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147 – Building trading strategies with confidence – Adrian Reid

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Transcript of Adrian Reid’s Interview On The Better System Trader podcast

147 – Building trading strategies with confidence – Adrian Reid

Speaker 1:

Welcome to Better System Trader, the podcast to help systematic traders of all levels improve their trading. We’ll give you loads of expert tips and practical advice on system design and validation, money management, trading psychology, and many other topics. Whether you’re just starting out or a savvy systematic trader, we’re here to help you improve your trading and find more success. This is Better System Trader with your host, Andrew Swanscott.

Andrew Swanscott:

Hello and welcome to the Better System Trader podcast, glad you could join us today, where we are going to be talking about confidence and trading. Confidence is a really powerful thing. When people have it, they can do some pretty amazing things. But on the opposite side, a lack of confidence can be debilitating too. And for traders, it can have some similar effects, especially in the times when a trader is switching from backtesting a strategy to live trading, or even when the performance of a strategy starts to suffer and a trader has money on the line. So what can we do about this? How can we have more confidence in the strategies that we build and trade, confidence that we’ve built strategies that are robust, confidence to continue trading strategies during the periods when the strategy performance may be struggling?

Andrew Swanscott:

Our special guest for this episode is Adrian Reid from Enlightened Stock Trading. And in our chat, Adrian is going to enlighten us on building trading strategies that we can have confidence in. Now, we’re not just going to talk about trading psychology here, but Adrian is actually going to be sharing practical aspects of system design and validation that can give us more confidence in the strategies that we create and trade live. So some of the things you’ll discover in my chat with Adrian today are the five key areas traders must address to build confidence in a trading system. We’re also going to look at significance testing, why it’s important to strip a strategy down to just the core components, and how to determine which components are actually driving performance.

Andrew Swanscott:

We’ll also talk about the transition from backtesting a strategy to live trading, how it can be a difficult and uncertain one, and the preparation steps traders need to take to make that transition smooth. We’ll also discuss a technique called start date stepping, which can provide valuable insights into how a strategy could perform in live trading. Plus, we cover a whole bunch more, including performance profiling across market conditions, sensitivity testing, why traders lose discipline, testing strategy rules in reverse, plus a lot more. So let’s jump over now to my chat with Adrian Reid.

Andrew Swanscott:

Hi, Adrian. Welcome to the show. It’s really great to have you here.

Adrian Reid:

Hey, Andrew. Thanks for having me. It’s a pleasure,

Andrew Swanscott:

Now. We’ve been in touch, I think, occasionally, over the last few years. So it’s really nice to finally have you on the show. But before we get started today, how about we get to know you a little bit better. So can you give us a little bit of background on yourself and how you got started in trading?

Adrian Reid:

Yeah, sure, absolutely. So I’ve been trading actively now for probably a bit over 15 years. My first exposure to the stock market though was long before that. Actually, my earliest memory of stock market type material was when I was nine years old. My family had a game called The Stock Market Game, and I remember playing that with my dad and my brother, and it really kind of captured my attention. It was on the Australian stock market, and so you moved around the board and bought and sold classic Australian stocks, some of which no longer exist. So my earliest memory of the stock market is becoming a paper billionaire, because I played this game for hours on end with my brother.

Adrian Reid:

But fast forward a few years, and I got started, mainly, as I was first entering the workforce, I started really realizing what I was in for, as an adult in the workforce, going to work every day and all of that. And I remember sitting on the bus one day, going into the office in the city, just thinking, “Oh, is this what life’s going to be like?” And I was already dabbling in investing and so on. But I made a decision at that moment, I made a decision that I wasn’t going to do that for the rest of my life, and whatever it took, I was going to learn how to invest or trade or something, to be free, so I didn’t have to do that for the rest of my life, like everyone else that I knew.

Adrian Reid:

So, pretty much at that point, I started learning about trading. I asked around the people I knew, “How do you make money? So I don’t have to work forever. How do you invest?” And my father taught me a little bit about investing. He was a fundamental investor primarily. And so he taught me a bit about that. And I started down that track, but pretty soon I realized I was bored out of my mind. And I just could not connect with the approach that he was teaching me. I tried to read some books and everything, but it just didn’t suit my personality. So, from there, I realized that I needed to find a different way, I needed to find my way.

Adrian Reid:

I started reading and looking at different books and different approaches. And like many of your listeners, Andrew, I came across Market Wizards. And as soon as I started reading Market Wizards, if I’m to be successful in a stock market or successful trading in general, I needed to find my way. So I just started devouring those books. I read all of the books that were published at the time. And I wrote notes on every single interview and all the things I liked and didn’t like, wanted and didn’t want in my life. Because some of the people in there have absolutely crazy lives, you know, [inaudible 00:05:45] screens in their bedroom so that they can wake up with one eye and check in the middle of the night. And other people had this amazing life where it was very calm and casual and not stressful at all.

Adrian Reid:

And by reading those interviews and writing notes, I figured out what I wanted to do as a trader, who I wanted to be as a trader. And to me, I think that’s one of the most important lessons I learned, which is, find my way. And everyone who’s listening, you’ve got to find your way, so that you can succeed, because if it doesn’t fit you, you can’t do it consistently. It’s got to fit your lifestyle and the way you want to live.

Andrew Swanscott:

Yeah. That’s a really great point actually. And I think we’re probably going to touch on that a little bit later. But just for a bit more of background, I mean, you’ve been trading a long time now, you even do coaching and things like that. Can you tell us what type of markets you trade? Do you specialize in particular markets? Or how did you come up with the markets and the trading style that you do now?

Adrian Reid:

Yeah, absolutely. So when I first started trading, after I gave up on the fundamental style of investing, I started looking at charts and technical analysis, and I read a bunch of books on that. And what I realized was, there’s lots of different ways to trade, and I tried a bunch of different methods out. I tried different indicators and I tried classical charting analysis.

Adrian Reid:

And one day I was testing this idea of trend following. I didn’t really know much about it at the time, but I’d read about a simple system, or simple set of rules rather, and I took a couple of trades, and this one stock just took off and it just did everything it’s supposed to do in a classical, long, beautiful trend. And what happened was, over the course of watching this stock move over several months, and it was a big trend, it lasted about nine months long, and I made a ton of money, at least relative to my very small account at the time, and as I was watching that, I realized, “Hey, that’s what I want to do.” Just sitting and watching the trends develop, and riding them, and sitting through those little bits of volatility, that’s the way I want to trade. And this was on a stock, right? So I actually like individual stocks. I had some familiarity with stocks when I first started out. And so that was where I started and where I’ve stayed.

Adrian Reid:

So as soon as I’d picked trend following, based on that experience, I let go of all of the other strategies I was using and I started investigating rules around trend following. So I learned how to backtest and started playing with trend following systems and developed my first couple of trend following systems that didn’t work very well, because I didn’t know about over-optimization, curve fitting, and risk management, and all of those things. But I started to develop rules to guide my trading.

Adrian Reid:

So, in direct answer to your question, I’ve always traded stocks. I started on the Australian stock market, mainly because I lived in Sydney at the time. And as I have grown as a trader, as my account’s grown and my experiences has grown, I’ve branched out into some different markets for diversity, to improve my equity curve, and then I’ve also adjusted that over time to suit my lifestyle. So now I actively trade all Australian stocks and Hong Kong stocks, and I actively develop systems for other markets. But from a lifestyle timezone perspective, those work really well for where I am right now.

Andrew Swanscott:

Yeah. So why don’t you trade any trend following stocks in the US markets? I know, from my own experience, trend following is a little bit more difficult there than in the Australian markets, which have some quite nice trends. Have you looked into the US markets at all?

Adrian Reid:

I have, absolutely. Actually, I’ve developed systems on a lot of markets around the world, and I did trade the US markets for a couple of years for diversification. But what I found was, the diversification from the Australian market at the time wasn’t that great, and also, as you say, trend following US stocks doesn’t work or didn’t work anywhere near as well as trend following on Australian stocks. Now, I have a few theories about why that is, to do with who the market participants are, and the nature of the indices, and the sort of reporting that companies do. But all of that doesn’t really matter so much. The fact is, if you design and test a system and it doesn’t work well, then there’s no point trading it. So I settled back on Australia and Hong Kong. They work really well. Plenty of other markets work really well with trend following, but I did drop the US from my portfolio after doing it for a year or two.

Adrian Reid:

The other thing is, as an Australian, where I am, from a timezone perspective, it’s really quite punishing to be trading US stocks and Australian stocks. So to maximize my quality of life, which is, let’s face it, I wanted to trade to be free, I didn’t want to trade be sitting in front of the computer or suffer from a quality of life perspective, so to improve my quality of life, I dropped the US as well.

Andrew Swanscott:

Yeah, sure. Okay. So through your coaching, you have the opportunity to work with a lot of other traders and students. What do you think are some of the most common missing ingredients to successful systematic trading?

Adrian Reid:

Yeah. Good question. So I’ve coached and taught a lot of traders now, hundreds of people I’ve come across, from new to experienced. The first and most obvious one really is just the lack of a profitable trading system. Now, this could be, they’re just trading an approach that they haven’t backtested and so it doesn’t have positive expectancy, or it could be that they’ve just backtested it badly, and actually the system is curve fit over-optimized and doesn’t actually have predictive value, even though the backtest looks good. So they’re very common problems.

Adrian Reid:

The second problem that a lot of traders have and a lot of my students have had before I’ve worked through the process with them, is developing that confidence in the system, in the quality of their testing. So you can have a system and follow it when times are good, but if you don’t have that confidence, that deep-seated rock solid confidence that that trading system will pull out of a drawdown, it’s very, very hard to sit through a drawdown of 10, 15, 20%. And a lot of traders will give up on a system at precisely the wrong moment because they lack the confidence. There’s nothing more soul destroying than trading a system and then getting into a drawdown, unless they have a 10, 15% drawdown, and at 15% you cry uncle and you give up, and then you stand aside, and then two years later, you go back and you backtest your system and realize that was the low point. And often it’s the low to the day or to the week, right? Because that’s the way psychology works in the markets.

Adrian Reid:

So confidence in your trading system. Once you’ve got that, if you’ve got a trading system that you’re confident in, you need the discipline to follow it. I’ve coached a lot of traders on the discipline, particularly around their execution. You must take the signal when you get the signal. I get asked this question many times a week, “Should I take this trade?” Or, “What should I do in this situation?” And my mantra is always the same, it’s, “What would your backtest do?” Because your job as a trader, once you’ve got a system that you’re confident in, your job is to replicate the backtest in the real world. So every single question about execution comes down to that, how can I get as close as possible to what my backtest would do?

Adrian Reid:

And then the final thing, which is broader than the system is, you’ve got to plan to take into count disturbances, I mean, kids get sick, you go on holidays, there’s power outages, the internet goes down, all of those sorts of things, a lot of new traders will let those disruptions through them for a six. It’ll cause them to miss their trading that day or miss their trading that week. You must plan for those things so that you can follow the rules consistently. Because it’s only in following the rules consistently that you get the positive expectancy that the system should be generating.

Andrew Swanscott:

Yeah, especially, I think, with trend following strategies, it could be, you’re relying on a couple of big trends to make up for all those losses, so if you miss a couple, it could kill your year basically. So yeah, it’s extremely important to follow the system and take all the trades.

Adrian Reid:

Yeah, absolutely. I mean, there’s two kind of mistakes, I mean, there’s many kinds of mistakes, but let’s just put them into two buckets. There’s the small regular mistakes and then there’s the larger, irregular, infrequent mistakes. And even something as simple as slippage can be a real killer. Let’s say your system demands that you enter at the opening price tomorrow if you get a signal today, which many systems do. That’s a fine assumption for a backtest, but as a novice trader who’s got a job, if you’re sitting at your desk and you have meetings with your boss every day when the market opens and you can’t actually place the order at the open, you’ve got a big problem. So you’ve got to take into account even just the tiny little impacts and differences that can influence the performance that you get from your realtime trading and try to eliminate those problems as much as possible.

Andrew Swanscott:

Yeah. So you raise a number of good points there, which I think are very good. But there’s one there that was extremely important, and that is confidence. And as you mentioned, if a trader doesn’t have confidence in their trading systems, that can cause a whole bunch of issues. So what do you think it takes to build confidence in trading systems?

Adrian Reid:

Yeah, look, good question, Andrew. I think this is huge, because I see a lot of traders who just lack that confidence, so this is really worth spending some time on. The first one is having a rock solid process to design and test your system. Okay? Now, I teach a process to develop stock systems and you’ve spoken with various other famous traders who also have a process to do that. So we don’t necessarily need to go into a lot of the detail for design and optimization of the systems. But you must have a process that you’re confident in, that will develop a positive expectancy system.

Adrian Reid:

The second one is, the parameters within your system have to be stable. You’ve got to know that the parameter values that you choose aren’t going to break down, they aren’t going to work today and fail tomorrow. You also need to know that the system is stable, not just the parameters, but the performance. So a lot of systems that you read about in books, if you go and code them and test them today, what you’ll see is that the edge has gradually decayed over time. And typically, that’s because more and more people are trading the system, or it could be that the markets are shifting and changing and the edge of that system is disintegrating. But you must be sure that the system performance is stable, because if you know that it’s not falling apart, then you know also that the drawdown is not system death, it’s just drawdown.

Adrian Reid:

The fourth point is significance. When I have a system, I need to know that every component of that system is significant and important. If there’s extra rubbish in there that’s not adding value, like rules that are for polish or to kind of tweak the performance, but not really making a significant difference, you’re going to run into troubles. So significance and simplicity kind of go hand in hand a little bit, I guess. Then the final thing is robustness. Your system must be able to cope with changes and shocks, so that it doesn’t blow you up when something changes.

Andrew Swanscott:

So you mentioned there that it’s important to have a stable trading system or have stability in a trading system. So how do you actually do that? How do you get the confidence that a system is actually stable?

Adrian Reid:

Yeah. Okay, good. Well, let’s break it into the two components of stability, there’s parameter stability and performance stability. We’ll talk about parameters first. So let’s say your system has four or five parameters in the system, and obviously, the fewer parameters, the better, because we want to keep it simple so that it can be robust. So if you have four or five parameters in your system, you want to choose those parameters so that, yes, the value gives you positive profitability, but the profitability isn’t very sensitive to the value of the parameter you choose.

Adrian Reid:

So let’s take a dumb example, let’s say you have a moving average crossover system. Now, I don’t recommend you trade a moving average crossover system necessarily, but let’s just use it as an example. Let’s say you buy when the 50-day moving average crosses above the 200-day moving average and you sell when it crosses back below. Just, again, a simple dumb example. For parameter stability, you would take that 50-day moving average and that 200-day moving average and vary it over a fairly wide range, I mean, plus or minus 20, 30%, and validate that, no matter where you set that parameter value, the system is profitable. And not only profitable, but tradable. Because if the 50/200-day combination works, but the 45/195 combination falls apart, you’ve got a huge problem. But if the system works with parameter values for the short-term moving average anywhere between 30 and 70, and for the long-term moving average, anywhere between 100 and 300, you know the parameter performance is stable.

Adrian Reid:

So when we vary the parameters, it shouldn’t matter that much. That’s my point. Because everyone who’s done optimization for more than about five minutes, realizes that you can optimize something for the past, but then when you start trading it in real time, the future’s different than the past, and so the future optimum parameter is different than the past optimum parameter. So by designing a system with stable parameters, that problem matters less. Does that make sense?

Andrew Swanscott:

Yeah. So we talk a lot about optimization on this podcast. It can be a very challenging aspect of trading, and it’s kind of like a balancing act, there’s a bit of art and a bit of science involved to it. So what’s your take on how and why to optimize then?

Adrian Reid:

Look, there’s two purposes commonly discussed for optimization. The most common one, which I think is actually the least important, is to improve performance. The second one is to check for stable performance. So there’s a whole lot of things we need to be careful of when we’re optimizing, particularly curve fitting to past data, cherry picking to particular trades or market conditions, are just two very significant challenges we face. So the real purpose of optimization, in my mind is, yeah, make sure the system is as profitable as possible, but even more important, make sure that it’s as stable as possible. I like to look through the parameter sets that I’m choosing from and find the areas of stability and use those. And I want to make sure that those areas of stability hold over a long period of time.

Adrian Reid:

I’m a fairly long-term trader, so I’ll typically hold my positions for several months or longer. And you can make very good returns as a trend follower doing that, particularly when you choose the right markets. So, because my position into fairly long-term, I don’t want to be re-optimizing my system all the time. I want my parameters to hold true through bull market, through bear market, over time. And I’ve traded systems where I literally haven’t changed a parameter for a decade and the system continued to work amazingly well. And that’s what I’m after, stable performance. And you’ll only get that by optimizing looking for stability, rather than looking for maximum performance, because maximum performance is almost always cherry picking an anomaly in the data, as you’re well aware.

Andrew Swanscott:

Yeah, that’s a good point. Now, I think, something that you mentioned a little bit earlier was significance testing. I think it was in the context of individual components of your system. Can you share a little bit more about what you mean there?

Adrian Reid:

Yeah, absolutely. So myself, early on, and almost all of the new traders that I’ve coached, have had this challenge where you develop a system and the performance looks good, but what if I could make it better? What if I could add, what about this rule, or what about that rule, or what about that rule? And you get this problem where you had a really great system, but you’ve layered on rule after rule in an effort to try and filter out the garbage and maximize the good trades. Now, of course, with a little bit of experience, we know that that’s counterproductive. But exactly which things are adding the edge? If you’ve found yourself in a situation where you’ve added a few rules and filters to your system, you’ve really got to take a step back and have a look at it and go, “Well, all right, what in my system is really generating the edge? What can I strip out to simplify it so everything is significant?”

Adrian Reid:

And the reason I want everything to be significant is because, if it’s not significant, it’s going to cause you problems in the future, because it’s a rule that’s sitting there doing nothing, that could have an unintended consequence that you haven’t yet realized in your future trading. So I want to get rid of it, because I want to only trade the things that are making a difference in my backtest. Okay?

Adrian Reid:

So how do we do that? Well, let’s say I’ve got a completed system, what I’ll do typically is, take each rule one at a time and remove it from the system, and compare system performance before and after on a whole range of metrics. I’ll look at the number of trades generated with and without that rule, I’ll look at the profitability with and without that rule, the reliability, the percentage winners of the system with and without the rule, and also the equity curve, and compare.

Adrian Reid:

And then what I’ll do is, I’ll also reverse the rule. Let’s say it’s an inequality, so this has to be greater than that. I’ll also check if this is less than that, so the opposite of the original rule, and make sure that I’m actually drawing a distinction between good trades and bad trades. I want it to be a very black and white blunt distinction that, yes, this rule makes a difference. That’s what it has to be. Because if it’s not black and white, blunt, yes, it absolutely makes a difference, it makes the system better, it doesn’t belong. So I’ll do that with each rule one at a time, and remove the ones that are obviously not making a difference. And then I’ll go through and do that process again with the remaining rules, until I get down to the core rules, which are really driving performance, and they’re the stable, significant rules that I know I can be confident in, and that’s back to that original theme of confidence.

Andrew Swanscott:

Yeah, I think it was the last point you mentioned there, when we were talking about what it takes to build confidence in a trading system, is robustness, which is another thing we talk about a lot on the podcast. So how do you personally determine if a system is robust?

Adrian Reid:

Yeah, absolutely. Good question. It’s closely related to significance and sensitivity. But let’s say we’ve got a system and we’ve narrowed it down to the small number of rules that really make a difference and we’ve optimized it and we’ve chosen our parameter set. So robustness is what? Well, it’s about that system performing and not breaking under a whole range of conditions. So there’s a couple of ways you can test that. I mean, the first thing I’ll do is, I’ll test my system on multiple markets. So let’s say it’s a system for the Australian stock market. I’ll have data that is unseen to my system, out of sample data, if you like, which I’ll test the system on, from the Australian stock market. Now, that’s nice, but that’s still very similar to the other data that I’ve designed the system on in the Australian stock market. So it gives me an added level of confidence, but it’s not absolute.

Adrian Reid:

The next thing I’ll do is, I’ll go to other markets, which I know are similar. So I’ve done enough design work, I’ve looked at enough charts to know that a few other markets trade somewhat similarly to my market. So I’ll test it on those and if the system survives and works and is tradable, then that’s another tick. So it gives me added confidence. So the first step is, out of sample in your existing market, say. The second step might be a completely different market that still trades similarly to your own market. And then the third step might be another very unrelated market. And as long as all of those are acceptable, then I’m thinking, “Okay, good. The system is pretty robust.”

Adrian Reid:

The next step is to understand the robustness of the parameters. So we already did stability. Okay? But typically when you do something about stability of the parameters, it’s one parameter at a time. I mean, you can do a brute force optimization, optimize five parameters at once, but it’s very hard to visualize that. So I tend to do it in a much more simplified way, one or two parameters at a time, so I can visualize the parameter space.

Adrian Reid:

But for robustness testing, what I like to do is vary every single parameter simultaneously. And what I’m trying to do is check that no matter how I shake up the system, that it’s still profitable. So if I take every single parameter in my system and vary it, say plus and minus 20%, or plus and minus 30%, and then run an optimization that will test every single combination of those plus and minus values for each parameter, I might get a few thousand parameter set combinations for this system. I want almost every single one of those to be profitable, and preferably, tradable. Because if I’ve shaken the parameter values that much, and it’s still tradable, then I’m feeling pretty good about the robustness of that system.

Andrew Swanscott:

So you’ve said a couple of times now, this plus or minus 20 to 30% range, how did you come up with that range? Is that something you’ve just discovered over time? Or is it recommended from someone else? Or where does that range actually come from?

Adrian Reid:

Look, I guess it comes from the systems that I’ve used over time, knowing how stable they are. I’ve tested many, many systems, I mean, hundreds of systems over the years, and I’ve thrown away most of them because they’re just not robust enough. And what I have done over my years of system development and testing is gradually replace what I’m doing with more and more robust models. So I know that the systems I’m trading can cope with that level of variation in the parameters, and still survive. Now, it’s not so much about the parameters, what it is really, in real time trading, it’s about, if the market shifts or if market behavior changes, will my system survive? And you can simulate that by testing on different markets and different market conditions, but you can also simulate it by varying the parameters and seeing, “Hey, does this still keep me alive?” So I know that my current systems can cope with that. So I wouldn’t be as confident in a different system that wasn’t able to cope with that level of variation.

Andrew Swanscott:

So then, I guess, after traders have done all this, they’ve done the stability checks and the significance testing sensitivity, all these robustness checks, what else could there be that could potentially stop a trader from succeeding?

Adrian Reid:

Discipline.

Andrew Swanscott:

That was a pretty quick answer.

Adrian Reid:

Well, look, I mean, again with my students and with people I’ve coached just through my interactions, lack of discipline to follow the trading system is one of the biggest failings. Because plenty of traders have a good system, or at least a reasonable system, but they’re losing money hand over fist, not because of the system, but because they’re not following the system properly. And look, I think that comes from two main sources, from what I’ve observed. The first one is that your system doesn’t suit you. The second one is that you don’t understand how the system actually performs day to day. Let me tackle those two things one at a time.

Andrew Swanscott:

Sure. Yeah.

Adrian Reid:

The system really has to suit you, because if it doesn’t fit in with your lifestyle, you’re not going to be able to follow the signals, because you can’t take them as and when they come. If it doesn’t fit in with your objectives, then your emotions are going to kick in at precisely the wrong time.

Adrian Reid:

Let’s say your objective subconsciously, that you haven’t really recognized or written down, is that you don’t want to lose more than 10% of your capital. That’s fine. But if your system has a maximum possible drawdown of 20%, you’re going to be in trouble at some point, guaranteed. So both return and risk objectives need to be matched between the trader and the system. So, oftentimes, I’ll come across someone who’s lost a lot of money and given up trading, or at least started cherry picking the signals from their system, and almost always it’s because something’s happened in the performance that they weren’t uncomfortable with, didn’t suit their objectives.

Adrian Reid:

So we talked about lifestyle, we talked about objectives, the last component is personality. So some people will be very comfortable trading a system that’s right 60% of the time, as long as the win/loss ratio is sufficient to give them profitability. But typically, a higher win rate system will have smaller winners and slightly bigger losers. Other people will be more confident and happy trading a system that has 40% winners, but much bigger winners and smaller losses. Now, I know from my own personal experience, that when I get this wrong, it’s much harder to follow the signals, because if you get a loss, which is bigger than you are deep down comfortable with, it’s hard to take the next trade. Or if you have more losing trades in a row than you are deep down comfortable with, it’s hard to take the next trade. So it’s got to suit your lifestyle, it’s got to suit your objectives, and it’s got to suit your personality. If you don’t have those things, it’s very hard to have the discipline to follow the system.

Andrew Swanscott:

Yep.

Adrian Reid:

Make sense?

Andrew Swanscott:

Yeah. That’s a really good point. I think, especially, personality. Earlier in my trading career, I was trading a weekly rotational strategy, and me personally, I like to be busy and I’m quite impatient, although after a couple of kids, I’ve kind of mellowed out a little bit, but in my younger days that strategy was actually a profitable strategy, but I couldn’t trade it because it didn’t really work for my personality, and actually it annoyed me. So I mean, it helped guide me into the type of trading that I do now, so it was beneficial. But yeah, I think it really does matter a lot to find a strategy that matches your personality and your objectives and lifestyle.

Adrian Reid:

Right. And just to make sure that everyone feels normal and okay about this, I’ve learned this through hideously bad experience. I mean, I went through a period where I was trading a system which was wrong on personality, it was wrong on objectives, and it was wrong on lifestyle, and it was disastrous. So I’m a long term trader now, I spent three months day trading, but I had a full-time job, and I don’t like making decisions under pressure quickly, and I don’t like being busy, I like to make slow and more considered decisions, and lifestyle-wise, I don’t want to be sitting staring at the computer and have that stress. And so I was trying to trade this system because I thought, “Well, everyone else is day trading, maybe I’ll try day trading, see what all the fuss is about.” And I tried it and I lost about $30,000 trading that system before I even realized what was going on. And it was because it was wrong for me on all three levels: personality, objectives, and lifestyle.

Andrew Swanscott:

Yeah.

Adrian Reid:

So we talked about, I mean, the original question was discipline and what causes the lack of discipline. The two things were, the system’s got to suit you, and then not understanding how the system trades day to day. So personality, objectives and lifestyle is about, does the system suit you? But what’s interesting is, as system traders, what are we doing? We’re backtesting and designing systems over past data. But I don’t know about you, when I’m looking at my backtest, that could be 10, 20, 30 years of history, right? Depending on what style of system or what markets you’re developing. But when you’re trading, when you’re actually executing the system, what timeframe do you care about? Right now, today. And what is the system doing now compared to yesterday?

Adrian Reid:

And so what’s interesting is, in the design process, we have this massive macro view over decades of system performance. But when we are trading at realtime, you’ve got to zoom right in and look at a couple of days, a couple of bars, and your attention is on very different things than during the backtesting process. And so if you go from backtest straight into designing a system without really investigating how the system behaves day to day, you’re going to wind up in trouble, because you’ve got to understand what’s natural, what’s normal for that system day to day, so that you don’t freak out at the wrong moment.

Andrew Swanscott:

Yeah. So then what can traders do then to get that expectation correct for when they do move from backtesting to live trading?

Adrian Reid:

Yeah. I think this is a really powerful point. There’s a couple of things that I do in my design process. Once I’ve finished the backtest and finalized the rules, there’s then a period of investigation to find out what’s normal, what’s normal for that day to day behavior. And the biggest challenge, I think, that most traders face when they’re starting with a new system, is that initial period, I’m going to put capital into market and start trading this new system. The first trade, the first couple of bars, the first couple of weeks, the performance during that phase really plays with your emotions, because it’s when you feel like you’ve got the most at risk. If you put a hundred grand into an account and you start trading a system, you’re going to feel pretty bad if you lose 10,000, typically. But if you’ve put $100,000 into an account and five years later your account’s worth half a million bucks, losing $10,000 in a drawdown is no big deal, right?

Adrian Reid:

So what I like to do is try and investigate as much as possible, what could happen when I start trading. And so the first thing I like to do is run a backtest where I step the start date, where typically we might do the backtest starting on a certain point in time and design it for a certain number of years and then walk it forward, and however you’re going to optimize, whether you do simple classical optimization or walk forward optimization. But I like to run the test with my final rules, starting it on, let’s say, 1st of January 1990, and then I might step it forward to the 1st of February 1990 and run it again, and then March. And then April, and so on, all the way through the entire data set.

Adrian Reid:

And what I’m doing is, I’m looking for, what does that initial drawdown look like? How long does it take for me to be profitable on average? How many trades might it take to be profitable? What’s my confidence that, after one week, one month, three months, six months, I’m up, or up more than 5 or 10%, a certain amount that’s meaningful to me? Because by looking at that entire data set and starting the simulation on many different days, you can get a good idea of what’s normal for when you start trading today. Yes, the future could be different than the past, but if you’ve tested every possible start date in the past, you’ve got a very good idea of what could happen, the range of things that could happen today, if you start. So start date stepping, I think is really powerful.

Andrew Swanscott:

Yeah. Just thinking about that, that’s a really interesting idea, because I guess, if you’ve got, say for example, a trend following long system, and you start testing it right at the beginning of a bull market, you’re probably going to look like a genius, but you step it back a year or two, when it takes into account the bear market, could get very different backtest results, which could mislead you and give you the wrong expectation if you don’t do that.

Adrian Reid:

Absolutely. Because if you are expecting to make, let’s say you’re expecting to make an average of 20% per year, but you start trading right at the peak of a bull market, there’s no way your first couple of years are going to be that profitable, if you’re trading long side trend following. So we must understand what’s possible so that we can make a decision about, are we comfortable with that? And then when we’re trading for three months or six months, and we stop to evaluate our performance and evaluate our system, we can look at it and go, “Okay, was what I’ve just experienced within the bounds of normal for this system?” If yes, continue trading. If no, there’s a problem, something’s broken, we need to go and revise, revisit. So whatever you can do as a trader to investigate the bounds of what’s normal for that system.

Adrian Reid:

So we talked about start date. The other thing to understand is performance profile. Andrew, you pointed out, if you started trading at the start of a bull market, you’re going to look like an absolute champion if you’re long side trend following. Of course, that’s true. What you’re also going to see is, you’re going to have a very high percentage of winners, your duration of winners is going to be pretty long, your duration of losses is going to be pretty short, and your initial drawdown is going to be close to zero. And you have a very high confidence that after a couple of weeks or a couple of months, you’re going to be quite profitable. But that’s the situation at the start of a bull market. You want to understand what the percentage of winners and loses your system generates across all market conditions are, not just on average.

Adrian Reid:

The temptation, again, for backtesting, we’re looking at many years of history, and the temptation is to look at the average and say, “Yeah, I’m good with that.” But if you look at the percentage of winners during a bull market, and the percentage of winners during a consolidating market, and the percent winners during a bear market, they’re going to be very different for almost every system. So to trade with confidence, back to that original theme, you’d better understand what you could get, what’s normal.

Andrew Swanscott:

Yeah.

Adrian Reid:

So, I like to look at the percentage of winners over time, the size of the win over time, the expectancy over time, the size of the losses over time, and the duration of trades over time, as you move through the entire test period. Because once I understand how they vary through bull markets, bear markets, sideways markets, I get those bounds of normality in my mind and in my notes, so that when I’m evaluating my real time performance, I can can say, “Hey, is this normal or not?” If it is, no problem, I can keep trading with confidence. If it’s not normal, something’s broken, I have to go and check, or suspend trading.

Andrew Swanscott:

Yeah, I think earlier in our chat, you mentioned that you like to keep your parameter values pretty stable across a long period of time. So does that mean you test bulls and bears markets and high volatility, low volatility, or different kinds of market environments as one, to see how it impacts the strategy?

Adrian Reid:

Yeah. Bearing in mind, my personal trading is quite long-term and most of it is trend following. I do have some swing trading systems as well. But for the long-term stuff, I like to make sure that my test period includes all market types. Because I want the systems to survive, no matter what the market is doing. And if that means going to cash, that’s fine for that system. Then I’ve got a short system which will pick up the slack and make some money. But I want to make sure that no matter what’s happening in the market, the system is stable and robust enough to not exceed my maximum loss parameter. So yeah, I look at my test window quite long-term, for the long-term systems, I won’t change the parameters drastically over time, it’ll be a slow adjustment, and I want those parameters to survive and help me thrive, no matter what the market’s doing.

Andrew Swanscott:

Yeah. Okay. All right. Cool. I just want to start wrapping up in a minute, but I think I might have cut you off in that last part there. So was there anything else that you wanted to add to the, I guess, switching to live trading and managing our expectations there?

Adrian Reid:

Yeah, look, I just think people underestimate the change in focus and mindset from backtest to day-to-day trading. And it really warrants working through the performance parameters of the system and looking at the daily and weekly and monthly ranges of those, so that you understand what’s normal. And then also going through the process of running the system. I’m not a big believer of paper trading, at least not for the purposes of testing a system. But I am a believer of doing it for a while to come to grips with the process, the process of executing it and checking for execution mistakes, and checking that there’s nothing in your lifestyle or your daily routine that’s conflicting with the good operation of this system. So I’ll encourage my students to do that for just a little while, to make sure that they’ve got the process down smoothly and they’ve ironed out any kinks, and they’ve observed some of the trades coming up, and they’ve observed the execution of those orders, at least in a simulated sense, so that they’ve got that comfort.

Adrian Reid:

So that’s probably the last thing, apart from, there’s probably never enough emphasis given to trading plans and the components of trading outside the system. I mean, I think most of us are guilty of following the system, but not planning our trading fully as a business at some point. So I would just encourage people to think beyond the system as well, to, what are the things that could go wrong and how could you plan for them?

Andrew Swanscott:

Yep. All right. Yeah. That’s a great point too. Thanks, Adrian. So I just want to start wrapping up now with some quick closing questions.

Adrian Reid:

Sure.

Andrew Swanscott:

Okay. So the first one, what’s the biggest lesson that you’ve learnt through trading?

Adrian Reid:

Oh, the biggest lesson is absolutely that the system must fit me. And I think this is true for everyone. But what’s amazing is that what fits me could be so drastically different than what fits someone else. I’ve been to now countless seminars and courses where people are teaching a system or teaching an approach to trading, and teaching an approach is one thing, but if you’re not exactly the same as the instructor in your personality and objectives and lifestyle, it’s going to be very hard for you to follow that system. So that’s why what I teach is the process to come up with the strategy and the system. Because by learning the process, you can develop something which works for you. And that then matches back to my biggest lesson in trading, which is, it’s got to match your personality, objectives, and lifestyle.

Andrew Swanscott:

Yeah. Good point. Okay. How about the best trading advice you’ve ever received?

Adrian Reid:

Best trading advice I’ve ever received? Follow the system. I mean, it sounds dumb and simple, but any supplementation of the trading rules with my own cleverness is a warning sign. I have this little trigger in my mind where, anytime I’m tempted to override or adjust, I have this little siren that I make go off in my head, saying, “Warning, warning, warning!” Because we’re human, and fundamentally, most humans are not good traders. But my system is a good trader. So if I can just follow my system to the letter, I’ll make a ton of money. So follow the system.

Andrew Swanscott:

Yeah. Okay. How about, you mentioned the Market Wizards before, but what about any other favorite trading books that you like to read?

Adrian Reid:

Oh, absolutely. I’ve read a lot, and I’ve read a lot of junk and a small number of amazing gems that have had a huge impact on my journey. So the ones that have had a huge impact, obviously, the Market Wizards books, I’ve got huge value out of those. Bob Pardo’s book, The Evaluation and Optimization of Trading Strategies, is an amazing book, which all systematic traders should read, no question. Thomas Stridsman’s books, also very helpful. And early on, when I read Van Tharp’s Trade Your Way To Financial Freedom, that had a very significant impact on my journey.

Adrian Reid:

One other lesser known one, which I don’t hear a lot of people talk about, is Richard Weissman, Mechanical Trading Systems. It was his first book, I think. And at the time, it just had a huge impact on me, because he went through, in that book, long-term trend trading systems, swing trading systems, and mean reversion systems, and talked a lot about the personality of the trader and who you have to be to really be comfortable taking each of those different approaches, and backed it up with data and with backtesting and so on. So I really love that book as well.

Andrew Swanscott:

Yep. Cool. Okay. So if someone wanted to get in touch with you or to learn more from you, what’s the best way that they could do that?

Adrian Reid:

Oh yeah. Good. So my business is Enlightened Stock Trading. So my website is enlightenedstocktrading.com. But for the Better System Trader listeners who are interested to learn a little more about all of this, I put together a little bundle of bonuses, goodies, if you like, which they can get. So if you go to go.enlightenedstocktrading.com/bettersystemtrader, and Andrew, I think we’ll have a link or something somewhere.

Andrew Swanscott:

Yeah. I’ll get a link for that.

Adrian Reid:

What I’m including for your listeners, just so they can take these concepts and push them a little further, and learn a little more deeply, is some cheat sheets around the concepts we’ve talked about, so talking about stability, significance, robustness, and system design. I’ll also include some additional training videos. I’ve recorded a number of videos on each of those concepts, just to elaborate, so you can revisit those concepts. And then I’ve also got a trading evaluation survey, so it’s like a quiz, where you answer some questions, and allows me to share what improvements you could make to improve your trading or stabilize your trading. So that will be in there too. So if you interested in learning more, that’s what I’d suggest you do first, because you get a whole bunch of additional value, and then, obviously, we’ll be in touch after that and I can answer any questions that the listeners have.

Andrew Swanscott:

Sure. All right. Well, thanks a lot for putting that package together, Adrian. I wasn’t expecting you to do all that. So thank you very much for sharing. Now, is there anything else that you’d like to mention before we finish up for today?

Adrian Reid:

Yeah. Look, I think, something that comes up for me over and over again is new traders thinking about their journey. And there’s this concept that I haven’t seen really talked about, about what traders have to do in different stages of their lifestyle. If you are new and you’ve just started system trading, what is your job? Your job is to follow the system, get good trading habits and start to build your account. It’s not to make a ton of money overnight, because this is not a get rich quick scheme. It’s just do the things which will build your account.

Adrian Reid:

When you’ve got a bit more money in your account, the temptation is to use that money for lifestyle. Let’s say you’ve built a couple of hundred thousand dollars and you want to go buy a new car, don’t do that, because that sets you back. What you want to do is get to the point of no return. And I think this is the reason why most traders don’t become self-sufficient, because they don’t let themselves get to the point of no return. I want to see more traders build their account through to seven figures, so that they’re past that point of no return and their trading will always support them.

Adrian Reid:

So in the middle, when your account is really starting to grow and rocket, what’s your job? It’s to keep following the system and to pump money in, so that you get past the point of no return. Harvest comes later, when you’ve already got a high, six, seven figure account, and you can really support yourself. So be patient, that’s what I’m asking.

Andrew Swanscott:

Yeah. I think that’s something that a lot of traders underestimate is, actually how much capital you really need to make a living. And I mean, if you look on the internet, there’s all these kind of promises of making a truckload of money from a small account, and it just doesn’t happen like that in reality. So I think you raise a good point there about having to build up the account to a larger sum before you can actually make a living from trading.

Adrian Reid:

Absolutely. And those things are just marketing stunts, they’re just marketing written by fraudsters who are trying to get a quick buck. But in reality, trading’s a long-term game. And when you commit yourself to that long-term game, it’s hugely rewarding, if you’ll just be patient and follow the process.

Andrew Swanscott:

Yeah, absolutely. That’s a great point to finish up on. So thank you very much for your time today, Adrian, it was really great having a chat to you, and appreciate all that you have shared today. So thanks again, and I wish you all the best.

Adrian Reid:

Thanks, Andrew, pleasure to be here, really enjoyed it.

Andrew Swanscott:

All right. Cheers. Bye.

Adrian Reid:

Thank you. Bye now.

Andrew Swanscott:

Okay, well, that’s it for this episode. Thanks for listening. I hope you enjoyed the show. Come right over bettersystemtrader.com, that’s where you’ll find all the previous episodes, all the transcribes, all the show notes, and all the free weekly trading tips, bettersystemtrader.com.

 

206 – “Systematic Crypto” – Adrian Reid

Andrew Swanscott:

Hello, welcome to BST Live. The show for systematic and algorithmic traders, glad you could join us today, where we’re going to be talking about systematic crypto. Tongue twister. And joining us today is Adrian Reid from Enlightened Stock Trading. Welcome, Adrian. Great to have you here today.

Adrian Reid:

Hey, Andrew. Thanks so much for having me. Super excited to be back on the show.

Andrew Swanscott:

Yeah. Well, you were here, I’ve got this in my notes. You’ve been on the show before. Episode 147, which was in May 2018. So what’s that? Two and a half years ago?

Adrian Reid:

Yeah, absolutely.

Andrew Swanscott:

Wow. So that’s gone pretty quick, because it doesn’t seem like that many years ago. But it’s great to have you back again. If people want to see that show, actually, or listen to it, because it was audio-only back then, that was episode 147, we were talking about building trading strategies with confidence. So that was a good episode, if people want to go back and review that one.

Adrian Reid:

Yeah, absolutely. Definitely worth listening if you’re keen on improving your confidence in your trading systems.

Andrew Swanscott:

Exactly. So today, we’re going to be talking about systematic crypto. My mouth is just warming up. So I’ll be able to say that a bit clearer next time. Before we get started, how about a little bit of background on yourself? Just to give us a bit of context. So, maybe share a little bit about your trading and what you’re trading now, that type of thing.

Adrian Reid:

Sure, absolutely. So I’ve been trading systematically now for, well, it’s pushing 20 years. Not quite 20, probably about 17, I’d say. I’ve been in the market for 20 odd years, but it took me about two to three years to really figure it out and realize that my emotions were just killing my trading results. And so, I discovered systematic trading. And the day I implemented my first trading system, you can see on the equity curve, things turned around. And so, basically, as soon as that happened, I realized I’d found my thing, and I’ve been trading system systematically ever since. I do my best to trade 100% systematically. I have had a few dabbles, usually resulting in losses. And I learned that lesson a few times over and over again, but I’m getting better. And so, basically, for the last 17 odd years, I’ve been trading stocks systematically, developing trading systems to eliminate my emotions, get better diversification, and reduce the time, effort, and stress in my trading.

Adrian Reid:

Crypto came along. And I guess, like a lot of people, I looked at it skeptically, dodgy market, decentralized, no rules, no regulations. And I was a bit, “No, that’s not me. I trade stocks.” But to be honest, that conservatism, maybe in the very early days, was [inaudible 00:03:13] but now, not so much. And I’m really excited to bring the systematic approach, developing systems to trade, portfolio of instruments into the crypto space because it’s just amazing. Such a great opportunity for traders.

Andrew Swanscott:

Okay. Well, that was an excellent summary of all the points I’ve got in my list here to talk to you today. So, thank you very much for that. So how about we get started with, why now? So crypto markets are obviously very hot, and they have been a hot topic for a couple of years now, but I guess relatively new compared to other markets. So why do you think now is a good time to be getting into crypto?

Adrian Reid:

Look, there’s a whole range of reasons. I mean, the first one is the obvious one. There’s a huge profit opportunity for informed traders. And the way you know there’s a huge profit opportunity is if you just look at what the market participants are doing, there’s masses and masses of uninformed, completely new traders who have never traded anything before, who are flooding into the crypto markets. And they’re using social tips there. There’s thousands of people on Facebook trying to ask, “Well, what crypto should I buy? And what’s going to the moon?” And, basically, it’s immature in terms of the masses.

Adrian Reid:

And that’s why there’s an opportunity because if you go way back in stocks, in the early days before there were hedge funds, before there was high frequency, before there was all of this algo trading, it was just dead easy to make money with relatively simple systems. And to be honest, you can still make great money with relatively simple systems, they’ve got to be a bit more elegant nowadays.

Adrian Reid:

But in crypto, because there are so many traders who just don’t really have a structured approach, a systematic approach, which eliminates the emotion inherent in all of that and eliminates the emotion inherent in the volatility of this market, will absolutely crush it.

Andrew Swanscott:

Yeah. Yeah. So I think there’s obviously some opportunity around the way these market participants are acting. Before we get into that, though, can you share a little bit about some of the things that you see traders doing wrong with their approach to the crypto markets?

Adrian Reid:

Yeah, absolutely. I mean, the first and most obvious one is a broad-based adherence to buy and hold. There’s this idea that’s very popular in crypto that if you just buy and hold, you’ll be a billionaire or a bazillionaire, whatever it is. And if you happen to choose the right tokens, that might be true. And if you just held Bitcoin, maybe Ethereum, that might be true. But the reality is this is so new, we don’t really know where it’s going in terms of the market direction. We know that it’s a very strong market. There’s a lot of hype right now. But if you do buy and hold, you’ve got to sit through absolutely gut-wrenching drawdowns. And I don’t know about you, but I’m not a fan of 70%, 80%, 90% drawdowns. It just doesn’t fit my risk tolerance and profile. And so, I think buy and hold is probably the biggest mistake or risk. Because most people will get into that massive drawdown panic, think they’ve made a mistake, and dump it because they just can’t cope. So I think that’s probably the first big one.

Andrew Swanscott:

And they usually dump it at the bottom as well, don’t they?

Adrian Reid:

Well, that’s exactly [crosstalk 00:06:55] creates the bottom is the [crosstalk 00:06:58]

Andrew Swanscott:

Yeah.

Adrian Reid:

The other big thing, I think, is because it’s a new and interesting market, it’s brought in a whole new generation of traders who are yet to learn a lot of the lessons that many of the listeners have probably learned over the last 5, 10, 15, 20 years of trading. Right? And so, there’s a lot of people listening to random people on social media for tips. You go into the crypto Facebook groups, it’s all about, “Well, what should I buy today? What’s going to the moon tonight? How can I get rich next week?” And there’s just no structure in the way a lot of people are trading.

Adrian Reid:

And in reality, we know, if you want to succeed as a trader long-term, you’ve got to have a disciplined approach and you’ve got to have a set of rules that will guide you, that’ll keep you out of trouble and actually be profitable. So listening to those social tips, and pressure, and fads, all of that. And a big part of the crypto market, which makes that dangerous is that there’s a lot of pump-and-dumps in this space. I mean, think penny stocks way back, where one broker might just get hold of a penny stock and really pump it, pump it, push the price up, and then they cash out, and it crashes. It’s exactly what’s happening in a lot of the smaller tokens as well in the crypto space.

Adrian Reid:

So again, if you don’t have a strategy, a set of rules to get in early and profit from the pump, you’re going to end up holding through the dump, and that’s really going to hurt.

Andrew Swanscott:

Yeah. Yep. And so, yeah. So there’s some really good points there that you’ve raised about the things traders are doing that they shouldn’t do and that the wrong approach to the market is obviously hurting them. And you mentioned about systematic trading and having a set of rules. Before we dig into that more, can you just explain a little bit about the ecosystem for systematic traders? Because there’s new tool sets coming out, and data availability, and all these type of factors that, as systematic traders, we need to factor into how we approach it. So can you just give us a bit of an idea of what the space is like now for systematic traders?

Adrian Reid:

Yeah, absolutely. And the first thing to realize is it’s changing very rapidly. Okay? So there’s new tools being developed and released on the market almost weekly or monthly, and so you’ve got to keep on top of what there is. But, fundamentally, there’s the decentralized exchanges and the centralized exchanges. The centralized exchanges are where probably the bulk of the tradable volume and tokens are. And so, I’m trading, for instance, on Binance and FTX, which are two of the biggest. Binance has the highest volume. FTX has the best interface combined with really good depth liquidity of the market.

Adrian Reid:

So the first step is choose the right platform. You’ve got to be really, really careful in this space of the spreads and the cost, because a lot of the exchanges are really just like bucket shops. They charge really wide spreads. They wrap their spread around the spread that they’re getting in. In some other market, they’re offsetting you against or they’re just trading against you. So it’s not just a case of opening up an account with any crypto broker and you get the price of Bitcoin or the price of whatever token you’re looking to trade. I’ve compared quite a few notable exchanges. I don’t want to name names. But I’ve compared quite a few of them and looked at the price, and the bid they ask, and the depth across several exchanges at the same instant. And to be honest, some of them are quite scary. So you really do need to go where the volume is. And that’s why I trade on those two exchanges. So just be mindful that you don’t get reamed by the broker.

Andrew Swanscott:

Yeah, yeah. Yep. So that’s a good point that you’ve made about the choice of exchange, but what other aspects should systematic traders consider? Things like data and stuff like that, what else is there that they need to look at?

Adrian Reid:

Yeah, absolutely. So if you’re going to be a systematic trader, which I think is great for this market because it eliminates all of that emotion. It allows you to cut through and actually have a profitable edge. So I think we’re down with that concept, right? So you need a data source, you need software to design and test your systems, and you need to be able to execute the systems.

Adrian Reid:

To talk about data first, I trade on daily and weekly bars. I don’t trade very short term. And the reason for that largely is lifestyle. I don’t want to spend a whole lot of time doing this. I spend about three minutes. Actually, it took two and a half minutes this morning to do my crypto trading. I ran six systems on daily bars this morning and that’s all it took and I’m done for the day. So you need data. And if you look at each exchange, the problem with the data is that they’ll only publish the data that they have for the tokens that they’ve had while they’ve had them. So it’s hard to get a long time series to design your systems with. And this is the first problem. When I first started looking at crypto, what I found was that you couldn’t really design a system adequately because you couldn’t get a long enough history to get enough bull and bear cycles in your backtest in order to design a system with credibility.

Adrian Reid:

So my first step was to piece together data from a range of different sources to get along the time series, so I could really look at how the systems were performing. But now, thankfully, you can get daily bars for a very broad range of instruments all the way back until inception from an independent data provider. So if you look up Brave New Coin, great source of data, they pull data from a large number of exchanges globally. They clean it, and aggregate it, and publish as a complete database. And you can get the Brave New Coin data from Nasdaq Data, and it’s on daily bars, so it’s not for intraday trading. But really good data set, which we didn’t have just a little while ago. So, that’s the first step. Good data.

Adrian Reid:

Second step is software. And what I’ve noticed in the crypto space, much like Forex, is that there’s a proliferation of trading robots, and algos, and platforms that will allow you to auto-trade and so on, which sounds great in theory, but the big challenge with almost all of them is that they’re pretty simplistic. They’re allowing you to trade one ticker at a time with one system. And what they miss is the ability to trade a portfolio of instruments with the one system.

Adrian Reid:

So in stocks, I don’t trade Amazon, I trade the entire US market and I apply my systematic rules to it. And what’s missing in a lot of the crypto ecosystem now, at least the popularized space, is the ability to trade a portfolio system. And so, what I’ve done is developed systems using this dataset. And I developed using AmiBroker, there’s multiple different trading software you can use, but it’s a portfolio-based backtesting engine. And so, my systems allow me to trade the portfolio of tokens with a particular system. And then, I have a portfolio of those systems to trade. So a portfolio of systems, each trading a portfolio of tokens gives you much better diversification.

Adrian Reid:

So the thing that’s missing and what a lot of crypto traders doing wrong is trying to create a bot, or an algo, or whatever for just one ticker. And there’s not really enough data for that. Yes, it’s possible, but I’d propose that most will have far more success in the long run by having a portfolio-based approach to their crypto trading.

Andrew Swanscott:

Yeah. Yeah. Okay. I want to dig into that a little bit more in a minute. But we’ve got a question about data in the chat, which I think is a very common one here. So it’s from Jeff. Thanks for the question, Jeff. How do you backtest crypto since there is not much history? Are your systems developed off short term back tests? And if so, do you consider them valid?

Adrian Reid:

Good question, Jeff. Andrew, there’s a slide in the pack that we developed. It’s the number six. Can you pull that up?

Andrew Swanscott:

Sure. Here we go, number six.

Adrian Reid:

So what’s interesting about crypto is that the timeframes compared to stocks are really compressed. So the bull/bear cycles are much faster. And so, while we don’t have a lot of data in crypto, we are starting to get a number of bull and bear cycles in the data set that we can test with. And that’s what’s really important because what we need to know is, with our strategy, is it going to blow up and destroy our account when the bull run is over? Because that makes the whole exercise pointless, right? We’ve got to keep our money. We’ve got to keep growing our capital.

Adrian Reid:

So this chart just basically draws a few comparisons. I mean, we’ve got a few years of crypto history now, depending on what data source you get. If you’re use the Brave New Coin data, you can get back to 2017 and start to get a decent breadth of tickers from back then. But during that time, we’ve been through about four cycles, depending on how you measure them. And now, in stocks, if you go back 30 odd years, maybe we’ve got about eight cycles. Again, depending on how you measure them exactly. So, yes, we don’t have as much data, but we’re starting to get there. And so, now, what you can do… Andrew, you can take the slide down if you like.

Andrew Swanscott:

Sure.

Adrian Reid:

Now that we’re starting to get those bull/bear cycles come through, we can develop systems and have confidence in them. But the key is I believe there’s still not enough data to optimize the same way you would in stocks. Because in stocks, you’ve got thousands and thousands of stocks. You’ve got exchanges all over the world you can do out-of-sample testing on. You’ve got 30 odd years of history.

Adrian Reid:

So my approach for crypto systems is a little bit different. What I’m far more interested in is optimizing to ensure the system is broadly stable, pretty much regardless of what parameters we choose. I’m not looking for the best parameters. I’m looking to make sure the system is not going to blow up. So if we take that approach of looking for real stability across the parameter space and only accept and trade systems that are inherently very stable no matter what parameters you choose, then you take those systems and diversify the parameter sets. So you’ve got a bunch of different varieties of those systems. Then, all of a sudden, you’re starting to get a lot more confidence in the way you trade. So long answer.

Adrian Reid:

Short answer to the question is, yes, I think you can develop systems. My systems are on daily bars. The holding period is anywhere from one to two days to four to six weeks, depending on the system. And in those backtests, there’s now many hundreds of trades in the backtest. And if we’re careful on how we optimize and develop those systems and really look for stability, you can actually rely on them.

Andrew Swanscott:

Right. Okay. Because that was my next question. What about sample size? Especially if you’re trading daily bars, then you have a lot less, I guess, data and opportunity for trade. So you look at them across the entire portfolio of instruments that you’re looking to trade? That’s how you assess it?

Adrian Reid:

Yes, absolutely. So, because I’m using daily bars, you do have to look more broadly. So you’ve got to look at the biggest universe you can to get enough trades into the database. And you also need the biggest history it can because you need to make sure you’ve got as many of those bull/bear cycles in your backtest as possible.

Adrian Reid:

So if you have one exchange, let’s say you’re trading on Binance, you could take the Binance data and develop a system and check it works. But this is not enough. You need to look at data from other exchanges as well because Binance will change its universe. And there’s also probably, built-in, some survivorship bias in the universe that ends up on some of these exchanges because they’re filtering for the large-market-cap stocks. So that’s why you want to go more broadly. And I think if you get 400, 500, 600 trades in a backtest, if you design the system to be elegant and simple enough, that can be enough to have a system that’s stable and works real-time.

Andrew Swanscott:

Yeah. And what about the little, I guess, nuances with data? Say, for example, you’re using daily bars. What time does the day end could be different across exchanges, and you test a strategy on one set of data, and then you try it on another. Because it’s decentralized, you get different prices. So what have you found about little things like that? Does that make a big impact in the results?

Adrian Reid:

Yeah. Interestingly, it’s a consideration, but it’s not a showstopper.

Andrew Swanscott:

Right.

Adrian Reid:

And we’ve got a program called the Crypto Success System, which I explained all the nuances. But one of the things that we talked about there was that, the daily cutover, it’s a universally accepted time where the daily bar ticks over. So that’s the same. But even if you use a different timeframe to cut over and you can adjust your data, depending on what data source you’re using, to shift your day, your definition of a daily bar, and then backtest again. So you can actually get slight variations on the data just by saying, “Okay, this is a day. Oh, no. Now, this is a day. Oh, no. Now, this is a day.” And just time shift it a little bit. And that also gives you some extra data to test on. And what we found is, again, if you design the systems, right, simple, elegant, and taking into account the nuance of the way the crypto markets move, and it really doesn’t matter that much.

Andrew Swanscott:

Right. Okay.

Adrian Reid:

Yeah. The key is to understand how your system will work, given the volatility of the market, given the size of the tails or the weeks in the candles. And the way that, sometimes, there’s nice long trends and, sometimes, there’s pump-and-dumps, you need to be able to deal with both of those.

Andrew Swanscott:

Yeah. Right. Yeah. So I guess maybe the next question out of that is what type of systems are you talking about here? You’ve said they need to be simple, and elegant, and they need to take into account the behavior or personality of the crypto market. So what type of things are you talking about here?

Adrian Reid:

Do you want to flick to some of the slides on behavior crypto market? And then, I can talk to what does that mean for the type of systems. Would that work?

Andrew Swanscott:

Sounds good. Yeah. Let me put this on my screen. Here we go. Yep.

Adrian Reid:

So this is a chart of Bitcoin over the last several years. First thing to notice is that the bull markets are very fast and sharp. They don’t last that long, but they are [inaudible 00:21:56] and the market really skyrockets. But after the bull market is finished, there’s typically a very sharp correction and a long period of nothing, which is very painful if you’ve got the wrong style of system. And then, all of a sudden, there’s a new bull market and it rockets up. And then, the same thing again. More pain. So you’re seeing this cycle play out three times on this chart alone.

Adrian Reid:

And so, I think the first thing is my preference is not to be always in the market. If I had, let’s say, the stomach to sit through the 90% drawdowns, then find always in the market might work, but that’s just not me. I’m just not interested. So I want a system that will get me in when the market is moving, but then be very quick to stand aside. So think very carefully about the market regimes that you trade in and when you stand aside. And one of the mistakes that many, many traders make in this space right now, again, because there’s so many new traders coming into the market, is they’re keen to trade all the time. Whereas my approach is patience is what makes you the money. You got to wait for the right conditions. You got to wait for the signal. And so, in my system development, what I’m doing is filtering out a lot of the market phases that I’m just not interested in sitting through. So that’s the first observation. Let’s go to the second slide.

Andrew Swanscott:

Second slide, there we go.

Adrian Reid:

Okay. So the next consideration here is the declines are really sharp and sudden. So from an all-time high, you can go a straight into a 50% decline that happens over the space of just a couple of weeks or less. So the key here is you want your systems to be fairly nimble. Okay? So we’re not going to use ultra-wide trailing stops and trend follow like you might in stocks and get really great returns in stocks, because it just won’t work here. You’ve got to get out more quickly. So, yes, trend following works, momentum works, but you need to have some cleverness in the way you that you exit because the market does turn around pretty sharply. And you’ve got to be careful of the [inaudible 00:24:04] when the market’s in a consolidation range. So a lot of people will [inaudible 00:24:09] bottom. A lot of people will say, “Oh, it’s over. We’re making money again.” But really, it’s just a big rally in a sideways market. So it’s easy to get tripped up by that. Let’s go to the next one.

Adrian Reid:

This is just an illustration of the pump-and-dump style move. And I think everyone knows what the term pump-and-dump means, but in this space, it’s phenomenal how often it happens. And so, out of nowhere, people can start pushing a token and it rallies. You see here on the left, an example of a 500% rally. And on the right, almost similarly big one. And this skyrockets, and then disappears to nothing. Now, if you get on these early enough and you have a profit take in the market, then you can actually make a huge amount of money very, very quickly with this style of move. So you don’t need to be fearful of the pump-and-dump. You just need to be nimble.

Adrian Reid:

And so, I’ll buy on a lot of the systems are entering on breakouts, and I know you love breakouts. But if you have a profit target in the market to get you out and be willing to get out before it really looks like the high is in, then you can make a lot of money from moves like this. So you can either sit through the drawdown and go, “Okay. Well, that was a pump. It wasn’t a trend,” or you can actually set the exit so that you can profit from these and increase your capital as they come along. You’re not going to know the difference in many cases in real time. So you want to combine the concept of momentum breakouts with exiting on strength at times, and also a nimble exit if strength collapses.

Andrew Swanscott:

Yeah.

Adrian Reid:

And then, let’s go to the next one. So one of the interesting things is because of the amount of social chatter [inaudible 00:26:06] and social interactions going on in this market, there are very short-term hype events and short-term fear events as well. And so, what you can see on the charts is really big upper, and also lower weeks on the candles. And so, I don’t use, for instance, in-market stop-losses on this because the lower weeks are very big and, very frequently, they just get hit and it bounces straight back up. So I’ll use a slower exit to cut my losses. I still cut my losses, but I’ll wait for the market close… Well, the tick over of the daily bar and exit then rather than exiting on a stop-loss in the market, because it’s just too often do your stops just get hit.

Adrian Reid:

But the opposite’s actually true of your profit target, because you’ve got these massive upper weeks, assuming you’re trading along, if you’ve got a profit target in the market, then every so often you can blink and you’ve got a 250% profit on a trade and say, “Oh, profit target got hit. Okay. But now, it’s way back down there. Okay.” But it happens. And it happens over and over again. So a system that takes advantage of that move is quite powerful as well.

Adrian Reid:

Probably, the last one, let’s just look at the last slide here. There’s a huge amount of hype, like I’ve said a few times, and new initial coin offerings coming all of the time. There was a big boom in this back in 2017, which I missed. I wasn’t in the crypto market back then. But here’s the danger of the hype and also of buy and hold. If you found the next big thing and you bought it, expecting it to go to the moon, you might get some initial excitement, but most of the projects have really no future. And so, the token would just disappear, [inaudible 00:28:00] away to nothing. And so, if you bought that, at the left-hand side of the chart, expecting to make millions, then on the right-hand side of the chart, several years later, you’re left holding this dud and wondering what happened. So, again, buy and hold is not so great. You want to get out when it’s clear there’s no more momentum in that market.

Andrew Swanscott:

Yeah. So let me just switch the slide off. So most of your strategies are really momentum-based. Is that what you’re saying? Is that-

Adrian Reid:

Look, momentum works really, really well. So, yes, I have momentum strategies. But I’ve also got rotation strategies, rotational momentum that works, not always in the market, mind you. So rotational with a regime filter, and I’ve also got mean revision systems that work. So, basically, what I’ve found is that, because it’s such a new market, because it’s still so emotionally-driven, a lot of the concepts that have always worked in stocks and maybe might be eroding a little bit now because there’s so much smart money, and high frequency, and so on, a lot of those strategies can be adapted for crypto really, really well. And that’s basically what I’ve done in the program I put together with a partner. I worked with a partner, [Adam Feldman 00:29:16], on the Crypto Success System. And we built some systems specifically to take into account all of those nuances of the crypto market. And what that allowed us to do is have a really big, broad, diversified portfolio. And we’re on the verge of fully automating the portfolio-based approach as well, which is pretty exciting.

Andrew Swanscott:

Yeah. Yeah. So it sounds like, from your examples there, that it’s very important to consider the top-of-market environment or the regime. And there’s a question here, actually, in the chat, I might just put this one up here, from Simba. Here we go. Simba would like to know, “Hey Adrian. Have you had much luck with developing a regime indicator? Do you just tend to use Bitcoin as a bellweather for the market?”

Adrian Reid:

Yeah. Look, I do use Bitcoin as the regime filter. There are other ways you could do it. There’s other indices. But to be honest, Bitcoin dominates so much of the market cap of the entire market right now. Not all of it, but a lot of it. That really has been a great… as a regime filter so far. Now, for exactly what indicators to use as the regime filter, that’s something you’re going to have to test. What I’m going to suggest is we don’t have a lot of data. I think we said four bull and bear cycles that we’ve got meaningfully in our data right now, something like that, depending on how you define bull and bear.

Adrian Reid:

And so, you’ve got to be really careful with your regime filter, not to curve-fit the regime filter, which is a big trap, right? Because let’s say you have a regime filter that turns your system on and off four times. And it works amazing. And you optimize that regime filter and you get this really great-looking equity curve, and you think, “Oh, I’m cool because I’ve got 500 trades in my database, and this regime filter really makes it amazing.” Actually, no, you’re in real trouble here. Because you’ve optimized something [inaudible 00:31:20] basically for data points for on-offs, which is a real big mistake.

Adrian Reid:

So for the regime filter, the important thing is to make sure that the regime filter works very broadly, no matter what the settings. And this is what I was talking about earlier, the stability of the system. We’ve got to make sure that we are not curve-fitting. And maybe you have one system with a regime filter of X, and you have another system with a regime filter setting of Y, intentionally. Not because X or Y is better, but because you want to build in that diversification, because we don’t really have enough bull/bear cycles yet to properly tune a regime filter.

Andrew Swanscott:

Yep. Yeah. That’s an excellent point. We’ve got a question here from AW, which is two questions in one. First of all, is your crypto approach even applicable to the future’s market considering it’s a one-or-none contract? And I guess maybe the second part is about holding overnight or over the weekend. So what do you say about that? Does it apply to the futures markets?

Adrian Reid:

Yes. I mean, first of all, I don’t trade futures. I trade stocks and crypto. So I’m not sure that my comments are going to be that relevant. But I would say anywhere where you’re trading a single instrument and struggling for diversification, the portfolio approach can really help. The challenge in the futures markets is a lot of the contracts are really big. And so, unless you’ve got a decent-sized portfolio, it’s hard to trade a portfolio system. I mean, to meaningfully trend following futures with a broadly diversified portfolio, that’s tough. I mean, getting easier with the micro contracts and so on.

Adrian Reid:

So I would say it’s more applicable to crypto. And the reason is the minimum trade size is basically there is no minimum. And so, even if you’ve got a small portfolio, a couple hundred, a couple of thousand bucks, you can still get a really good diversified portfolio using a portfolio system in crypto that you just can’t do in other markets. And so, this is why when someone says to me now, “I’ve got $500, I’ve got $1,000, I’ve got $2,000. What market should I start in?” Well, the answer is crypto. Because the opportunity is the best. The systems have the most amazing edges and the diversification potential for a small account is phenomenal. And so, that’s why it’s so exciting for a new trader, if you are systematic.

Andrew Swanscott:

Yeah. You’re touching a little bit on risk there, which is one of the hot topics for traders when they talk about cryptos, the risk and the volatility. And so, I mean, you just spoke a little bit about having the opportunity to take very small position sizes, but how do you think traders should look at risk and volatility in the crypto space?

Adrian Reid:

Good question. Thank you. There’s a couple of parts to it. There’s catastrophic risk, and there’s system risk, and then there’s position risk. So we’ll need to cover each of those individually, if that’s okay.

Andrew Swanscott:

Yep.

Adrian Reid:

So, catastrophic risk. You can’t deny that the regulation in this space is evolving rapidly, if I can get my words right. And so, what you can trade in one country from one week, to one month, to the next can change. And also, the future of particular tokens or parts of the market can change over time. So you want to be really cognizant that you might need to be nimble with your strategy, your portfolio, and get out if the market turns down. It’s an immature market, so there’s a lot of market shock potential. We’ve seen some very sudden declines. And so, you want to think pretty carefully about your risk profile and your catastrophic risk tolerance. For me, if I think about my whole portfolio, no matter what happens, any conceivable event that I can dream up, I want to be able to trade the next day and still support my family. That’s my threshold of what catastrophic risk I’m willing to tolerate.

Adrian Reid:

Now, what that means is when I think about something like crypto, I’m not putting all of my assets in that, however tempting it is. However amazing the returns are in the systems I’m developing, they’re just a part of the portfolio. And I think that’s important because people see the dollar signs and just go all in. And particularly, a new trader with very little experience, that’s really dangerous. And then, you combine that with a 10, 50 times leverage that the exchanges seem to want to give you, and, instantly, people are just blowing up. So catastrophic risk is huge.

Adrian Reid:

You also want to think about the exchange risk. So I wouldn’t put all my money on one exchange. I am trading actively. So I can’t use cold storage because I’m in and out of the positions fairly quickly, and that’s a bit cumbersome. But in order to protect myself a little bit there, what I’m doing is I’m using multiple exchanges. On the exchanges that offer leverage, I’m putting some of my assets on there and using leverage and keeping some of the cash separate out of the market. So that’s to make catastrophic risk protection.

Adrian Reid:

The second part of the risk management is the systematic risk. The risk of your systems failing. And this is important because the market’s evolving rapidly. And we’re seeing new participants entering. There’s ETFs coming, and there’s broader and broader acceptance. And so, the nature of this market may change over time. Well, it will change. How quickly, [inaudible 00:37:10] yet to be seen. But you want to know that you have a broad portfolio of systems, so that if one of them fails, you can close it and keep trading with the others and monitor those pretty closely. So backtesting weekly and evaluating, “Okay, are the stats doing what they’re supposed to be doing? Is this behaving as I think it should, given the market conditions?” So I’m not trading one system. This morning, I ran six and I’m developing new systems all the time. And so, my goal is to keep building that portfolio of trading strategies so that when one fails, because the market dynamic shifted a little bit, it doesn’t actually matter that much. So, that’s system.

Adrian Reid:

And then, the last one is the individual position risk. You just can’t afford in this market to get married or fall in love with one position. People talk about, “Oh, this is going to change the world,” and, “This token is going to revolutionize everything.” And maybe it will. But trying to call it now is like going back to when the automobile was first invented and saying that it was going to be Ford and General Motors that survived. I mean, who knew? No one knew, but there was hundreds and hundreds of car companies. And the same, again, with aircraft, when the aerospace industry took off. Same thing. Massive proliferation of people trying to crack it and change the world. And then, same again with the dot-com. And most of those aren’t here now either.

Adrian Reid:

So the same, and probably more so in the crypto space, is we just don’t know which ones are going to succeed. And so, if you buy one and heavily concentrate your portfolio with a couple of tokens, and they happen to be the ones that change the world, congratulations, you’re probably going to be a billionaire. But you’ve got to think, what if I don’t? What if I don’t pick the right ones? What if the five that I pick are the duds and I end up with nothing?

Adrian Reid:

My approach to trading is I want maximum probability of a certain outcome, not maximum profit potential with a small probability. Yeah. I’m much more interested in a degree of certainty about what results I get. So therefore, a portfolio of systems trading a portfolio of instruments with a very low reliance on any you one ticker is what gets you there.

Andrew Swanscott:

Right. Yeah. And I guess as well that you’re talking about which cryptos to trade, I don’t know the exact number for today. It’s changing all the time. Right? Cryptos are coming and going.

Adrian Reid:

[inaudible 00:39:52] thousands and thousands that you could.

Andrew Swanscott:

Yeah. So do you have some filter to say which ones you would even consider? How do you manage that?

Adrian Reid:

A lot of that is built into the design of the strategy, the system that you’re trading. Right? And so, you need to look at the charts and the exchanges, and look at the spreads and the volatility of the tokens, and create rules to get rid of the garbage. Because, I mean, it’s the typical trap. Let’s say you backtest a system with no commissions and no liquidity filter, and you can design an amazing system. Looks fantastic. And you think you’re going to be rich next week. But the reality is the spread, and the slippage, and the commissions are going to kill you. So instead, design a system with strict criteria for how liquid the tokens are and just ignore everything else. Yeah, there’s going to be a bit of FOMO, “Oh, I didn’t get into that [inaudible 00:40:57] for the cent token that went to [inaudible 00:41:02] for the cent,” and got rich. You’re going to miss that. But it’s okay because you’ve got a higher level of certainty that the outcome will be good long term.

Andrew Swanscott:

Yeah. Yep. Speaking of liquidity, I guess one of the unique features of the crypto market is that it’s 24/7. So do you find that you need to consider liquidity on the weekends or out of popular times of the day, that type of thing? Is that a factor?

Adrian Reid:

Look, it definitely will be the bigger and bigger the account gets. I mean, I’m not trading tens of millions of dollars in crypto because it’s a small part of my portfolio. So I’m finding that with a decent-sized portfolio, you can get in and out any day of the week, without too much trouble, provided you’ve got the right liquidity requirement on the tokens you’re trading. Right? And that’s all built into the system. So, for me, it has to trade many millions of dollars a day worth in order to make the cut. And so, you can usually get in and out, and because I’m so diversified and the positions are so small, it’s pretty straightforward. If you were trying to move a whole portfolio in and out, then, yeah, that’s going to be a problem. There’s some interesting price behavior that’s a little different on the weekend, which I haven’t yet developed systems around. But not something that, really, you need to worry about as a showstopper getting into the market.

Andrew Swanscott:

Yep. Okay. A little bit more on risk here before we move on. There’s a question in the chat from a Asindu about handling risk. Do you follow it a market-neutral approach or stop-loss?

Adrian Reid:

Look, I’m definitely not market-neutral. I’m [inaudible 00:42:48] So if the market [inaudible 00:42:51] my portfolio is going down, but I do have stops in all of my systems. But I also have price behavior-based exits or indicator exits as well. So depending on what the market behavior looks like, I’ll definitely get out to protect myself. But in every single system that I’ve developed in this space, there’s a stop-loss that it will basically get you out in the case of a disaster, if all else fails. And I think that’s the key. You don’t want to be left holding the bag. You don’t want to turn things into a long-term hold in this space.

Adrian Reid:

In stocks, again, you see it over and over again. People go, “Oh, I missed my exit,” or “I didn’t execute my stock.” Oh, don’t worry. I’ll just put this into my long-term portfolio. And in 10 years time, it’ll be okay. Maybe it’ll come back and I’ll get out break-even. In this space, so many of the tickers are going to go to zero that you just can’t afford to do that. So you need a fail-safe exit to get you out.

Andrew Swanscott:

Yep. Okay. Thanks, Adrian. Another question in the chat here from AW. What are you using to trade such a wide basket of exotic cryptos or exotic [inaudible 00:44:04]?

Adrian Reid:

Look, I don’t want to give the impression I’m trading this massive, massive universe. I’m trading on Binance and FTX, right? So they’ve both got a pretty broad range in the vicinity of several hundreds, but not thousands, right? The trouble with the more decentralized markets where you’re going to get all the really exotic things is that the depth is low, the commissions or the spreads are going to be high, and it’s going to be pretty hard to make good money repeatably in that space. I’m not adverse to developing systems in that area, just like I’m not adverse to trading penny stocks. But think about it, the same thing. I’m not going to put all my stock money into penny stocks. I’m not going to put all of my crypto money into really exotic off-exchange tokens. But right now, what I’m doing is I’m trading fairly high-volume tokens on Binance and FTX, which gives you more than enough diversification, because between them, there’s many hundreds of tokens you can trade.

Andrew Swanscott:

Yeah. Okay. Thank you. Oh, we’ve got a comment here from [Tab John 00:45:12] from Poland. It’s 2:00 AM when you posted that. So, thanks for the commitment, [Tab John 00:45:17]. Well done. If there was a prize, you’d win it. But, okay. Here’s a question about intraday. I know you mentioned that you only trade daily and weekly. Have you actually looked at intraday?

Adrian Reid:

I have not. So, look. Strong hypothesis is that, yeah, absolutely, a systematic approach would work intraday. The trouble is the platform. The ecosystem, I don’t think is really up to trading a portfolio approach intraday just yet. I mean, probably, with a little bit a work and a stretch, I could use the current platform that we’re on, AmiBroker-based systems, with a live data feed running intraday. Possible. But when your systems backtest in the triple-digit annual return space with drawdown of 20%, 30%, 40%, I don’t really feel the need to trade more frequently, to be honest. I mean, maybe you could make more money. But it’s not really my thing. I’ve never been an ultra short-term trader.

Andrew Swanscott:

Okay.

Adrian Reid:

But don’t dismiss it. If you’re into it, definitely look into a portfolio-based approach to trading systems intraday. I think it could work.

Andrew Swanscott:

Yep. All right. We’ve got a question here from Jeff, and then we’ll start wrapping up soon. Let me just put this one up on the screen. Turtle system’s worked for many years for markets that trended and in markets without much history. What are your thoughts on using turtle system on crypto?

Adrian Reid:

Yeah, good question. Look. Whenever I had a student who asked me a question like, “Oh, what do you think of this rule or this system?” My answer is always the same. It’s backtest it and see. And, look, I’ve backtested breakout systems like the turtle, not the turtle system per se, but breakout systems like that, and there’s definitely some potential. But because of the nuance of the way crypto moves, you can achieve a lot more by taking into account those nuances and tailoring the entry and exit rules around that. So, yes, start there, but also look at all of the systems that you’ve got in other markets and apply them to the crypto market and see how they do. Actually, it’s probably a good time for one last slide, Andrew, if we’ve got time. Just this morning, I was mucking around in preparation for this session. And I took one of my existing stock systems. That’s slide seven there, if you’ve got it, Andrew.

Andrew Swanscott:

Yeah.

Adrian Reid:

I took one of my existing stock systems, unmodified, and I just took out a couple of components of the system that were not relevant to crypto, and I applied it to my data set and backtested it. It’s like, “Oh, I didn’t reoptimize it. I didn’t change the rules. I didn’t change the structure. And to be honest, it’s amazing.” And this takes into account slippage and commissions, and it takes into account liquidity requirements. So it’s got a several-million-dollar-a-day turnover filter. So actually quite tradable. Is it the best system that we’ve got? Absolutely not. I’ve got way better systems than this that I trade myself in, that are in the program. But the point is if you’ve got systems in other markets, take them and apply it and test it, and see what’s working and what’s not, and then work with that. You don’t need to reinvent the wheel here, which is the great thing.

Andrew Swanscott:

Yeah. Well, we’ve actually got a good question here from Simon to dig a bit deeper into that comment you just made. What are the most significant things you have had to change in your approach to system building as you adapted from stocks to crypto?

Adrian Reid:

Yeah. Good question, Simon. Nicely done. Look. The first one is that the markets turn around very quickly, particularly at tops. So I’m much more nimble in my crypto systems than I am in my stock systems. In the stock systems, I’m typically a long-term trend follower, and I give them a lot of room to move. But in crypto, you want to be much more nimble and exit much more quickly.

Adrian Reid:

Second thing is the timeframes are massively compressed compared to most other markets. So the bull/bear cycles happen more quickly. So your system settings will typically be shorter-term than they would be in stocks or in other markets. I mean, take, for example, a breakout system in the stock market, you could very easily trade profitably with a 200-day breakout. But in crypto, 200 days is a very long time. So maybe looking at 20 or 40 days, or 50 days, maybe at the outside. So shorten them up.

Adrian Reid:

And then, take into account the price behavior of the weeks and the pump-and-dump nature of the markets. If you take all of those things into account with your rules, you can do a lot better. So that’s why I said earlier, I don’t use in-market stops because they just get hit too often. And profit targets in the market can be very, very profitable if you know where to set them. And long-term systems that bank on big trends going forever are probably not as good as nimble systems in this market.

Andrew Swanscott:

Okay. Thanks, Adrian. We’ve got a question here from Christopher on statistical edges. Is it a bad idea to use historical data before mid 2016, since futures and perpetual swaps changed the nature of the market around that time?

Adrian Reid:

Yeah. Look, it’s a good question. And I think you’re right. That’s risky. And what’s interesting, the bulk of the data that’s available is post that period anyway. And the futures and perpetual swaps are in a small part of the market. It’s not like you have those contracts on every token. So I think you want to take it into account. I would be very suspicious of a system that performed astronomically well in, say, 2016, 2017, that has since died or has since been lackluster. Don’t trade a system like that expecting to have another cycle like you did back then, because the market has moved on. Pardon me. But there’s still huge opportunity. And I’ve backtested systems where it did work very well in those bull markets back then, but it still works well in the last couple of cycles, showing that it’s not a showstopper. The market dynamic or structure hasn’t changed that much. So it still works.

Andrew Swanscott:

Yep. Okay. Thanks for that one, Adrian. Let’s take [inaudible 00:51:52] question from Mike. And before we start finishing up for today, so it’s from Mike. Are your systems robust or simple with few parameters?

Adrian Reid:

Yeah, absolutely. They have to be because we don’t have a lot of data. Instead of simple, I’m going to use the word elegant. Okay? Because you’ve got to be careful here between a simple system, which is simplistic, moving average crossovers, simple system channel breakouts, that sort of thing. Simplistic. And elegant, where there’s a bit of nuance to take into account the way the market moves.

Adrian Reid:

So, yes, they’re simple, but they’re elegant in that they’ll adapt to the way that the crypto market moves and profit from that. Few parameters, and the critical thing is when you’re developing the systems, you’re not optimizing to get the optimum result. You run your optimization to check that the system performs well, pretty much no matter what value you choose. Because we don’t have a lot of data, you’ve got to make sure the system is really, really robust to the parameter settings. So if I have a system that works with a setting of 50, but it doesn’t work with 60 or 40, then it’s going in the bin. But if it works with a setting of anywhere from 20, 30, 40, 50, 60, 70, 80, then maybe it gets a look at. That’s really, really important just because of the data problem.

Andrew Swanscott:

Yep. Okay. We’ve got a question here from Tim. I think we’ll finish up on this one. This is a good question. “Adrian, can you outline your system development environment and execution workflow? How do you code and do you manually auto-trade these systems?”

Adrian Reid:

Okay. Yeah. Look, there’s a lot in that. Okay? So the environment, I’m using data from Brave New Coin. I’m using AmiBroker to backtest the portfolio systems. The whole development process, we don’t have time to go into here. But, basically, it starts with a hypothesis concept based on observation of the market. So I’m looking at market behavior saying, “Okay, I’m seeing this type of behavior over and over again. What type of system would capture that?” And then, I’m developing the system based on that hypothesis to see if I can build something profitable out of it.

Adrian Reid:

So execution-wise, what I’m doing is when the daily bar ticks over, I’m updating the data and I’m running the system immediately, and I’m placing the orders. Right now, I’m doing that full order. But that’s only new this week, right? So up until last week, I was trading these manually. So you update the data, it takes a couple of minutes to pull down the entire data set, import that into AmiBroker, run the backtest to generate the buy and sell signals, and then go to the exchange straightaway and place those orders. So that whole process takes just a couple of minutes. The rate-limiting step is the data download, which, now, we’ve got down to just a minute and a bit. So that’s quite good. The market doesn’t move that much in that time. So we’re getting really close to the opening price, which is what the backtest assumes.

Adrian Reid:

Now, I’m trading now on full-auto. There’s still a few bugs we are working through. But from start to finish, on full-auto, it’s taking about two minutes to run six systems and across trend following, momentum rotation, mean reversion, across a portfolio, the entire universe, that Binance trades. So it’s really quite quick and pretty exciting that you can do all of that on automatic.

Andrew Swanscott:

Yep. Okay. Thanks for sharing that. So there’s a few more questions in the chat, but we’re just about out of time. So how can people get in touch with you if they have more questions?

Adrian Reid:

Yeah. Great. So there’s a couple of things. First one is I’ve put together a little package for people to benefit from what I’ve learned in the crypto market. The first one is I’ve put together a crypto acceleration bundle, which is the 20 killer crypto trading mistakes, a couple of articles, and a course to get your mind right about how to approach trading. So you can get that at go.enlightenedstocktrading.com/crypto. You can also just go to my website, enlightenedstocktrading.com, or email, [email protected] Love to hear from any of the listeners.

Andrew Swanscott:

Yeah. Okay. Well, thank you very much for preparing that for the listeners today. It’s much appreciated. So is there anything else that you wanted to mention before we wrap up? Because I know you’ve shared a lot of stuff. Is there a way you can summarize that in 30 seconds to a minute?

Adrian Reid:

Yeah. Look, the big thing is just because the market is new, you don’t have to throw your long, hard-earned discipline out the window. Okay? A systematic approach works and it eliminates the emotion. Now, the challenge is, in crypto, the volatility of the market is bigger than pretty much anything else. You can blink and something has moved 40%, 50%, 60%, 100%. And so, with that, comes emotional fluctuation, which is why you need a systematic approach, which is why I think this is so important, because most people will blow up due to their emotions. Adopt a set of portfolio systems like this, reduce your risk, trade many small positions, and you’ll be right.

Andrew Swanscott:

Yep. Okay. Well said. That’s an excellent way to finish up today. So thank you very much, Adrian, sharing with us all your knowledge and insights on crypto. It was great chatting to you. And thank you, everyone, who participated today. Thanks for joining us. We had a lot of great questions in the chat. So thank you very much. And don’t forget to hit the thumbs up on this video, and hit subscribe and the bell icon so that you’re notified every time we share some new information. So thanks again, everyone, for joining us today. We’ve got a couple of thanks in the chat as well. So, excellent work. Cheers, Adrian.

Adrian Reid:

Thanks so much, Andrew. And, everyone, please do like and share the video, and also the Better System Trader podcast. Andrew puts in such a lot of work to bring this to you guys. So please support it and make sure you tell your friends about it.

Andrew Swanscott:

Excellent. Thank you very much for that little plug too, Adrian. I appreciate it.

Adrian Reid:

Thanks, Andrew.

Andrew Swanscott:

All right. Take care. Thank you very much. Cheers.

Adrian Reid:

Bye.

Andrew Swanscott:

Bye.