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387: Making A Living Trading For 20+ Years – Adrian Reid

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Transcript of Adrian Reid’s Interview On The Desire To Trade podcast…

387- Making A Living Trading For 20+ Years – Adrian Reid

Etienne Crete:

Welcome to the Desire to Trade Podcast, the podcast helping you develop for training skills for more freedom. I’m your host, Etienne Crete. Let’s get started right away.

Welcome back. Today, I’m sitting down with Adrian Reid from Enlighted Stock Trading, who’s been a trader with over 20 years of experience. Looking forward to talking with him about systematic trading, things he’s doing right now to kind of trade different assets, stocks, cryptos and other markets with his strategies and his portfolio. So Adrian, welcome to the podcast. How’s it going today?

Adrian Reid:

Thanks so much for having me. Super excited to be here.

Etienne Crete:

Good that you’re here. Of course, there’s a lot we can discuss here with systematic trading and a lot people want to get into that more. But let’s go back in time and kind of tell us how you began trading. What was the first experience that you had with trading, and how did that sort of turn out?

Adrian Reid:

Yeah, good. Look, my very first experience of trading in stocks was way back. I was about eight years old and we had a board game at my family holiday house called The Stock Market Game. And I remember as an eight-year-old going around the board and prices were going up and down and buying and selling and getting dividends and becoming a billionaire. And I thought that was the best thing ever. So it was my first sort of introduction to trading, if you like. But fast forward a few years, I just graduated university, just got into the workforce and it took me about three and a half minutes to realize that I didn’t want to work for the rest of my life. And so I started looking around for things to do, to invest, to get ahead and I started learning about the stock market, about property, about my own businesses and all of these things.

And the thing that really resonated with me was the stock market because I liked the analytical sort of numbers, nature of it. I liked the dynamics of things going up and down and you could buy and sell and have rules. So I just threw myself into learning about that and spent three years basically fumbling around, like most people do, trying lots of different methods that didn’t work, losing a little bit of money, not a lot of money, but losing a little bit. And then I started reading books when I realized that I wasn’t smart… Not that I wasn’t smart enough to figure it out, but it wasn’t just an obvious thing that you could just start trading and make money. So I started reading books and I came across systematic trading after reading maybe 20 or 30, 40 books. I was captivated. I threw myself into systematic trading, read another couple 100 books on that, threw myself into it, took three months off work, developed my first system and started trading. So that’s my sort of backstory, I guess, in a couple of minutes if that helps.

Etienne Crete:

That’s interesting because systematic trading is something people don’t come across through the first time. It’s something that comes later in your journey, sometimes. People want to pick the trades, they want to be able to make their own way up by predicting the market in the beginning. So for you to both come across that, I’m sure that took a lot of time. How was it like to go from having no plan to just kind of [inaudible 00:02:50] by yourself to then going to systematic and having some processes in place? Was it easy to follow them or was it difficult?

Adrian Reid:

I’m a pretty risk adverse person and at the beginning of my trading I always started off with risk management rules. So even from the very beginning I was like, “Okay, only this much risk per trade, every single trade.” And so I had some discipline right from the beginning. What I didn’t have at the beginning was rules that I followed in terms of what was the entry and what was the exit. And I was probably also a little bit too aggressive on my position size, but not so much that I was at risk of blowing up. So the transition to systematic trading, for me, it was actually a huge breath of fresh air. Because like you said, people at the beginning of their trading journey, they liked to, and I was the same, like to try and outsmart the market, try and predict what’s going to happen, try and choose the stock that’s going to rocket to the moon.

That’s all ego. It’s all ego-driven. And that was taking me a long time. I was spending 3, 4, 5 hours a night after work, after my full-time job, to try and find all my trades and look at the charts and analyze and set my entry and exit levels and all of that. It was taking hours. And when I moved to systematic trading, all of a sudden it was taking 20 to 30 minutes and for me that was like, “Whoa, this is heaven.” And so I loved it and all of a sudden trading just became easy and natural because it became almost a button pressing exercise. You download the data, you run the rules, you find the entries, you place the trades, you close the computer and that’s it. So for me, that was just perfect because I was super busy. I traveled a lot for work and I needed something simple and easy. So as soon as I found it, it was easy to follow.

Etienne Crete:

How about the area of finding the strategies, finding what to trade exactly? Was that hard or was this easy from the books you’ve read, what you’ve come across back then?

Adrian Reid:

Yeah, no, I think finding the strategies is tough. And the problem is… Well, the problem I found was that I read a lot of books with a lot of different strategies and I just couldn’t relate to some of them. Some of them just didn’t feel natural, they didn’t fit my personality. I read a lot of books from US stock traders because 20 odd years ago when I was really doing a lot of this research, that was where a lot of the books came from and I was sitting in Australia looking at the Australian stock market. And I took some of these techniques, it’s like, it doesn’t work. It was very frustrating. So it took me a long time to figure out that A), the markets are a little bit different each market, and B), I needed a method that fit me. Because even if the method worked, I felt uncomfortable and unnatural following it sometimes.

And so I figured out that it needed to match my personality because I’m a fairly… I don’t like a lot of fast-paced action. I like to make decisions sort of slowly and methodically. I didn’t want to trade 20 times a day, I didn’t want to have to be looking at the screen during the day because I had had a full-time job. So these lifestyle and personality constraints that I had to figure out. And my objectives were really about making money, not spending time staring at the market. So it took me a while to zero in on the right strategy to develop a system around, and eventually I found trend following. And again, as soon as I found it, it was like, “Oh, that’s what I’ve been looking for.” And I developed a trend following system after reading a bunch of books about it and started trading it.

It was like, “Oh, this is easy.” It just felt natural. But I know other traders who look at trend following and think, “God, that’s an awful strategy. You got to wait so long to take profits and there’s nothing to do, there’s so few trades.” So for some people, trend following is great. For other people, mean reversion is great or something in between. Some people like daily charts, some people like intraday, some people like weekly or monthly. So I had to find where I was really best placed for my personality, my objectives, my lifestyle. And once I’d found that, then it became sort of natural, I guess.

Etienne Crete:

I think it’s a big realization for people to have is that they cannot just copy someone else’s system online. They have to create their own or at least take parts of different places and kind of make it their own to trade well. That took me many years to do and probably you the same. Once you get there and you kind of work on that, then that makes things a lot easier.

Adrian Reid:

Yeah, absolutely. I love what you said, make it your own. Because a lot of people will… I have a bunch of trading students that I mentor, and many who come into the markets insistent that they have to develop their own strategy from the very beginning, from scratch. And I was like that, I believe that at the start. But I think a much faster way for new traders or traders who are not yet profitable to become consistent is to take a strategy from somewhere else that works and then make it your own. You don’t have to create the whole thing from the beginning, but you’ve got to test it and evaluate it and interrogate it and learn it and watch it and paper trade it and backtest it and make it yours. And then once it’s fully yours, then you can trade it.

Etienne Crete:

What do you think makes a good system? Is it just the results when you backtest or is it more something of the sort of how do you validate the raw business of the system? What is going to work long term or what you can actually trade it well or not in the market?

Adrian Reid:

Yeah, good question. Look, there’s a lot to that, like what makes a good system. There’s a couple of things. First of all, I would say on the psychology side, it has to fit the trader. I’ve got some systems that I wouldn’t trade myself because it just doesn’t resonate with me, doesn’t suit my style, at least if you’re trading manually. If you are fully automated, which is a direction I’m moving in, we can talk about that later, then it makes less difference whether you can pull the trigger every single time, psychologically. It makes more difference whether you’re happy to just let the strategy run. But in the first instance, the strategy needs to fit you. You’ve got to be comfortable, you’ve got to understand it and relate to the strategy and it’s got to fit your lifestyle and your personality. I think that’s the first thing.

Second thing, it’s got to be profitable. So when you run a backtest, it has to be profitable. You’d be surprised how many people have come to me and said, “Oh, can you help me learn to backtest so I can prove that my strategy is amazing so my wife or my husband will let me trade more money?”, or whatever it is. And we get the strategy and we backtest it and it doesn’t work and it’s not profitable, because they’ve just believed the hype in some trading book that this indicator and that indicator and this signal and that signal work. But most strategies don’t work very well. So you’ve backtest it.

Third thing is it’s got to be robust. And again, I love that you used that word because that’s really, really important. For me, a robust strategy is one that works over a broad range of market conditions over a broad range of parameter values and preferably over a broad range of markets. So I won’t develop a system that works on Apple stock from either 2022. I’ll develop a system that works on the entire US stock market from 1990 to 2023. And it doesn’t just work with a moving average of value of 200. It works with 100, 150, 200, 250, 300. It’s got to work over a broad range of perimeter values over a broad range of market conditions. And if it does and it makes money under all of those conditions, then maybe in the future you’ve got a pretty good chance of making money in real time. Does that make sense?

Etienne Crete:

Yeah, so that’s a very good point. It’s not just about the indicator, the tool, the values of it. It’s more about the logic behind the market and why that strategy works based on the market movements. I like that, definitely.

Adrian Reid:

Yeah, absolutely. Look, I think also a good strategy. You have to start with one good strategy because usually you start with one, but sticking with only one strategy, I believe, is dangerous long-term because no strategy works all the time. If you’re trend following on the long side in stocks, you make really great money in a bull market. But when it turns into a bear market, it starts going down, you’re going to have some give back, you’re going to have some drawdown, then you’re going to go to cash and your equity curve is going to be sideways and you’re going to wait and you’re going to have to have a lot of patience and wait and wait until the market turns around and then you can start making money again when the next bull market comes, which is fine.

I did that for a long time. I traded seven years long only stocks with trend following right at the beginning. But if you can add… Short side, if you can add mean reversion, if you can add a few different markets, then that’s when the magic really starts to happen because you can make money in more different conditions and more consistently.

Etienne Crete:

How do you make the distinction between a good enough strategy when you backtest it compared to something you might expect to be perfect? Because a lot of people when they backtest they expect to see a positive good curve go up and up and up over time without any big drawdown, but in reality that’s rarely going to happen. So you got to have a backtest that’s going to be somewhat kind of choppy a little bit, and you got to be able to know what’s good enough for you straight. How do you recognize that?

Adrian Reid:

Yeah, that’s a really, really insightful point because good enough is way better than perfect. And the more perfect you try and make it, the worse the performance is going to be in real time, generally, because a perfect backtest is only the result of curving over optimization, too many filters, too much complexity and it falls apart. So when I’m working with my students and when I’m thinking about my own trading, what I want to do is I want to look at the strategy in the context of my portfolio. So if I’ve got 10 different systems, I want to be thinking about, “Okay, does this new system in its current form add something to the portfolio? Does it add some diversification?”

And if it makes money the way my other strategies don’t and it has a drawdown when my other strategies are making money, then that’s a really good addition and it’s probably good enough in its current form to just put into the portfolio. But if it’s highly correlated to everything else in my portfolio, then it’s not good enough. It’s got to either be better than what’s in my portfolio to replace it or I throw it away because it’s not going to add any diversity to the portfolio. So I really want a good system, not an exceptional system, because an exceptional system is probably just curve fit, a good system that adds to the portfolio in the form of diversification.

Etienne Crete:

How do you deal with correlations when trading, especially stocks? I’m thinking non-cryptos as well, but whenever you could buy in, let’s say, on the same trend with different cryptos or different stocks that all end up going to the same place and stopping at the same time or going down at the same time, how do you avoid that?

Adrian Reid:

Yeah, common. Look, couple of different ways, different styles of systems within the portfolio helps create that diversification and address the correlation effects. So if you’ve got long side systems and short side systems and you combine them together into the portfolio, yes, the holdings in the long side system going to be correlated and they’re going to tend to move up and down together. And the holdings in the short side portfolio, the same thing. But the two non-correlated strategies, the equity curves of those strategies low and negatively correlated. So it’s a good combination in the portfolio. What I’m looking at is the equity curve of the strategies and I want to make each strategy have as good an equity curve as possible, but then I really want to combine multiple strategies with different equity curves so that I get the diversification benefit. The correlation of the individual stocks matters less then because it’s about the strategies and how they move in and out of the market.

Etienne Crete:

Interesting, interesting.

Adrian Reid:

Probably one more thing actually is the stocks within the US stock market tend to be correlated. Stocks within the Australian stock market are correlated. Stocks within the Hong Kong stock market are correlated, and those to some extent are correlated to each other, but not always. So if I only traded US stocks, I’d be in a much worse position than I am trading US and Australia and Hong Kong because the US market might be going up, but Hong Kong might be going down. So there’s also some good diversification you get from that, which reduces the impact of the fact that stocks are all internally correlated.

Etienne Crete:

Interesting. You mentioned something earlier which is that you are quite risk averse trader. Now, I’m curious to hear how you make trading work for that kind of risk averse personality because other people and myself included are that way also. We get into trading then we kind of maybe don’t understand from the start that we are risk averse. We tend to take a bit too much right on then feel bad about it or we tend to skip trades because we’re afraid to take trades or risks in the market. So how do you make that work being risk averse and trading at the same time?

Adrian Reid:

I guess it comes down to understanding what are you willing to tolerate? Now, what am I willing to tolerate? I’m willing to tolerate a drawdown up to 30%. Some might say that’s not too risk averse. That’s kind of very aggressive, but that’s my limit. But I have zero tolerance for blowing up. So under no circumstances am I willing to blow up my account and leave the game, because I want to be in the game favor and I need to be in the game to support myself and my family and so on. So I have an extreme risk aversion to blow up and I have probably a slightly higher tolerance for volatility in the account. So you got to first of all understand as a trade up, what are your tolerances? And so for everyone listening, it’s like first of all, okay, what’s your drawdown tolerance? How much money are you trading with? Can you afford to lose it? Are you willing to have any risk of ruin?

If you are, under what circumstances? For my trading, there could be World War III and an atomic bomb go off somewhere and I’m not going to go out the back door. I may not make a lot of money. I may have a big drawdown, but I’m still going to be able to trade another day because of the way I structure it. And once you understand your objectives, then it comes down to structuring a portfolio and risk management to meet those objectives. So for me, I don’t use much leverage, if any at all, just a little bit to allow me some flexibility in my trades. I risk a very small amount on each trade, so less than half a percent on each trade is what I would lose if I’m wrong, typically.

Depends a bit on the system because some systems want a slightly higher level of risk. Some systems want a slightly lower level of risk to sort of maximize their performance. But low leverage, very small risk portrayed, very broad portfolio of holdings. So I have low stock specific risk. I’m not willing to have 25% of my portfolio in one stock in case there’s a bad earnings announcement and it gaps down. Or in case the stock, I don’t know, Enron or something like that, there was some fraud and it blows up or it gets delisted, I want to avoid those sorts of situations. So very small positions, small risk and many different systems to spread the risk of market conditions away.

Etienne Crete:

How did you find that 30% versus based on trial and error, like having a drawdown then kind of seeing what it feels like? Or was it just based on thinking about it before?

Adrian Reid:

Look, to be honest, at the beginning I didn’t really think much about drawdown. What I thought about was how much am I willing to lose and still be able to pull the trigger to sell this stock if it goes against me? So I always had the idea of risk per trade and a stop loss. So that was low to begin with and then as I was trading, I was up and down 10% and it didn’t really worry me. But when I started sort of 15, 20 or a little bit more, I started to get a bit nervous. And then at about 25% I knew I was approaching my threshold. So it was probably experiential, I guess. Now, 20 years later, it’s much more, “Okay, what can I tolerate and still survive, still earn enough money to live, still build wealth for the future for my family?”

It comes down to a bit more of the mathematics because I’m much more comfortable with the fluctuations in the market in my account now. For my students, I get them to play a game to work out their drawdown tolerance. We do some sort of visualizations, we walk through what the market’s doing and how their account fluctuates and we just… It’s a sort of a guided walkthrough exercise and they document their feelings and emotions about it and we come up with a number and then we multiply that by about 0.75 or so to reduce it to give a margin of error and then that becomes the drawdown tolerance that we use to design the systems and the portfolio, if that makes sense.

Etienne Crete:

That’s a good idea. I’ve never heard that before. That’s a good way to figure it out, definitely. Or then kind of experiencing yourself then kind of finding out after. That’s a good one.

Adrian Reid:

What’s interesting is almost everyone overestimates their drawdown tolerance.

Etienne Crete:

Right, yes. Yeah.

Adrian Reid:

Which is why so many traders freak out, they stop taking their stop losses, they liquidate everything at the worst possible moments because of the stress and worry caused by drawdown.

Etienne Crete:

Interesting. So you’re coaching a lot of traders and I’ve seen that people when they hear about systematic training think that, “Oh, it’s just a system so you can just sit there, trade it, then everything’s going to be perfect from there on forward.” What are some mistakes people make? In [inaudible 00:20:18] people think they will just not go, plug it and play then that’s going to be done forever. What are some of the mistakes people make when they trade systems?

Adrian Reid:

Oh, there’s so many. I think a big one is believing that any trade system algo strategy will make you rich in the short term. It doesn’t matter how good a backtest looks, something can always go wrong. The market dynamics can change, the market microstructure can change, the level of volatility can increase and decrease. So, so many things can change. So I think when traders have a strategy and they’re blindly following it, they’re exposing themselves to breakage of the strategy. You want to monitor. So the mistake is not monitoring the performance of the strategy and the edge in the strategy. So you want to know is the strategy still performing? Is the edge stable and consistent? If you do a backtest and you see the equity curve kind of curving over, flattening out, getting more volatile, these are warning signs. If you see the average profit portrayed dipping or the win rate dipping, there’s a warning sign.

So the biggest thing is not monitoring. Second thing is putting too much pressure on the one strategy to make you rich. It’s like, “Oh, it’s a good strategy. Look how smooth the equity curve is.” I’ll go in with two times leverage, five times leverage, 10 times leverage in crypto or in other leveraged instruments and believing that nothing can go wrong because the backtest shows that nothing went wrong. But just because nothing went wrong in the past doesn’t mean nothing can go wrong in the future. So the mistake there is too much leverage and not realizing that the future is different to the past. And we want to make sure no matter what happens, as traders, we stay in the game, we have to stay in the game, otherwise if we blow up, we’re back to zero. We’ve wasted years, years. If we blow up our account and we have to save up another stake and then we have to start trading again, we have to build our confidence again and then we have to compound, then it’s soul destroying for your future self.

If you think 10 years from now and you never blew up and you just compounded the whole way, you’d do very well. But if you get 10 years in, you blow up and you have to start again 10 years from now, you are so much further behind. So the mistake is blowing up, putting too much pressure on one strategy to make you rich quickly instead of diversifying broadly enough. And I think probably the third big mistake from an algo perspective is just taking someone else’s algo and blindly trading it. Oh, buy an algo, put it on auto trade and sit back in The Bahamas. But you can’t just buy an algorithm and trust that it’s going to make you rich. You have to actually test it, evaluate it, make sure it’s stable, make sure it’s robust, monitor it and make sure you make it your own so that you can really trust it. Otherwise, the drawdown is going to be bigger than you expect, you’re going to freak out at the worst possible moment and losses as a result.

Etienne Crete:

Yeah, and I think a lot into it comes from confidence and, like you said, trusting the system. I’m sure you get students who build a really good system, it works out really well in the market for them. Then they get to a point where they have a couple of losses and they stop trading it because they’re afraid they’ll lose money more and more or they kind of get away and then trade different, perhaps. So having the confidence to keep going through the trades, keep doing the same thing as always is something you got to train yourself to focus on also.

Adrian Reid:

Yeah, absolutely. And that confidence only really comes from doing a lot of testing, a lot of analysis and a lot of thinking about the way the system trades. One of the exercises I really like to do with my students is to talk about, “Okay, what do we expect when we are going to trade this system?” And we look at the performance stats and we look at the day-to-day movements and the equity curve and we look at the size of the drawdown, the length of the drawdown, we look at the percentage of up days, the percentage of down days, the time between highs. You just really understand the performance profile of the system. Most people will just go, “Oh look, the equity curve goes up. Awesome. I’m going to be rich.”

But you’ve got to go way down deeper than that and look in detail about how it will feel and how it’ll move and what the best trades and the worst trades and the average trades really look like so that you know what to expect. Because when you know what to expect, it’s far less stressful to just follow it. It’s like, “Oh yeah, that’s normal.” And when something happens that’s not normal because you know what to expect, “This is not normal. Okay, I better pause, take a time out and actually investigate. Is it broken? Is there something wrong? Has something changed?” And that’s what gives you confidence, knowing that what’s normal and what’s not. It only comes through detailed analysis, unfortunately. You got to do the work.

Etienne Crete:

That’s good advice to do, kind of replaying the credit curve. Because if you look back at your graphic from your backtest you’ll see, you had a drawdown here, you cover it quickly and stuff, everything is good. But when you’re in the drawdown in the same place [inaudible 00:25:32] so you don’t see how far it’s going to recover. Everyone’s going to do it and that can be very scary for some people.

Adrian Reid:

Drawdown is scary and if you’re not prepared for it, how long it can be or how deep it might get or how quickly it might drop, some strategies have fairly slow drawdowns but they last long. If you’re trend following in stocks, from the peak of a bull market to when you draw up and make a new equity high, it could be years in a long side, long-term trend following system. And if you’re not prepared for that, you’ll throw in the towel just before the new bull market. Or you contrast that with a mean reversion system in stocks and you might have… In mean reversion on the long side you’re buying when there’s been a sudden dip. And just because you buy doesn’t mean the dips finished, it might keep going for a little bit before it bounces and you get out with the profit. But that dip, that could cause a very sharp, sudden drawdown, and you’re going, “Where’d the money go?” But if you’re prepared for, it’s like, yes, that’s normal, and then it bounces, but you’ve got to know what to expect.

Etienne Crete:

How much time and effort do you put into learning or trying out new systems, new ideas you have on a daily basis or monthly basis let’s, say?

Adrian Reid:

Now?

Etienne Crete:

Yeah.

Adrian Reid:

Look, I’ve been trading more than 20 years and systematic for most of that period of time. I have a list of ideas that I still haven’t tested hundreds of pages long, so I’m constantly testing out new ideas. Some of it is brainstorming ways to improve my existing systems. Some of it is testing completely new concepts in new markets or new strategies. And look, I probably devote, now it wouldn’t be a day a week, but I would like it to be a full day a week to devote to testing and playing with new ideas and investigating. My trading pretty much looks after itself. My portfolio systems I’m pretty comfortable with, so I’m fairly happy to let that run. Probably if I didn’t have the coaching work with so many students, I would spend more time. But I guess I spend the time helping them rather than developing new stuff in my portfolio because my portfolio’s kind of okay.

Etienne Crete:

Interesting. And you mentioned you were going toward algo more and more. Is it a choice based on is it easier to manage? Is it something where you can do more with this time? What makes you want to go to algos?

Adrian Reid:

Look, I want to say automated systematic trading rather than algo, the distinction might be very fine or nonexistent, but I don’t trade stocks intra day, I trade on daily charts. What I’m implementing is an automation engine for all of my daily and weekly strategies. And the reason I want to do that is so that I can cover more ground with less day-to-day effort and less mistakes. So the more strategies you have, the more positions you have open, the more chance mistakes can creep in. And also the bigger my account gets, the more slippage I get on individual trades. So if I automate, then I can have more systems, then I can have smaller positions, then I get less slippage. So make more money, but also I get less mistakes because the automation is placing all the orders, doing all the calculations and that just happens.

The other reason is probably a little bit not trading related, it’s lifestyle related. We were just in Thailand for a week, understand you’re there now. And that was amazing, I had a great holiday with the family and I didn’t have to worry about my trading because the automation just ran it. And every day I’d just get the emails like, okay, nothing wrong, it’s all good, monitoring what’s happening to make sure my fills were good, to make sure the orders were placed to make sure I was out of the right stocks and that was it. So it allows much more freedom of lifestyle, but most traders are too eager to run to automation. “Oh, I want to be a trader. Oh, I’ll buy an automated algo and I’ll get rich.” You first need to do the work, you need to develop strategies that you’re comfortable with, you need to make them your own, you need to build confidence following them, then automate so that you can diversify more broadly without making mistakes and improve your lifestyle. That’s my philosophy around automation, anyway.

Etienne Crete:

Yeah, I totally agree. It took me many, many years to automate my training and I’m just, since about a year ago, the strategies are basically fully automated where they can run by themselves. Before it was all partial automation, partial manual, but that took a lot of time. It’s like, going and doing the work and there’s always things going up with algo so you want to modify them. They’re not as you expect them to be and you got [inaudible 00:30:14] and stuff. So that’s the part that took the longest time, but it’s definitely a big process.

Adrian Reid:

And for me, look, given that I trade daily charts and I don’t look at the market intraday, the automation doesn’t actually save all that much time. My trading has literally taken 20 minutes, maybe 30 minutes a day on average for the last probably 15 years. So I saved 20 minutes a day, but I have to use some of that to monitor the automation. So it’s not like the work goes away, it’s just slightly different work. But I think it’s a good trade because I can diversify more broadly and reduce my mistakes by automation.

Etienne Crete:

Yeah, the faculty have less mistakes and things are running as a system very simply, like very streamlined. And that definitely saves a lot of, not necessarily effort but more like mental energy and stuff to kind of… Yeah, definitely errors also is a big factor.

Adrian Reid:

I think the mental energy is a really good point because, again, after trading so long, I don’t really want to place another trade. It’s okay, but placing a trade is not very exciting. It’s boring. Buy this many, this stock, select order type, submit. I don’t really need more of that in my life. But what I do like is the thinking about the strategy and the portfolio construction and different system ideas. And by removing the execution, I’m excited because it frees up the brain space to then focus on strategy development, which is kind of cool.

Etienne Crete:

Interesting. Now, trading the daily chart is something that other people aspire to. They want to do that because it’s very low effort. Let’s say that you don’t have to be there to look at the charts all day, you don’t have be there a few hours a day and stuff. At the same time, it’s very slow in a sense that for you to be able to see results might take a long time. And people who want to… They want to make a percentage of month, they want to get to that target might take them many, many months to be able to get that result. So how do you work with that, and how do you get to see results on trading on the daily charts?

Adrian Reid:

Look, I guess the first thing is what do you measure? And a lot of traders struggle with the pace of trading and how quickly they get feedback. Because some of my holdings, my long-term trend following systems, for example, I might hold the same stock for 12 months or more. It doesn’t happen often, but it does happen. Whereas some of my short-term systems, I might hold the stock for a day and that’s it. And I have some intraday systems as well and they hold maybe for a couple of hours, but I don’t watch the market for those. The orders are placed before they open, and the system just takes care of the entry and the exit. So I think this comes back to the personality thing, knowing how much action you need, knowing how quickly you need feedback.

I don’t care if I’m holding a stock for 12 months, as long as it’s going in the right direction, because I view it as money in my account. I’m raising my traveling stock all the way and it’s building my wealth. So I don’t care that I haven’t closed it out and banked the cash. That doesn’t bother me because it’s just about points on the board and the points on the scoreboard, the liquidation value of the account and I want to see that going up. Some people take their satisfaction from closing a trade, “Yes, I got a winner.” I take my satisfaction from I followed my system, my account’s growing.

Etienne Crete:

At the same time, you cannot really backtest anything on crypto on a daily chart because cryptos have been fairly recent and you don’t have a lot of data to be able to backtest them on a bigger perspective, so how do you deal with that aspect?

Adrian Reid:

Yeah, look, I think you need to be careful. I do trade daily crypto systems and we’ve got data back to 2014, 2015 for that and there’s several bull/bear cycles that we’ve been through now. My approach for crypto is I still trade daily charts. I even have a weekly crypto system if you can believe it, it works amazing. And the systems are designed to be what I call fail safe. Now, fail safe means it doesn’t really matter what happens in the market, they’re not going to blow up. There’s always something that will get you out, get you to cash. There’s always something that will get you into the big move. I’m not looking for very precise patterns that need huge amounts of data to prove that they’re real. They’re very blunt systems. And by making them simple, blunt but very robust, then you can backtest with less data.

I think with crypto, because the market is so accelerated compared to stocks, the bull/bear cycles are much faster than the typical stock market, or at least in the past they have been. That means as long as you’ve got a few cycles then you can backtest a simple system and build confidence in it. But if you want to have a very complicated patent-based system or a seasonality type system in crypto, there’s probably not enough data to validate it yet on a daily chart. But a blunt trend following system, breakout, stop loss, trailing stop or mean reversion system with a profit target, you can get plenty of trades over plenty of market cycles and, I feel, build confidence in them.

Etienne Crete:

Interesting. Now, we’ve covered a lot here. Is there anything we didn’t talk about too much you would like to tell people you want to focus on a little bit more?

Adrian Reid:

Look, I think the biggest challenge for traders, in my experience, is how long it takes to get profitable. And people try so many different things that are all about trying to predict the market, trying to be right, trying to be clever. “Look at this chart pattern that I found and when I draw this line and then it’s going to go to here and blah blah, blah, blah, blah,” or “Look at my indicators,” and they’ve got all these indicators on the charts. It’s too complicated and it’s ego-driven. What works, in my experience, is simple strategies, simple systems that get you into up moves and get you out when they start going down, get you in short to down moves and get you out when they start going up. Just keep it simple. And the easiest way to do that is to implement a systematic approach.

So I think the quicker people can go to a systematic approach, the quicker you can get profitable and consistent. And I think that’s really the key here because if you can shorten your learning curve by putting rules in place that work, then you get more compounding time. If you take five years to learn, in 20 years time, that five years is going to cost you millions of dollars, millions.

I did the calculation of how much my three years cost me that it took me to get profitable and it was millions, even now, and I’ve still got 20 years of trading left, at least. So get profitable quickly by finding systematic trading, by finding someone to show you how or reading a whole lot of books to learn how to implement some simple systems so you can just get profitable. And then don’t blow up. Keep your risk low, keep your leverage low, stay in the game. Because if you blow up again, you waste years, years. And that’s just devastating. You don’t want to be 20 years down the track regretting that 10 years into your trading journey you started from zero again because you blew up. That’s just financially terrible. So I think that’s probably the learning curve, quickly. Get systematic and your life changes.

Etienne Crete:

I think the effort it takes to become systematic in the beginning initially is a lot more than it would take to try to predict the market by watching YouTube videos or opening strategies online. And that’s the bar that people have to go through is doing the work first and the tough work didn’t get to a place where things are getting easier for them.

Adrian Reid:

Yeah, yeah. I’ve taken many traders from not trading at all straight to systematic and, man, I wish that I had that, someone to guide me. When I first came to the market, it’s like, “Look, here’s a system that fits your personality and it fits your objectives and it fits your lifestyle. Let me show you how to backtest it. Let me show you how to build confidence in it. Now, paper trade it for a little bit. Now, trade it live, ask lots of questions, get confidence. Three months later you’re trading and profitable.” I wish I had that. That would’ve been amazing.

Etienne Crete:

So this is the thing. When you start to do the work, and I’ve seen the same thing myself, when you start to do the real work you need to do, things are a lot faster to get profitable. Like with me, let’s say, took me two years of just doing anything, like trying everything out in the market to not get new results. Then six months to get profitable after that on top of it, which was very focused on doing the right stuff, taking the right actions, and also going systematic, like you said. So definitely a good time.

Adrian Reid:

Absolutely. With my students it’s a step-by-step process. “First do this, then do this, then do this, then do this.” As you do that, the level of confidence increases so quickly and the level of insight and the type of questions they’re asking, it just accelerates so fast. So if you have a step-by-step process, someone to guide you, I think it just speeds things up so much, so powerful.

Etienne Crete:

Totally agree. Where can people find you that will connect with you or reach out after the interview? Where can they see your work, learn from you and hopefully work with you?

Adrian Reid:

Yeah, great. My website is EnlightenedStockTrading.com, so that’s probably the best place to start. There’s a huge amount of resources on there. I’ve also put together a little bundle of free training for listeners. So if you go to EnlightenedStockTrading.com/DesireToTrade, then you can opt in and get a free course on systematic trading, like how to think like a systematic trader, a bunch of cheat sheets, and an ebook on how to build confidence in your trading strategy or system. They’re all great resources just to get your mindset right and get on the right path so you can stop wasting years looking at things that don’t work. Hopefully that’s helpful. So EnlightenedStockTrading.com/DesireToTrade.

Etienne Crete:

Awesome. I appreciate that. I’ll actually put the links with all the description of the video and the podcast as well for them to check out and then they can learn from you there. I think it’s a really good set of resources people to check out and we’ll put those links there, for sure, so I appreciate. Thank you very much, Adrian, for this advice. I think it’s been a lot of stuff you covered here, but I think it’s good for people who are… It’s just about getting systematics, just about making their own path to trading also and doing the right work from the start. I appreciate you and look forward to catch up with you soon.

Adrian Reid:

Thanks so much for having me on the show. Really appreciate your time.

 

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