them. And then I have capital allocated to the short side systems that kick in when the market turns down and they start making some money, which further limits the drawdown of the account. So I want in my trading and my systems, when I allocate my capital, I want to make sure that no market scenario will be catastrophic for my account. And so when you think through your trading, what market scenario would be catastrophic for the way you’re allocating your capital right now?
You know, if the market collapses tomorrow, will that be catastrophic for your account? If the market rallies hard for the next three weeks, will that be catastrophic for your account? This is the goal of capital allocation to avoid any scenario being catastrophic for your account. And so there’s no one right answer about yes, 50% in essence, 30% an ad and 20% of it is that there’s no one right answer. But the right, you know there are,
There are less good answers. You know, any answer that causes you a draw down more than you’re comfortable with or that causes your account to collapse or implode is no good. So when you’re looking at your capital allocation, look at those market scenarios and go through that exercise. The mental exercise, if this happened and my capital allocation is set the way it is, will I be okay if this happened and my capital allocation is set the way it is? Will I be okay? And generally it’s important to have your money spread around different systems, different timeframes, different directions. It might not feel good sometimes, like if you have a bull market and you’re, you’ve got a system that keeps taking a few little short positions, that system is going to get kind of frustrating to trade after a while because it keeps losing a little bit of money, a little bit, some money. And so you might be sub-optimizing in that bull market, but when the market turns, you’re going to be damn grateful that you’ve got that short-sighted system. So again, think beyond what’s happening right this instant to the scenarios that could play out and let that inform your capital allocation. In general, my rule for capital allocation is give each strategy less money than you want to.
If you’ve got this great system and it has a great equity curve and you’re really confident in it and you want to give it access to up to a hundred percent of your capital, don’t do it. Just take a breath, take a step back. Say, right, I’ve got this great system. I’m going to give a good slice of capital, but if that system breaks or if something goes wrong, I need to protect my account. And so I think my, my, the system that has the biggest capital allocation in my account now is 64% up to 64% and that will only happen in the strongest of bull markets. And on the short side, the biggest capital allocation I give any one system is 30% of my total capital. So I have a couple of short systems so I can go more than 30% short. I can go like 50% short, but I won’t go 100% short or 120% or 200% short because I, I need to protect my account from those different scenarios. Right. And so that’s, that’s what I want. That’s what I want you to think about. You know, there’s no one right answer, but think through the scenarios and make sure you could survive.
So help make sense. Someone give me a yes. So we’ve taken it. Is this helping? Does it, does that all make sense? Yeah. Good. Okay. Thanks Anthony. So how much, how, how much capital should you allocate any one, one direction long verse short in general, I have a long side bias, but right now I have very little long side exposure. I’ve got a couple of positions that are still open. But the vast majority of my trades now are short. So I have short and cash, teeny little bit of long in a bull market. I’ve got basically all long and the occasional short position when it’s when it’s really obvious when this is, you know, I’m very selective short position, we’ll take some shorts in a bull market. But I’m not one of these people that will recommend, you know, using leverage and going 200% long or you know, 200% short or something like that because I want you, it just survives in 10 years’ time talking about how you survived all the different market conditions in the last 10 years. I don’t want to be here with you in 10 years’ time lamenting that your accounts have blown up three times since we first talked.
Okay. you’re going to saying the sound is gone. Can anyone hear me? Can you guys hear me back now? Okay, great. Thanks. Sorry about that. I think it might be the internet in the country. Okay. So what I was just saying, let me repeat that last bit. I want to be here with you in 10 years’ time talking about how you’ve managed to survive and thrive through all the different market conditions. I don’t want to be here in 10 years’ time with you lamenting that you’ve blown up your account three times since we spoke first spoke. That’s why I’m so big on not taking a lot of exposure, not taking a lot of leverage, not giving any one system all of your capital, you know, spreading it around. Have some long, some short, some short term, some long term. Yeah. And trading less, not trading more.
This is, this is why I, I want to have this conversation with you now because I want you to survive this and yeah, make some money. Great. Absolutely. If you can, but you know, first priority, protect your capital, protect your family, protect your financial future and allow it to grow good. He likes the sound of that. I mean, can we have a conversation in 10 years’ time having survived multiple market cycles and everything that the market can throw at us, right. If we can do that, it that, that’s, that’s a win. No, I’ve, I’ve traded for 18 years. Never blown up a single account. That’s the record I want for you. My biggest drawdown in 18 years was 27%. And that was painful but not terminal. So you know, this is, this is what I want for you guys. You know, it’s, yes, we’re trading to make money with trading to build wealth. It’s a long game
And if you blow up your account,
The game becomes much shorter all of a sudden. And growing from a small base to a large base is much harder. Yeah. If you’ve blown up your account, you’ve got a small base, you got to start again. No one should start again. Don’t, you know, this is why this capital allocation, this preservation, this position sizing is so critical. So now more than ever, think about your total exposure and the worst case scenario and manage according to that. Okay. David has an interesting point. So it’s hard to get my head around not having a 100% long only system. You mean David, do you mean having a system that doesn’t use 100% of your capital on the long side? Is that, is that what you mean? [inaudible]
Let me just assume that is so how’d you get any 100% loan? Look, it’s, it’s fine to trade long only. But you’ve got to go to cash as well. If the market is just losing your money, otherwise you’re buying and holding and look, if you bought and held through the 1930s, it took a long time, years, years to get back to where you were at the peak years of waiting. So you’ve got to exit. You don’t need to cash at some point. Yeah. 57 years. That’s right. I didn’t have the exact number, but I knew it was decades. Thank you Anthony. And so yeah, long only is good providing your legs and get a cash and white. But lonely buying hold in the extreme market conditions is very, very dangerous, very dangerous because the, the, the, the peak to trough drawdown can be 70% or more in a, in a depression type situation.
And it can be decades of recovery. So if you want to be long, lonely, that’s totally fine. Just make sure you go to cash when, when the market keeps going down. But the second, the second part of it is long only with one timeframe. One type of market is problematic because if the market turns in a certain way that hurts that system, then your whole account goes down with it. But like one of, one of the great things that advantage that I had going into this downturn was I had two long systems, one in Hong Kong that exited very quickly before the peak and one in Australia that went into the, into the downturn, fully invested. And so my draw down was much less because it was spread between those two, both long and the systems. But one of them had some cash. And so I, you know, I, I had I had a smaller exposure going into the turn, the downturn and yeah, that’s a downturn next in the past. Okay. But we’ve had the same scenario, the same situation with what could happen next. And every single day you’re trading, you’ve got the same situation about what could happen next. It could, it could go up, it could go sideways, it could go down. What is your mix of systems going to do?
David says trading was stops, but isn’t it okay to just have one system and wait for the system to kick in once the bear market is over? Yeah, absolutely. Absolutely. I’m far more comfortable having one system that exits stands aside and then waits for the market to recover into the next bull phase and re-enter. That’s, that’s completely okay. Okay. And if that’s the way you’re going to trade and you have 100% of your capital allocators, that system, cause it’s the only system you’ve got that’s way better than buy and hold. It’s way better than guesswork. It’s way better than taking tips or single service or anything like that. Absolutely.
If you take it just that one step further and add another system to the mix, it doesn’t have to be a short system. It could be a shorter term system, then that little bit of diversity will make a huge difference because you’ll get into an out of the market in a at a different time. And so your equity curve, your portfolio equity curve will benefit as a result.
Okay. so basically this is [inaudible] that’s what I had on my agenda to share your homework. Every single one of you is to think about what would happen to my current portfolio, my current mix of system, my current exposure. If there was a shot, if there was a shock against the trend and we had a sudden rally, if the market went sideways in a very volatile fashion for some time, several weeks, or if the market collapses on Monday, think through those scenarios and be true with yourself about what would happen. And then if you’re uncomfortable with the potential drawdown that could happen, then it’s time to look at your capital allocations and reshuffle the allocation between systems. So that’s the key. That’s the key message. Okay. Limit your exposure on each one. Trade. Manage your exposure on each system, manage your exposure in each direction, and then think through the scenarios and if the different scenarios give you a potential draw down, you’re uncomfortable with adjust your capital allocation.
I do like to have multiple systems with less you know, with a little bit of money allocated to each of them rather than having big chunks in any one system. Cause that way if a system breaks or if I have a big drawdown, it doesn’t hurt my whole account. So look, that’s everything that I really wanted to cover formally. I’ve got a lot of questions in the chat roll, so don’t go anywhere. If you’ve got any questions, please put them in the chat role and I’m just going to go through and answer these one by one. And what does let’s deal with what’s there. And I also got a bunch of questions on email, so I’ll go through those and make sure I cover every single question you’ve got. So I’m, I’m good for at least, you know, as, as
Long as we need to go. So I’m just going to scroll up a little bit. David had a follow up question about can’t short with a self-managed super fund. And so what do you do if you’re in a structure where you actually can’t short the market? Really good question. And a lot of people, probably a lot of people on the call are in that same situation. So there’s several things you can do. First one, stand aside, just stand aside from the stand aside from the market, go to cash and wait and take your exit signals, wait for the market to turn around. The second thing you can do is buy things that profit or go up in a bear market. So in the trader success system, there’s a system called bear defines and bear defines looks for instruments listed on the stock exchange that are negatively correlated with the index. So if the index is going down, these things tend to go up and it buys those negatively correlated instruments when they’re trending up and they have a dip and then start to recover, buys them for the next rally in that instrument price, which happens when the stock, the stock market collapses. So there are things that are negative, correlated or low correlation. You know, it could be gold, could be bonds, could be inverse ETFs. All of those you can typically buy in a like a retirement account that doesn’t allow shorten.
So there are systems that you can use and Wayne says, yeah, you can, you can’t show it in SMF. And, and a SMSF self-managed super fund for those who aren’t Australian in, in several different ways. But bear defiance was created. That system was created because a lot of people couldn’t show it. And you know, it benefits in a down-market, it just needs a rally in the downmarket and then the market has to turn down again and then it will get short. Let me just scroll up a little bit. Yeah, I think I’ve covered all of those.
Oh, okay. Your concern, how do you juggle between all the systems and monitor each one every single day? Great question. I love that one. When I went in my trading my systems are all on daily charts or longer, so daily or weekly, weekly is my longest. But most of my systems are, are all are in daily charts. And so the work to maintain a trading system on a daily chart is actually very, very small. The process looks like this. I open my computer and I press the button to update my data to get the previous day share prices. Then I look at my watch lists of open trades and for each system I have a different watch lists. So every system that’s got open trades, they’re grouped together in a different watch list and I’ll just scroll through those open trades and at each stock to see if it’s generated an exit signal.
And if I’ve got 20 positions open for one system, that might take 30 seconds. Basically just to scroll through them all because the charts are all set up with the bind cell arrows and the indicators know everything on there for that particular system. So to check the exits, it takes only a couple of minutes for all of the systems. Even if I’ve got 60 or 70 positions on, it still only takes a couple of minutes, very, very quick process. Then just scan for entries. What I do is I’ll look at my capital allocations first and see which systems have spare cash. So it’s as simple as I’m opening the system, pressing explore, I’m setting the dates and the stocks are exploring, pressing explore, and then the system automatically gives me the list of stocks to enter either long or short and tells me how many to buy, where to place a stop loss.
All of that is all set up. So that process only takes a couple of minutes and then the rest of the process is just about executing those trades. So taking those orders and putting it into my broken platform and placing the trades. So that process, you can run six or eight systems, 50, 60 positions at a time very, very easily. It takes me almost every day less than 30 minutes, most days, less than 10 minutes to run a portfolio of trading system on daily charts. So it’s really, you know, it’s really not a job. It’s, it’s a hobby that makes money. And when you trade like that, there’s a, there’s so many advantages. I mean, a lot of my students are on here, so they’ll, they’ll, they’ll know already, but the stress is out. It’s gone because all you’re doing is following the rules.
You’ve already back-tested it. You know how big the draw down could be. You know what to expect. You know exactly what to do. You don’t have to judge, where should I place my stop-loss? Should I stay in? Should I get out? Do I use a profit target? All of those questions are already taken care of because you’re following the rules. So as a result, the amount of time it takes to do your trading is compressed dramatically. When I went to systematic trading from discretionary trading my, the time I was spending every day, every single night, I was spending four hours to look at charts and try and make trading decisions and all of that. When I went a hundred percent systematic, it dropped to 30 minutes overnight because most of that work just disappears. It’s very, very easy to run a portfolio of trading systems. Particularly if you do it on daily charts.
I’m not sitting trading all day, every day, buy, sell, buy, sell, buy, sell, buy, sell. That’s not what I do. The decisions are made at the end of the day based on the daily price bar, not intraday. So you can get really good diversification, have lots of positions, run it very easily, very low maintenance. I actually spend a far more time teaching and working with traders than I do doing my trading because you just don’t need to spend that much time doing your trading to make money and to run this stuff. So I hope that helps. If you’ve got any more questions about that, please post them in the, in the chat row here. Sarah says, what’s an early signal that the market is turning from bullish or bearish and vice versa? A really good question. I wish I had a magic bullet for you here.
There is not a magic bullet. But there are a few things that, that you need to be aware of. The first one is that the stock indices an average of the market, you know, there are an average of all the different positions in the market. So if you look at the S and P 500, it’s capitalization weighted. So it’s very heavily focused on the biggest stocks. But the price of 500 stocks goes into that index. And so when the index is going up, most of the stocks in the market are going up and this is going down. Most of the stocks in the market are going down, but there are always leaders and laggards, you know, for the index to turn out of a bear market and go into a bull market. What has to happen first? Do all stocks go down and then all of a sudden turn around and start going up?
Well, on Thursday they did, but I’m talking about in a more sustained way, in a more sustained way for a bear market to turn into stop and finish and turn into a bull market. Some stocks will come out of the bear market and start going up first and when enough stocks are going up, then the index will turn and then the rest of the stocks will turn. So a good way to get back into the market in anticipation of the next bit then explore market is to trade. I’m a long term breakout system when the index is slowing down, you know, so that you, if you’re trading a long term trend following system, you can’t actually get profitable signals towards the end of a bear market because there’s some stocks that are starting to break out and trend upwards. So it’s not so much, this is a signal that the market is turning, but some stocks will start to turn and this is why you have long side system, long term long side system, short term, long side system and a short system because they’ll pick up different trades no matter what the market is doing.
But if you’ve only got one system, you know they might be right or they might, you know, change that it could be wrong. I like to have, you know, the diversity so I can pick up some early trades and they may turn into winners or I can, I’ve got another system which is whites for a lot of confirmation that there’s a new bull market in place and then it gets in. I’ve got a short side system that kicks in relatively quickly and I’ve got a short time system that kicks in slowly. So that variation at the timeframes of your systems also helps. I want you to think less about predicting the market, more about diversifying to cover all the different scenarios that could happen. Does that make sense? Because we actually, it’s very hard to predict. We can’t really predict what’s going to happen with certainty, but we can position to profit from some different scenarios that could happen and then allocate some capital to each of them and then manage our risks so that the ones that are wrong don’t hurt too much and the ones that are right do him enough to make a difference.
Okay. Trading is not actually about prediction. It’s about allocation of your resources, your capital and having a positive edge and managing different scenarios that can happen.
So I, so Roger, I hope that helps. And if you want to have an, I mean, here’s another idea. If you want to assist them, that will profit, that will profit from the early stages of a bull market. Basically buying stocks that are winners towards the end of a bear market. What you do with your system development is you set up the conditions at the beginning to say, okay, I’m only going to take trades when the index is going down, but I’m only going to take on side trades. And you try and find rules that actually work that are actually profitable. It’s a, it’s hard, but if you want to constrain yourself to try and [inaudible] to build a system to catch the turn, then just do that. You know, put an index rule in place that says, well, the turn is going to happen between when the market is obviously going down and when the market is obviously going up.
There’s this period in the middle. I want to catch profitable long side winners in that period when the between, when the index starts going down and when it starts going back up again. So maybe it’s when the index crosses below the 200 day moving average to when it crosses back above the 200 day moving average. And you can actually put that in as a rule and then brainstorm all the different ideas that you’ve got for entries and exits and trend filters for the individual stocks and put them into that system and back test it. And chances are you can come up with a system that does that. Now I’ve got the two systems in the collection that get in relatively quickly. The lift-off system gets in relatively quickly when the market turns. Yeah, it definitely catches the leaders out of the decline and then has a trend following exit so it follows them up.
And also even the freight train gets in pretty quickly because the freight train system, which is one of my favourite long side systems, will take entry signals on stocks that are breaking out to new highs, long term highs when the index is either above the 30 day moving average or above the 200 day moving average. It doesn’t matter which one, as long as it’s moving up a little bit or a lot, it’ll take, it’ll take signals so it can get in pretty quickly as well. But you don’t need to predict, you just need a system to follow. Hope that helps. Okay. Anthony says, would you recommend buying more of a particular stock as it goes down? I’m good question. Everything down is a very common strategy and I don’t recommend it at all. Let me, let me try and explain. So when you, when you buy a stock, let’s say you bought a stock at $100 a share
And then it goes down to 90, you know, it’s tempting to say, well, if I buy more at 90, like let’s say I bought a hundred shares at a hundred, at $100 a share, and then it goes down to 90. If I buy a hundred more, my average price is 95. So only has to go up to $95 to break even, right? This is the, this is the thinking behind averaging down, but there’s a floor in the thought. There’s a floor in that thought process. Now floor is this. You’ve made two trades, two traits, not one. The first trade you bought at a hundred. And that if that goes to 95, that trade lost money. The second trade you bought at 19, if it goes to 95, you made money. You need to think about every trade separately because the market doesn’t care if you’ve got 15 positions in one stop or one position in one stock, if that stock collapses, that stock collapses.
You’re going to get nailed. So I’m, I’m far more inclined to take a trade in one stock. Okay? And then think about those three scenarios we talked about. That stock can either go in your favour, it can go sideways, or it can go against you. Now, if it goes in your favour and you’ve bought more, you’re going to win. But if it goes sideways or against you, you’re not going to win. You’re going to hurt. So I would rather have taken that money instead of averaging down and buying more of that stall, put it into another position that could go up, sideways or down. Then you’ve got more diversification. You know, this idea that my, my lower average entry price for this particular ticker is better. I made money. It’s just plication of your ear, of the ego. It’s all it is. Because fact is if you, if you’re you’ve got two positions, one at a hundred, one at 90, and you exited at 95, one of them lost money.
One of them made money. That’s the back. You know, you’re not a genius cause you’ve got out, even you’re at one winning trade, one losing trade. That’s the fact. So we don’t, as traders, we got to see it as it is. If we if we try and dilute ourselves or pretend that we’ve done better because we’ve, you know, average down and you know, somehow, okay, that one wasn’t so bad because I’ve got some down here and it’s sort of average out. All we’re doing is making ourselves feel better. And when you back test, you’ll find that if you bank test a system that pyramids in or averages down, you get much more volatility in your account than if you back-test with more diversification. So I always will take a different position rather than another position in the same store because that diversification that helps, that helps you survive, helps you thrive no matter what’s happening.
So, yeah, I don’t, I don’t buy more as it goes down because if it’s going against me, I don’t want to lose more money by loading into it. Okay. so Raul says, how do you decide which system is long term trend trading? When you have many of the same kind. Yeah. So there’s lots of like, let’s say you want a long term trend following system, but there’s lots of long term trend-following systems, which one do you choose? And it’s going to come down to your three things your personality, your evicted, your lifestyle. And this is the first thing in the trader success system that I really teach is about understanding yourself and what you need and what you can, the way you can trade and then matching assistance with that. So you know what I, what I’d encourage you to do is think about your objectives first.
Your personality, your lifestyle. And if, you know, if you’re a really calm, considered patients that a person who just wants the account to go up and up and up in the long run, then, you know, go for the longer term trend following system. But if you like, you know, more activity, you know yeah, more frequent winners, not necessarily as big, but you know, let’s say you want a system that has, you know, win loss, win loss, win loss and overall makes money. And you’re turning over your trades more quickly, then you’ll have a shorter term system. Basically you’ve got to match the system to your personality. But that’s what I’m going to say there. So some people were comfortable with freight train, which is a really long term system. But some people don’t like cause it takes too long to exit out there, not let patient, which is fine, right?
There’s just your personality. So for those sort of people, something like firecracker would be better because yes, it’s long side. It does follow trends but it closes out much more quickly. So that’s how I decide between systems. Really think about your objectives. The other thing is your lifestyle. Now a lot of people will say, I want to trade the U S market. Cause it’s the biggest, it’s the most liquid, it’s where all the pros are, blah, blah, blah. But if you’re in Australia and you want to trade the open of the U S market, let me tell you, it’s torture because you got to be up in the wee hours of the morning every single day. And so it’s terrible. So from a lifestyle perspective, unless you’re awake in the middle of the night and naturally you can’t do that, you shouldn’t do that. So you can’t trade in a way that is going to impact your lifestyle adversely.
You know, you’ve got to, you’ve got to look at how you can trade consistently. You have to be able to not just like the rules, not to just be comfortable with the rules, not just have confidence in their rules, but be able to follow the rules consistently with your lifestyle. And if you can’t, that system is no good. Few weeks you’ll make mistakes, you’ll miss trades and that’s not going to benefit you in the long run. So I’ve had a couple of people ask me about the trader success system and the systems that are in there and so on. And if, you know, if training systematically is something that really interests you, if you’re not doing Nate yet, I’d suggest you look into it and join the program because you can get basically the trade successes and gives you everything you need. Everything you need to build a portfolio of systems that you’re confident in, that will take you through all different market conditions. It’s going to take you through you know, bull market, sideways markets, bear markets and it gives you things, it gives you
The knowledge to back test, build confidence and trade systematically. It gives you the collection of systems that you need so you can pick and choose the ones that you want that are right for you, your personality, objectors in lifestyle. It gives you those systems. There’s 18 different systems in there to choose from. And it also gives you the tools that you need to tobacco test and build confidence in those systems. And so the back testing is, is critical because you’ve got to have confidence in your rules in your system so that you can follow them consistently. So for all those people asking about the tray success system and the systems that are in there, and how do you choose go to that link? I just put in the actually I put the wrong link. Oh no, sorry. Bear with me. One second. Here we go.
Sorry. I’m just kidding. This link more about the trader sophist system, about the trader success system. So this second link go there and it tells you all about it. And it’s, it’s got as I say, the knowledge to try to systematically survive and thrive in all market conditions, back test your systems, build confidence and so on. The systems you need to succeed in all different market conditions and the tools that you need to back. Just build confidence and all the coding done for you. So that’s, that’s the quickest way to get ahead and just get back to the questions. So Sarah says, is there a situation where you’re fully invested 100% of your capital or you do always have some cash? Yeah, there is actually. There’s definitely times when I’m 100% invested and usually it’s in a bull market.
I’ll end up 100% invested. But it doesn’t yeah, it can last. It can last for quite some time, but when the system starts get out of sync with the market, when the market starts to turn or slow down, then the exposure will naturally come off because the weakest positions will close out. So I can get up to a hundred percent long with my capital allocation. There’s not always cash sitting there. I won’t be a hundred percent short though because bear markets are so volatile. I do like to have some cash aside for, you know, disasters and all that sort of thing and for when the market turns. So my capital allocation, you know, is set like that. Yours might be a little bit different. But really what you’ve got to do is think through the system you’ve got available to you and your objectives and then allocate that capital accordingly, but be very cautious or conscious of your total exposure in either long or short direction because that total exposure is what determines your catastrophic risk.
So, yeah, I’ll go a hundred percent long because bam, bull markets are long grinding. They tend to last a long time and it works for years until the bull market ends. Then you have a draw down at the end, but you’ve made so much money in a bull market, the drawdown doesn’t really matter that much, basically, it’s the way look at it. And then a follow following question how much fixed dollars do you think is good enough to invest in a single signal? Suppose our capital is 20,000. Look, it’s a tough question when I don’t know what the systems are and I don’t know your objectives and all of that sort of thing. But first of all, think about the total exposure you want with one system. If you’re trading $20,000 and you’ve only got one system and that system is 100% of your capital, each signal should only risk 1% of your account or less.
You know, I would recommend, you know, generally you look at position sizes of the order of half a percent risk. So if you’re wrong, he looks half a percent of your account. If you’re right, you can still make a substantial amount of money with that. If your position size and using percent equity rather than percent risk, then you know, position sizes shouldn’t generally be above 10% of capital, preferably 5% of capital. Because if you’re at 10% of capital and you have a big loss, it really hurts your account. But if you’re at 5% of capital less and you have a big loss, it doesn’t really matter that much. So that’s how I think about that. Okay, what else? Alright. I’ve got some questions in my email, which I’m going to cover. I’m not done yet. So if you’ve got you’ve got more questions, please put them in the chat box and I’ll go through them. But let me just get back to my notes from the email questions and make sure I cover those said, of course I’ve lost my place now. So bear with me for a sec while I find it.
Here we go. Okay, cool. So the first question I’ve got I got via email was when a long system eventually comes back online, will I allocate capital fully or some fractional amount until a long term trend is re-established? This is the sort of question that you, you really establish in the backtesting. Okay. So again, if you, if you’re not back testing your systems, you need to be in the trader success system cause you need to learn how to back test to survive. Markets like this to answer questions like how do I allocate my capital? Like how much to risk on each trade? Like what sort of draw down will this system give me? But when you back testing, you will look at the maximum historical drawdown of the system and you’ll figure out how much capital you can allocate to that based on the draw down.
So if the draw down and if the system is 30% and you’ve got $100,000, if you trade all of your capital with that system, your maximum drawdown potential is probably about $30,000. That’s too much for you. You need to allocate less money. So give that system less capital. You know, let’s say you’re only comfortable with a $15,000 drawdown. You can only allow that system to take half of your capital because then your maximum historical drawdown would’ve been $15,000 with your current account size. So that’s kind of how I, how I think about that. Have a, yeah, have the back test help you decide how much capital to allocate. I don’t allocate my money dynamically as the market conditions change. I have systems with a set capital allocation to each system and those long systems and those short systems will be in the market at different times generally.
But the capital allocation is fixed for the long run. And I change that slowly and with very deliberate consideration. It’s not something that I flip around and change depending on what the market’s doing. If I learned something new that I didn’t understand or I see a mistake, I will adjust. But it’s not just on a, on a, a wound based on what the market’s doing. I definitely obviously I’ve got my, my capital allocation spreadsheet set up. It’s got all my systems, all the different currencies of those systems, the maximum exposure and risk in each system and every day I’ll refer to that spreadsheets. Okay, this is the capital I can take. This is how much exposure I’ve got in that system. This is how much spare capital I’ve got that I can allocate to that system, run the scan. That’s how many trades I can take. It’s all preset and that’s the joy of backtesting, the video backtest, and you can actually determine all that in advance. You don’t need to worry about what the market’s doing, the rules rule set.
Second question I got via email was way to park cash while not trading in cash, right? Anything else is a position. You know, if you’ve, if you’ve got a trading system and you’re trading it and trading it and then it goes to cash and you take that cash and you put it in a ATF, will you put it in gold or you put it in us dollars or you put it anywhere? It’s a position that carries risk. And my view as a systematic trader is that every position should be determined by a trading system. So when my systems are in cash, they’re actually in cash. No, I don’t put it anywhere else. You know, the, if you’ve got to an account that allows you to put it in short term treasuries or something like that, where there’s literally pretty much no risk, fine.
But I certainly wouldn’t go putting in gold or putting it in foreign currencies or anything like that unless you’ve got a really conscious strategy behind that Cassius cash and when you’re out of the market, you’re out of the market and you’re not taking risks, that’s probably the key. Let me see. Oh, David’s got a question about margin costs and do you model margin calls when back testing, a short trading system? Really solid question. You look, you can I trade the short side very conservatively and so my risk of a margin call is kind of pretty much zero because I will never allow near 100% of my capital to be short. But what’s interesting, I had a very interesting experience the other week. I was short a position. It was a $12,000 position. I was short, but the margin requirement for that $12,000 position was $100,000.
My exposure was 12 [inaudible]. My margin requirement for that one stock was $100,000. Obviously it was a very volatile small price stock. And so the broker thought that it could go up dramatically. So short side margins can be really high and that caught me by surprise. I’m going to tell you, be I, I’d never seen that before. But in general I would say if you’re trading in a way that could lead to a margin call, you’re probably going to get yourself in trouble. So allocate your capital such that a margin call is a very low risk because you’re going to have to liquidate at the worst possible moment to fund the margin call or you’d have to come up with a whole bunch of cash that you have to put into your account in at short notice. So I don’t generally worry about modelling it because I ensure my capital allocation takes, takes care of that.
So David, I hope that helps. If you want a model margin calls, you can put all the margin requirements into your backtesting software and, and do that and check you don’t run out of margin. But my, my guidance it would be my personal approach is to be more conservative than that and just avoid having much. Of course I don’t use much leverage at all because I want to survive. You know, my number one priority is for me and you to survive whatever the market can throw at you. Because if you’re in the game, you can keep making money and you can win. But if you get wiped out, if you get margin caught at the wrong moment, you have to liquidate and you have a huge loss in your account. You can’t wait, count me in this game. So that’s the, that, that’s kind of how I think about the, the modern court.
Okay. What else we got here in the chat roll? Bill says, I just joined, you may have already answered this question, but what would be a reasonable expectation for a total portfolio to make in terms of return? Look there. I mean it depends on so many things. The first question you should be asking is how much drawdown can I tolerate? Because understanding the risk profile, your, your risk tolerance is, is the first step to understanding how much money you can make. If your maximum drawdown that you can stomach in your account is 10% then the maximum amount of money you can make per year is probably of the order of eight to 15% if you’ve got a really good system, because in order to make 10% pretend per year, you’re probably going to have drawdowns of about that same or more in your account.
But if you’re comfortable with a drawdown of 20% you can probably make more like somewhere between 15 and 30% return per year. If you’ve got a couple of really great systems, if your Jordan tolerance is 30% then you can probably make somewhere between 20 and 40% per year. Something like that. So think first about the drawdown tolerance and that’s the most important thing because that’s what ensures your survival. And again, back to my original point, and bill you, I think you probably missed this because if you’ve just joined, but my purpose here, it’s to ensure that you and I can have this conversation in 10 years’ time without you having blown up your account three times between now and then. You know, if I can help you establish a stable portfolio of systems that you can trade in a, in a low risk way and keep you alive and keep you in the market making money for the next 10 years, no matter what the market is doing, then I fill my purpose.
I want to have that conversation without you blowing up in the meantime because your, your balance if you don’t blow up is going to be far higher than if you blow up several times in the meantime. So first we think about risk. How big a draw down can I tolerate without having to, you know, liquidate and go kinda cry in a corner or you know, panic and leave the market. And I said first thing about that then roughly that amount plus a little bit plus maybe 50% more is, is sort of your upside potential. I hope that helps. Good. okay, I’ve got another question from the emails. What’s the minimum account size necessary to follow your systems? Not a good question. It depends on which system you’re going to trade in, which market you’re in. But I try, I started trading systematically with seven and a half thousand dollars in my account.
I tried to one system the quite a few years and that was fine at the beginning was kind, kind of tough because I was paying $30 commission to buy him $30 commission to sell. And it was a long time ago and Australian brokers were very expensive, kind of still are, but not as expensive. And so you know, you don’t need that much money. Now with free commissions in the U S if you trust those brokers, you can do it with much less, you know I’m not going to say a couple of hundred bucks, but certainly a couple of thousand bucks. You can trade systematically. And if you’ve got, I’ve got 15, $20,000, you can, you can try it. A few different systems. If you got $50,000, you can have a pretty well diversified portfolio of systems. But you don’t need to worry if you’re not at that point. If you don’t have $50,000 a trade with, if you’re going to use $2,000 a $1,000, whatever, you can still start, you know, it’s still important to start the journey, right?
You know, get some, get a system that you’re comfortable with, learn how to back to trade it, follow it with discipline, find other systems and co and back just those and build confidence and knows save money into your account, grow your account through profits and savings. And then as your account balance goes up, add another system. As your account balance goes up, add another system and build the portfolio of systems that way. And this is what, you know, the trader success was all about that. It’s basically about you know, finding systems that fit your personality, your objectives, your lifestyle, building confidence in them and implementing them into your portfolio. So if you’re not in and you want to join the program, click the link there and, and come join us because this is, this is the sort of thing that’s going to stand you in good stead for them for the next few decades of training.
It’s not just for right now. Yes, it is for now. But it’s not just for that. It’s for your trading career. It’s going to set you up for the long term. And the cool thing right now is if anyone, if you join right now, I’m going to include a brand new thing, which I’ve never done before. I’m going to do a free one. It’s not free. I’m including as a bonus in the, in the tray success system a five week. Master class called trading a system trader launch pad. And so in that five weeks live, I’m going to work with you to set up your computer, set up your data and your software and start running scans for systems and do the back test and make sure I’m looking over your shoulder and you’re doing that wrong and do it all to get a live on zoom like this, it’s going to be super cool.
So if you’re, if you’re concerned at all about how do you start, this is the way to start, is going to give you everything to get your, get your trading, moving in the right direction, all of the knowledge to do the back-testing, all the systems you need to get started, all the coding tools, the coach all done for you. And I’ll be looking over your shoulder for five weeks. We’ll talk on zoom like this every week to kind of move you through a structured process of getting up and running with your systematic trading. So I’m super excited about that. I hope you join me. I had some other questions by email. The parameters we use indicate, let me see. What are some good parameters that can be used to indicate you should stop trading for the time being?
Every system is different. You know, some systems benefit from very calm, quiet conditions in the market and they should be turned off when volatility rises. Some systems should be traded all the time and never turned off. Some systems should only be traded when the market is very volatile. And so in my system design I will look at the conditions in the market and the conditions in the individual equity and test whether that system is better with low volatility, high volatility or not worrying about volatility. This is one of the steps that I follow in, in trading system development. So there’s no one, no one right answer for when should you turn the system off if it gets really volatile. It depends on the system. So, for instance, the freight train, which is you know, one of the flagship systems in the trailer success system it will only take buy signals in low volatility stocks. So right now
There’s a lot of low volatility stocks. Everything is kind of jumping around, the market is trending down and so it’s out of the market. But when some stops return to a smooth uptrend and the index just settles, it settles down a little bit, it’ll start taking trades, contrast that with, with some of the short side systems and now only take trades when the market is very volatile and there’s actually a filter on that. So you need to look at the different systems in different market conditions and, and consciously test, should I trade this system in volatile or quiet markets and doing that is a part of the backtesting process. Anthony says, do you have recommended brokers? I don’t have relationships with any brokers. Let me tell you why I don’t have relationships with brokers because if I have a relationship with a broker, the reason I have a relationship with a broker is because when I introduce you to my broker, I get a kickback.
And usually the kickback comes in the form of a, of a share of commissions commission share. And let me give you a tip. This is how far X trading educators, educators make their money. This is why they drive, you know, Ferrari’s and Maserati’s and Aston Martins. It’s not because they make money trading, it’s because they introduce you to their broker. Because what happens is I introduce you to, you get introduced to the broker, you sign up an account that account is tagged to the educator and every time you place a trade and the client pays some commission as much as 70% of that commission gets paid to the educator who introduced you to that trader. And so what does that do? It drives some really terrible behaviour. It makes the educator makes more money if the trader uses high leverage because the position size is bigger and the commission is bigger, the educator makes more money if the trader trades more frequently because there’s more commissions to share.
So the educator makes more money teaching trader to do reckless stupid stuff. So I don’t have relationships with brokers because the conflict of interest is just too high. So all I’m going to tell you is I trade with interactive brokers. I trade with them because they’re cheap, they’re awesome, they platform’s good and you can trade pretty much any major exchange anywhere in the world. You know, any instrument. And they actually have an affiliate arrangement and I could make a whole 200 bucks by introducing someone to them flat fee, but I kind of thing what’s the point? It’s like sending 200 bucks and all of the admin and talking and all that. It’s not even worth the effort. But if you go to a at trading course or an educator or a website and they’re trying to pitch you on their broker, they aren’t making an absolute fortune from those referrals. And it’s criminal because it’s the conflict of interest is massive. Some, so just I do, I don’t do that. I don’t trust anyone who does that. So I hope that I, that helps.
Other questions what sort of systems work best in Volta markets? Like these? Good question. Two types of systems. If the volatile market is sideways, mean reversion works really well. So an overboard I’ve sold type setup where you, you’re buying when on a dip and in selling on the rally or selling on the statement, selling short on a steep rally and covering on the, on the dip that works really well in a trending volatile market. That doesn’t work so well because those positions tend to go against you and against you and against you. So if you’re going to trade beaner version, it’s got to be a sideways market or in the direction of the trend. So don’t trade a long, meaner version in an established downtrend, you’ll just get, you’ll just get killed. In a Volta downtrend, a short system works best.
And generally the best way to short stocks is way from established downtrend. And then get short in a rally because the next down leg is where you going to make your money. If you go short on downward momentum, the next rally is going to hit your stop and you’ll get stopped out. But if you get short on the rally as it turned, as it’s turning, you get short, your stops up here, the next collapse is going to make your money and your stop is generally safer. So I would say in a volatile market, I’m cautious, meaner version if it’s in the direction of the trend or short side systems. Generally bull markets are not really volatile, so there are some volatile, there is some volatility at the end of some bull markets. And meaner version can work well in that case. But generally when volatility spiking is because it’s a bear market.
Bill says, do any of my systems involve options? No, I’m stock only. So, and the reason I trade stocks is because I’m helping traders get systematic, get established and get consistent and profitable. And one of the key components of that is back testing. Now if you, if you want to back test your systems or in order to back test your rules and really build confidence and I’m talking over 30 years of history, over thousands and thousands of trades over all of the stocks on the market, you actually can’t really back test options practically. So, but you can back test equities then just playing stops. So, so I work with, I work with that. Some of the strategies could be adapted for options if you’re already an options trader. But my, my, my program, my teaching, my systems are designed for, for stocks long and short. So bill, I hope that helps.
I got another email question here. How do we know when we’ve bottomed? That’s the $64,000 question. We don’t, we don’t know we’ve bottomed until we’ll, after we’ve bottomed. And so again, back to this cat and this idea of capital allocation. If you can allocate some money to different types of systems, different directions, different durations, then it doesn’t really matter when you’ve bought them because those systems are going to sort of kick in and an exit at the appropriate times for those systems and your, your equity will grow over time because their systems have an edge and they’re making money. We don’t need to worry so much about bottom picking. I don’t, I’m not a big fan actually. I’m a, I’m, I’m really not a big fan of trying to time the bottom because for every person that gets it right, there’s probably a thousand people that gets it wrong and they end up losing a whole ton of money.
I mean last week might’ve been the bottom, but I doubt it. You know, if we collapsed another 20% that might be the bottom, but then it could be another rallying another down like we didn’t really know. So let the system do the work for you. You know, if you’re alongside system keeps you in cash, stay in cash, wait for it to start signalling because when it starts signalling, you know that system has an edge and you can start taking those traits. So yeah, really probably don’t try and predict the bottom. You know, some people have approached me and said, well, you know, can I start putting some money in the market cause it’s cheap. Well, yeah, the market’s cheap. But let me tell you why it’s cheap. It’s cheap because we’re in the middle of a pandemic, a whole bunch of businesses, thousands of them globally are about to get bankrupt and the mind has evaporated because everyone is at home.
And that’s going to have lasting ramifications for the for the for the economy and for the profitability of the stocks. So I don’t, I don’t think we’ve, I don’t know if we found a bottom yet. I don’t think we have, but by now because it’s cheaper than it was. It’s kind of crazy because the world now is not what it was. No, we have not yet seen the first major bankruptcy. So that’s the that’s the key. You know, when we see a big bankruptcy and people start to penny stocks will tank and now maybe there’ll be some magic in the federal prop up everyone and they’ll decide that 2 trillion is not enough. They’ll do 6 trillion or whatever it is. And maybe that won’t happen. Maybe this, maybe this is the bottom, but it’s a big maybe. So I would much rather put my faith in systems that have an edge and follow those systems in the way up.
And if that’s what you want to do, learn how to back test, learn how to train systematically and you can do that. Join the trader success system. You’ve got all of that knowledge, all the training on how to back test all of those systems and all of the coding already done for you and the five week masterclass system trade a launch pad where we’ll kind of get you up and up and running with that and you won’t, you know, you’ll be able to answer these questions for yourself. How much should I risk, you know, where should I place my stock? Should I use profit targets? How do I know when those are bottom? All of these questions, you can answer yourself when you know how to backtest correctly. So I hope that helps. Another couple of, and then I can sort of wrap up.
I noticed that the chat role has sort of calmed down, but if you have any other questions, put them in there and I’ll make sure I cover them for you. No, the question is I can’t short stocks. Does your system do ETFs or, or what can I do with ETFs? Well if you can’t short stocks then you can buy inverse ETFs or other ETFs that are negatively correlated. I talked about the bear defined system a little bit already, but if you, if you want to make money in a bear market, stocks are going down. You need to buy something that’s going up or you need to short. So there is a system in there that has that buys ETFs that are going up when the ma good, just going down that spear defiant. Or you can just stand aside and cash.
And, and, and wait and buy the ETFs when, when on the long side, when the market starts going back up. Another question was do I use different capital allocation strategies for different market conditions like bear markets, bull markets? And I think I covered that already. I have a capital allocation model that is not dynamic. It’s static, it’s fixed. And the reason I do that is because you can’t predict what’s going to happen. I mean, if I had swung my capital location to a fully, fully bullish model where it was fully invested in alongside and then the market collapsed, like it did, I would have been killed. But I don’t, I don’t do that because I know that things change. Market conditions change. There are shots to the system, there’s price shocks, there’s health shocks, there’s economic shocks. So yeah, my, my capital allocation model is fixed.
And in the last, the last question I’ve got and then we can sort of wrap up enough, I could see, believe us. One more question, so I’ll cover that too. What mistakes would you focus on avoiding? The biggest mistakes that traders make, there’s several. The biggest one is trading without an edge. So if you’re trading without a back-tested set of rules, then you, you don’t know if you couldn’t age or not. You know, you must have an age to survive in the markets. And so having a system instead of back tested rules is the waiter to counter that mistake. I’m sorry. [inaudible].
So I would say take you know, the biggest mistake is not having an edge. The simple solution to that is use it back to some trading system. The second mistake people make is not having a plan that thinks through all of the different scenarios. So you need a trading plan that is very holistic. It’s not just about the rules that you buy and sell buy. It’s the whole plan that wraps around those rules. And so create a complete trading plan and follow it. And you know, I’ve got a trading plan workbook, which is most definitely the most comprehensive trading plan workbook on the market. I’ve, I’ve at lots of them and
It’s, it’s definitely the most extensive and it’ll step you through all of the considerations you need to have in your in your trading. And it will help you with your capital allocation, will help you with the scenarios that we’ve been talking about, all of those things. So that’s, that’s the second mistake is not having a plan. And then there’s, there’s many other mistakes. The, the, the most common one that slows people down is not asking for help. Yeah. This is a scammy industry. I’m not going to, I’m not going to sugar coat it. There’s a lot of garbage out there, but it doesn’t mean you shouldn’t get help. You know, you should read books, you should find people that you trust. You should ask questions, you should see if their answers are credible. And if you think there is a credible and you can learn something from them, you can buy their program and you can do the, do the work.
I mean, I’ve bought lots of trading programs. Some of them complete rubbish, some of them quite good. I like to thing mine, the trade to success in this system is exceptional. It covers everything that you need. And if it doesn’t cover everything and if it doesn’t give you the value that I think it does then it has a hundred percent money back guarantee so there’s no risk for you. But the Keith, the, the mistake is not getting help because when you don’t get help, your learning curve is long. And when your learning curve is long, your compounding is slow. Like I did a calculation a little while ago and it nearly made me cry. No word of a lie. It took me three years to figure out that I needed to be trading systematically and then I started making money if I’d gone systematic on day one instead of making money like I do now from day one, my account would be several million dollars bigger than it is now.
And I have a pretty reasonable size account, but three years of missed compounding cause I wasn’t systematic and wasn’t profitable, cost me an absolute fortune 18 years later, absolute fortune. And so the biggest mistake is taking too much time to learn. You know, people say, Oh, the course, there’s $997. It’s pretty expensive. It’s like, no delay is expensive. Let me tell you, because my delay 18 years later cost me multiple millions of dollars. It makes a trading course look cheap. And you know, I know that’s easy for me to say. I’m the one selling the course and I’m the one that’s been trading for 18 years. But if you’re not profitable yet and you’ve been banging your head against trading for several years, which many people have, right? It’s, it’s time to get it. Now it’s time to understand systematic trading, learn back, testing, get disciplined, get consistency and do it in the quickest way possible because compounding is the magic that will build your wealth and get you there.
So bill says could you summarize the different programs you offer and what each type of person would be suited for each one? I have one entry program just to make this simple. Because the trader system teaches you everything you need to know to build confidence and profitability as a systematic trader. Whether you’re going to be a long term trend follow or a short term main reversion trader or a bit of both or a swing trader, it doesn’t matter whether you going to trade the Australian market or the U S market or the Canadian market or the UK market doesn’t matter because the principles, the knowledge of how to trade systematically is the same. So once you have that knowledge and you know how to back test and you know how to run systems, that’s everything you need to know, then you need a set of systems that you can follow.
And in the trade success system has got 18 different systems. No, I do not expect you to trade all 18 systems. I don’t trade relating systems. I do trade a lot of them though with my own money. And in fact I only have one system in my portfolio that is not in the collection. So just so that, you know, I’m not holding back the magic. The only reason I have one system in my portfolio that is not in the collection is because I don’t have enough faith in that system yet to share it with you. I’m trading it at very small size and eventually it’ll be in the collection. If I can get enough confidence, share it with other people cause I don’t want people to lose it, lose money because I’ve done the role, you know my, I haven’t done enough homework on that system.
So all my systems basically are in the collection and there’s systems for all the different markets, long term, short term, trend-following, meaner version, swing trading, short side stops, ETFs, daily charts, weekly charts. I don’t do day trading. I don’t encourage day trading because frankly, if you can’t make money on daily charts, you’re definitely going to lose money on intraday charts. Absolutely no questions asked because there’s too much room for mistakes. And even the tiniest mistake on intraday trading on day trading compounds into massive losses. And most day traders lose money. So the first place to start is definitely daily or weekly charts. And if you can make money on those and you want to go shorter term, fine look into it, but chances are you won’t because you will make money. But chances are you won’t want to go short a term because why would you, I mean I managed a seven figure account with multiple systems on 30 minutes a day.
Why would I want to spend all day staring at the screen? That’s crazy town. It just, it’s, it’s unhealthy. So I would much rather just update my data around my scans, place my trades, go do something else. And my something else typically involves sharing with you guys because that’s what I love. So I don’t do day trading, but the trading success system covers everything else that you need. And it will set you up in a position of power, a position where you can answer your own questions, all of your what ifs. You can answer. You know, what if I take the stop loss out, what if I use a wider stop? What if I use a profit target? You know, should I close all my positions? If the index turns down, you know, should I trade this system in a bear market? All of those questions, the trading success system empowers you to answer for yourself because I want you to walk away from your work with me as a fully independent, fully empowered trader in control of your own decisions so that you don’t need me.
So you don’t need anyone else because nothing, frankly, nothing shoots me more than seeing these down multi thousand dollar courses where you go to the course and you sit through a three day workshop and at the end of it they say, that’s all great, but don’t worry about that. I’ve made it really easy for you by my signal service and subscribed for 300 bucks a month for forever after because they didn’t actually teach you anything. They just made it sound like they were teaching you. So you would buy their signal service. I don’t do that and I hate that. I want you to be empowered. So that’s why. That’s how I’ve set off the trade success system because it should set you up no matter which way you want to try it. So I hope that helps build. Does that answer your question? Great. Okay.
Look, it’s, it’s a, that’s two hours, 17 minutes. If you have more questions, I’m happy to stay. But if you’re, if you’re if you’re exhausted and your questions have been answered, then I’m, I’m happy to call it a night. If you’re not in the Tracy success system and you want to learn please join the re. There’s, there’s no risk is a hundred percent money back guarantee. It’s only $997 and it will set you up for Korea of profitable systematic trading, which you know, very few careers will compare with. I worked at my, my hourly rate of return for my trading compared to my day job in 2012 when I left my day job. And I made $230,000 in my day job that year and my hourly rate was probably less than a McDonald’s worker because I worked like 12, 14 hours a day and it was just terrible.
But my alley right from my trading was astronomical because it only takes 30 minutes a day. And so it’s very well paid. Work when you get a ride is the joy and the advantage of systematic trading. And that’s what, this is what I want for you. Yeah, come join me on the journey. Henry says, is it necessary with a S subscription? There is no subscription. It is a one off service, a one off investment in the program. It’s $997. Once only you can spread it over three months if you want to do instalments. But it’s, it’s once off if you want coaching, there’s a subscription for coaching obviously cause it takes my time every week, but that’s extra and separate. If you just want to join the trader success system, there is no ongoing commitment single time payment. So hope that helps.
Henry. thanks David. Thanks Dean. Thanks bill. I’m glad you enjoyed it. There was so there was no need for coaching. You do not need to take coaching if you do not feel you need the coaching. But the offers there, if you want extra support, some people or many people sell through the program online. I do a lot of support in the Facebook group. I have a student’s only Facebook group, which is quite active. I’m in there every day. I answer questions and quite, quite a lot of detail. So you can get your questions answered
There. There’s definitely supporting the program without coaching, but if you want to eyeball me every week, if you want to do group calls like this I have a, a group coaching program. You can S you can join, you’ll see that when you when you purchased the trader success system, there’s an offer there for the group coaching. You don’t have to take it, but if you want support and you want to work with me face to face like this, you absolutely can. So I have that. Hope that answers your question, Henry. And someone else asked HB said I missed the early part of the webinar. Any access to the recording? Yes, absolutely. I’ll send this recording to my entire email list. So what’s your email? If you’re not on my email list and you happen to get here anyway, congratulations. Send me a message with your email address and I’ll make sure you get the recording.
So I hope that helps. Thanks John. Thanks Henry. Thanks everyone. I really appreciate your questions. Here’s the link again to the trade assist system. Please click on that and go have a look and shoot me any questions you’ve got about it. Trade safe this week. It is volatile. The volatility is not going away anytime soon. Even if we have a rally, please do not be complacent about what the markets are doing because in bear markets, the rallies can last quite some time and they can be very strong, but there could be another big downline as well. So just be cautious and allocate your capital, manage your risk so that you will be safe no matter what scenario we end up in. So with that, I’ll say good night. Look after your families. Please be safe and I’ll see you in the next training.
Bye for now.