Hi, I’m Adrian Reid, founder of Enlightened Stock Trading. Ask Me Anything!
Today, I thought I would do something a bit different, as 93% of my website traffic is brand new, people like you who want to learn stock trading.
For those of you who don’t know, my name is Adrian Reid, a full-time stock trader of 18+ years and the founder of Enlightened Stock Trading. I’ll show you how to make consistent profits from the stock market using a trading system that fits your lifestyle, goals and personality.
Early in my education when I was first trying to learn stock trading, I read hundreds of trading books trying to find the answers. From those books I tried countless different trading approaches which the authors claimed to be profitable. The trouble was none of them worked for ME. You have probably had similar experiences, right?
I had many major realizations that finally helped me start making money, and have been making me money trading ever since. These are at the core of everything I do at Enlightened Stock Trading.
For all of my students looking to learn stock trading I have found that having the opportunity to ask trading questions and get great answers is critical to becoming a successful stock trader quickly!
I’ve taught many students and conducted sessions to help them develop their own stock trading system so today is your day to ask me any questions you have, and I will do my best to answer it. You can ask me anything about stock trading that you’re curious about.
All I ask of you is. Please keep your question as short as possible. One to two sentences max as I will get hundreds of comments.
So, what can I answer for you?
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Hi Adrian, how many systems would you recommend to combine to be able to cover all / most market states? In that context, what level of initial capital would you recommend to start with?
Great question – thank you for taking the time to post. When you are trading stocks systematically there are several different behaviours the market can exhibit. I have a model I use called The Market System Map which is shown below and discussed in greater detail on this post about bear market trading. In a nutshell, stocks can have a primary trend that is up (Bull Market), sideways (Ranging Market) or down (Bear Market)… within each of these primary trends three things can happen:
1. The trend can continue
2. There can be a sudden temporary shock against the trend
3. The trend can change
By combining the three primary stock market trend directions and the three behaviours within each, there are 9 possible behaviours that stocks can exhibit.
The Market System map is illustrated here:
If you want to cover all bases then having a portfolio of profitable stock trading systems that is able to make money in each of these 9 scenarios. This does not mean you have to have 9 systems, because each system can be profitable in several of the 9 behaviours. Typically traders should aim for the following stock trading systems in their portfolio:
1. Long Side Trend Following Stocks: This will make you money when the stock market is trending up, and the strongest stocks can make you money as a bear market turns up into a new bull market, and also when the broader market is range bound the strongest stocks can still make you money. However trend following will lose money in dips during the bull market and also will lose money when the market turns down into a new bear market.
2. Long Side Mean Reversion For Stocks: This will make you money from the dips and corrections that are inevitable during a bull market and even early in a bear market when stocks drop suddenly and then rally hard. When the market collapses suddenly though the mean reversion system will tend to lose money.
3. Short Side Mean Reversion: One of the most challenging times for traders is when a bull market suddenly collapses into a bear market. If you are heavily long when this happens the drawdowns can be large, especially if you use leverage. I like having a system that short sells heavily overbought stocks and profits in a period of euphoria and then covers quickly at a profit when the stock corrects. This type of system (Like the Gravity Trading System that comes with The Trader Success System gives you a steady level of short exposure and profits during a bull market… then when the market collapse this system profits very well during the period of initial market weakness.
4. Short Side Momentum: When a bear market is in full force then you can make good trading profits from a short side momentum system. These are systems that short weak stocks in a falling market and hold them until the stock or the market rallies.
These 4 types of systems will give you a fairly stable portfolio which can profit in most market conditions. Once you have established a portfolio of stock trading systems like this you can continue to diversify – it takes very little additional effort to add another system to your portfolio.
Then you are thinking about how much trading capital you should start with, this will be very individual. You should start with enough capital to make sure you treat your stock trading seriously, but not so much that you are a nervous wreck worrying about the money as you learn. You can start with one system with as little as $1000, but the more you start with the easier it is to get the diversification you need to have a stable portfolio.
If you want to work through how much capital you need to trade stocks for a living then I would suggest you read this post about trading for a living and particularly look at the diagram that explains how much capital you need based on your stock trading returns, drawdown and living expenses.
Thanks for the great question – I hope this helps!
Do you daytrade stocks and would you recommend it? If not what are the negatives from your experience? I don’t daytrade as of now as i feel the risk/reward and time commitments are significant even though some of my friends seem to be able to make it work! Thanks in advance.
I don’t recommend daytrading unless it is automated or you are trading based on daily charts (eg. place a limit order to enter at a certain pullback and exit at the close of the day). The reason I don’t recommend daytrading beyond this is it is very challenging to remain profitable and it is extremely stressful. Most daytraders lose money long term and I don’t want to be in that situation!
Can systematic stock trading be used for all types and styles of trading? For example, from scalping or flow trading being minutes in the market to once a year trading like an annual rotation.
Great question – thanks for asking! Systematic stock trading can be used for most styles of trading. At the core of pretty much every style are rules / guidelines / a checklist of when you should trade. When you take your trading systematic, you are documenting those trading rules, replacing the points of discretion with objective rules and then backtesting your rules to ensure they are profitable. If the rules are profitable then you can follow them as a trading system. I certainly know of systematic traders in the whole spectrum that you described in your question – all the way from scalpers to annual rotation style strategies.
There may be some very discretionary styles that are difficult to systemize, or some chart based approaches that are hard to code, but in my experience these are difficult to be consistently profitable with anyway and I would certainly encourage you to look at adopting a systematic approach to eliminate the variability and reduce the number of mistakes you make in your stock trading.
Following a stock trading system is so much easier emotionally and requires so much less time and effort than any other trading approach.
I hope that helps, thanks the for great question!
Hi Adrian. I have a full time job and never home when the my stock market is open. How can I become a stock trader? Do I need to be in front of my computer live to be able to be a real trader?
Thanks for your question – much appreciated. You can absolutely become a successful systematic stock trader even though you are away from the market when it opens because of your day job. I traded for many years while I was working a day job so it is certainly possible. The key is making sure that the stock trading systems you are using, especially at the beginning when you are first starting to learn stock trading, fit your Personality / Objectives / Lifestyle. With a full time day job you don’t what to be trying to place 20-30 trades a day where you have to monitor your trades during the day. End of Day Stock Trading (EOD Stock Trading) is best for people who have a day job.
Even after I left the corporate world in 2012, I still kept trading the same way with EOD Trading Systems because I don’t like spending my whole day staring at the computer!
In fact I would say you have a very distinct advantage because you have a day job because you are not relying on your trading to support you at the moment. This means you can focus on trading well and saving money to build your account rather than the week to week returns.
Keep going – the goal is achievable AND it is so worth it.
Let me know if there is anything else you need support with.
I have heard you mention that you use adaptive orders to place your trades? Can you explain what those are?
Thanks for your question! Adaptive orders are a order type for stocks that Interactive Brokers provide which is an algorithmic order. When you place an adaptive order, the order entry algo automatically manages the trade and adjusts the price between the bid and the ask to reduce slippage and improve the average execution price of your order. I have explained the Adaptive orders more in this blog post about order types for stocks. Have a read of that post and let me know if you have any more questions about it.
Adaptive orders can be market or limit type orders – I frequently use Adaptive Market orders to enter at or near the opening price by placing my order before the market opens.
How do you know you have a trading system that fits your personality? And how do you find it?
Great to hear from you – I hope you are doing well! When you have a trading system that really suits you you you will don’t it very easy and natural to follow the system’s signals. A trading system that fits you gives you enough activity to keep you focused on doing it well, but not so much that it feels frantic… it will have a profile of wins and losses that fees comfortable to you – some people like lots of small wins and the occasional large loss while other people like a smaller number of large wins and many small losses… the hold time will also feel natural – some people start getting impatient to close out a trade after 2-3 days while others are comfortable sitting in a long trend for months.
There are other factors but these are some ideas that will help you narrow down the search.
If you want to find the right system for you, first work through the above issues and narrow it down… once you are clear on that you will be able to select the right system for you.
Let me know if you need some help and I’ll point you in the right direction… just reply to this comment and let me know where you sit on the timeframe / trade profile / frequency issues and I’ll let you know what systems might work well for you.
I have systems in The Trading System Collection that will fit most types of traders if you need something to work from just let me know.
Great question – thank you Paul!
I do mostly credit spreads with small gains but occasionaly loose heavy amount when expected price moves on the wrong side. Rolling out most of the times keep my capital blocked and prevent doing regula trades from making any money.
Yes credit spreads do have that problem – you need to be very careful of trading strategies that have a very high percentage of winning trades because the winning trades tend to be small and the occasional large loss is usually very large. It is critical that you check the expectancy of the system is positive or you will ultimately be wiped out.
I would also warn you that if you have an extremely high winning percentage of trades that in the future if your win rate drops, even by a little bit, that your trading system profitability will degrade dramatically.
I prefer Lower win rate stock trading systems that have larger winning trades than losing trades because I find them more profitable and stable in the long run.
Let me know if this sparks any additional thoughts or questions for you.
You dont have a Amibroker course, do you?
I absolutely do – I have not promoted it broadly yet, however I created a course recently called Amibroker Launchpad which consists of >50 tutorial videos to guide you through how to use Amibroker for charting, Amibroker Formula Language, backtesting and managing your trading systems. The course on its own is $497, but is currently offered as an optional extra to my System Trader Launchpad program which you can find out more about here: System Trader Launchpad Link. System Trader Launchpad is $497 and if you want to add Amibroker Launchpad you can do that for just $97 extra on the order form.
I would be happy to have a quick chat with you to answer any questions if you would like to – just email me and I’ll help you out.
Hope to hear from you soon… thanks for your great question!
Backtesting relies on looking at historical data to see whether a system works in the past and likely to work in the future. However, how people invest in the past may not be how they invest in the future. Furthermore, algotrading is even more prominent now than say, 20 years ago.
What gives you the confidence that what worked before will still be reliable as we trade into the future?
This is a great question and is an issue for all types of trading (not only for systematic stock trading). Firstly I would say that if a trading idea does not work in a backtest then it will not work in real time trading, so Backtesting absolutely eliminates some of the bad trading strategies that are not profitable.
The real challenge is when trading systems worked in the past but no longer work moving forward. There are two possible causes of this:
1. A shift in the market dynamics
2. A poorly designed system
I cover both of these issues in The Trader Success System in quite a lot of detail. For the market dynamic changes, this is observable in the backtest if you test correctly… for example a certain type of mean reversion system used to work extremely well in the US but something changed post the 2008 financial crisis and the stats of the system degraded and the shape of the equity curve became less appealing. During testing you need to be mindful of the shape of the equity curve and how the statistics change over time to identify these shifts in your stock trading system’s performance. These changes are visible during Backtesting if you are monitoring for them.
The second type of issue is when the system is not designed well and ends up curvefit to historical data. When you don’t follow a process like the one I explain in The expert’s Guide To Backtesting (Part of The Trader Success System), curvefitting is an extremely common problem. The solution is to firstly design the system well with robust parameters and simple rules, but then you can also forward test the system on paper for a period rather than immediately trading it with real money. Alternatively saving some recent data to walkforward test the rules on is useful too.
As a final thought I would also suggest that rather than trading with one system, you instead adopt a portfolio of systems and add to that portfolio over time as you find / design good new systems that work.
Thanks for the great question!
When you do your robust backtesting, what is the maximum number of parameters that you would optimize at once?
This is a very important question – well done! I move frequently recommend that you optimize a single parameter at a time so you can really see how stable the parameter value is as you vary it. Optimization is what gets traders into trouble with curve fitting very often so you need to keep it simple. You can’t visualise more than two parameters simultaneously so more than two and you are likely to pick an unsustainable performance peak in the parameter space.
Given we should be looking for stability more than the best optimized backtest result, I think doing one at a time (maybe two) will keep you out of trouble.
I also have a more advanced technique for optimizing all parameters simultaneously but it requires a lot of post optimization analysis to find stability in the parameter space before choosing the combination you want to use.
For just the robustness testing I like to do all of the parameters at once… it is really just a matter of how long the backtest will take. If you are varying all of the trading system parameters +/-20% simultaneously and you have 8-10 parameters in your system it could take a really long time to backtest. In this case just do the most important parameters (the ones you optimized originally during the trading system design)
If you get a trading system that somebody else made and you want to evaluate it. What are some of the things that you might look at?
Thanks for your question – this is a really important issue. One of the most important things to realise is that the published system could be curvefit before you even start… so my major focus is backtesting the system to ensure that every rule has a very significant impact on the number of trades generated and the average profit per trade. I also want to check every parameter value is stable, so I would vary each parameter over a broad range to ensure that the system is profitable on more than just the published parameter set. The system should be robust enough to make similarly good returns when you vary all of the parameters +/- 20% or so. Finally another consideration is whether the system edge is stable over time… When you test the stock trading system with a constant position size (to remove the impact of compounding) is the edge stable? When you backtest a trading system like this you want the equity curve to be nice and linear with a constant slope. If the slope is becoming more shallow or turning down then the edge could be decaying.
I hope this helps – Thanks again for the great trading question.
When looking to diversify my portfolio is it better to trade a different market or a different type of system? What are the pros and cons for each?
Great question – thank you! Both of these are valuable ways to improve your portfolio. I would say that you should ultimately aim to adopt as many different methods of diversification as possible in your portfolio of trading systems. It is often easiest to first diversify to a different type of system in your own market so you don’t have to worry about exchange rate risk or different time zones to begin with, but if you are trading the long side in Australian Stocks and you want some Short exposure then you would probably be better off going to the US Market for shorting because you will get more stocks that are shortable there.
Do Both 😉
I was listening to your interview on the Better System Trader Podcast and it has provided me with valuable insight in my trading journey to the point that I’ve had to listen to it multiple times now. Thank you for that.
I remember you said you were against moving average crossover systems, could you elaborate on why? I’ve recently built and started trading one (as my 1st system) to teach me how to trade consistently. I am curious to hear your insights on this.
My second question is does your coaching provide an emphasis on the psychological or technical side of trading?
Thank you for your time, I hope to hear from you soon.
With regards, Malik
Thank you for your great comment and question! I am glad you found the Podcast with Better System Trader useful. I covered some really important concepts in the podcast which will make a huge difference to your trading.
On the question of moving average crossover systems, I don’t like pure moving average crossover trading systems because I have found that performance of a chosen parameter set is rarely stable over time. You can optimize a 2 moving average crossover system for one period but the performance could be wildly different in the future. There is a high risk of curvefitting to past behaviour because of this parameter instability and so the systems rarely hold up that well in real time trading.
In regards to your coaching question, when I work one on one with traders in my Mentoring Program I focus on both the technical and the psychological aspects. I vary the emphasis depending on what the individual most needs to address. This is the beauty of Mentoring – I can see based on our conversations what you need to take a big leap forward in your trading and focus on that so you get the maximum value out of out time together.
Great questions – send me an email or use the Contact Us form if you would like to talk about next steps for the Mentoring Program.
Hi Adrian, what are your thoughts on trading weekly charts? Long trends seems to be less noisy than daily charts.
I like weekly systems because the return for effort is extremely good… 20-30 minutes a week to make 20% or so per year is pretty solid! The only challenge is finding a weekly system that gives you a good Annual Return / Max Drawdown. Some weekly systems have a lot of ‘give back’ of profits before the exit signal is given at the end of the week.
We have a great weekly system in The Trader Success System which performs extremely well that I trade with my own capital.
Weekly trading systems are a fantastic way to trade for lifestyle!
Question regarding Amibroker trading system rules and formulas: what are the differences (if any) between backtesting formula and real time trading formula for the same strategy? Do you use different settings in these cases?
When you are using Amibroker, the code for backtesting and the code for signal generation is the same. You can easily generate the signals for tomorrow’s trading by ticking the box “Add Artificial Future Bar To See Tomorrow’s Trade Picks” in the analysis settings as shown in the image below:
Another great question – thank you!
This depends on the style of system. If the system has a one bar delay and enters / exits at the open then there are no differences between the backtest code and the signal generation code. If the system enters on a limit order then you need to run an exploration to find the stocks that meet your setup criteria, rank them and then calculate the limit level… so this is different than the backtest code.
How to determine what trading strategy to trade in the particular market situation? What kind of market regime filters or volatility filters do you use for that?
Great question – This is something I do during the trading system design phase. I create the raw system and then test a range of different market regimes to evaluate whether the system performs better under certain market conditions. If it does, and it is worth filtering out the other market conditions, then I add a rule to the system to require the specific conditions on the broader market index in order to generate a buy signal in a stock.
Market regime filters could be market trend filters (eg. Moving averages), volatility filters (ATR of the index or VIX level / change), or level based (new highest high more recent than new lowest low).
Think about what strategies work well in each market condition and make sure you have a balance of different strategy types to perform well in each different market condition. For example, having a trend following system, mean reversion system and short side system is a really good start.
For the stock market regime filters you are basically looking to turn the systems on when they are likely to perform well. For example turning a trend following system off during a bear market is a good idea… only activating a long side mean reversion system when the stock is still in an uptrend is also a good idea and avoiding shorting during a bull market. Most of these can be achieved with a moving average filter on the index in the first instance… then brainstorm some other ideas and try to make it better.
Hope that helps
Hope your well & thanks for the great content.
New to this in the later stage of my working life. Can your “teachings” be of help to a complete novice?
Love the fact you dont promise overnight riches!!!
Thanks for your great question – yes absolutely, I have designed my courses so that they can work for anyone. There is a bit to learn, but assuming you have the desire to succeed (and I know you do) and you are willing to ask questions, you will be fine! The Crypto Success System takes you quickly from complete novice to confident systematic trader in cryptocurrencies. The System Trader Launchpad program does the same for stocks.
I am looking forward to helping you get started on your systematic trading journey.
PS. Yes I don’t promise overnight riches… there is work to learn and get moving, but I can certainly tell you it is absolutely worth it!
Hi Mr. Reid,
I am a systematic crypto trader and I am very confused about asset allocation. Based on some research, these are the prominent methods other people use on asset allocation: minimum variance, risk parity, mean-variance.
Do you have a specific recommendation that works best in your experience (for crypto)? Thanks so much.
Im looking forward to learning from you.
I would use a more blunt and pragmatic approach than the ones you suggested personally – I look at the correlation of equity curves and optimize the capital allocation to give me the best combined equity curve. To do this I backtest all of my systems, export the equity curves to excel and combine them with formulas that allow me to change the capital weighting and adjust the weightings to give me the best combined portfolio equity curve that also meets my drawdown tolerance and any other objectives I set for my portfolio.
Hi Adrian, I’m a student and a system trader from Vietnam, I admire what you’ve done and what you are doing, I hope you will have more content to support Newbies in this field like me. I want to say thank you. Hopefully 20 years from now I can be a different version of you and share this with others. Peace and love!
Thank you so much for reading my website, it is a pleasure to help you with your trading. I will continue to make new resources and write articles to help with your trading, so please check back regularly. Please share any content you find useful on social media to help spread the word!
Remember – You’re only one system away!
Hi Adrian, I came across you on Desire to Trade podcast. Quite a few other traders interviewed highlight that systems should be able to work across most markets rather than only working in one area. On this basis is there any reasons why the strategies you use would not work on FX, stock index’s, Commodities etc? Thanks
Thanks for watching! I really enjoyed being on the Desire to Trade podcast. In my experience I have seen that different markets do tend to behave quite differently and so the best trading systems for each market can be quite different. What I do like to see is that the system works well on related markets. For example if a system works on Australian stocks, it should also work well on Canadian stocks because the markets move in a similar fashion… however the Hong Kong market moves quite differently so my Hong Kong systems are different than my Australian systems. This is just like in commodities – I don’t think it is reasonable for a Lean Hogs system to work as well on Gold or Soybeans… Hopefully it does not loose too much money but when you move a system to a different market it often requires some adaptation.
Some strategies may translate well to other markets but I don’t think this is always the case and I do not believe it is required.
Hope that helps
Hi Adrian, I came across you on a podcast. Given the systemic nature of your trading, I just wanted to know whether your strategies would work on other markets i.e FX, stock indexs, commodities etc. The impression I get is that broadly speaking trading of this nature should work across the board but as you just focus on stocks I wondered whether there was a reason for that. thanks in advance.
Thank you for your great question. Systematic trading certainly works across all markets, however the individual strategy may not translate to other markets for a variety of reasons. It is not essential that a stock trading strategy work well on Forex for example in order for it to be considered a good strategy because the markets are quite different and do tend to move differently. What I would say though is if you have a good stock trading strategy it could be adapted to work on other markets in many cases… but this does take some effort and may not always be successful. I focus on stocks on my channel and in my courses because that is my area of greatest experience. Though I am supportive of diversifying across multiple asset classes and that is something that I do in my own trading.
I hope that helps, let me know if you have any additional questions.