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Thanks for Listening to My Interview on Money and Business Hero Podcast!

Money and Business Hero 4 – How systems lead you to trading success – Guest Adrian Reid

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Transcript of Adrian Reid’s Interview On Money and Business Hero podcast

How systems lead you to trading success

Florian Fritz:

You’re listening to The Money and Business Hero Podcast where we’re talking about the three pillars of financial success, money mindset, money management, and money making. And how they can help you to improve your financial life. My name’s Florian Fritz and today I have another very special guest, Adrian Reid. He’s a full-time private trader as well as the founder and trading coach at Enlightened Stock Trading, which is dedicated to educating and supporting traders on their journey to profitable, systematic trading in stocks, and now as in crypto as well. He started trading stocks over 20 years ago and left the corporate world in 2012 after making hundreds of thousands of dollars a year, working just 30 minutes a day managing his trading systems.

Through Enlightened Stock Trading, Adrian educates traders in the principles of profitable, independent trading through the development of their own personalized portfolio of trading systems. He’s focused on empowering you as a trader with profitable trading systems, which suits your personality, objectives, and lifestyle, teaching you to be independently successful rather than relying on him or anyone else for advice. Now, welcome to the show, Adrian. Great to have you here.

Adrian Reid:

Florian, awesome to be here. Thanks so much for having me and for taking the time to talk.

Florian Fritz:

Well, wonderful because I know you have lots of value to give to people who want to grow their money.

Adrian Reid:

Yeah, absolutely. I love talking about trading, I’ve been doing it a very long time and it’s one of those topics where people get into it thinking it’s easy and they do what is intuitive and obvious to them, and lose money and wonder what happened. But unfortunately, as with a lot of things, money, business, and investing, it’s a little bit counterintuitive what works and what doesn’t. So we need to learn some skills so that we can make money in the market rather than just fritter away our wealth and bad decisions.

Florian Fritz:

Well yes, that’s definitely true. And you say traders, well, most traders lose money, right?

Adrian Reid:

Exactly, yeah.

Florian Fritz:

Before you get into profits, you need to lose money to learn what not to do to, or you start with a coach that actually tells you the things you shouldn’t do. Now, I read that you got into stock trading by playing a game. What game was that and how did that happen?

Adrian Reid:

Yeah, good question. There was a game, so when I was about eight years old, my family had a holiday house. They still do, but my family had a holiday house and it was a rainy day, boring sort of situation. We couldn’t go to the beach because the weather wasn’t very nice. And so we were looking around in the house with something to do and we found this game called, The Stock Market Game. And dad, my father was like, “Oh yeah, that’s a great game. We should play.” So we played and basically what it is, is you go around the board and each square you land on, the market goes after the market goes down and you’ve got an opportunity to buy or sell different stocks or whatever. And I remember playing this game with my brother and my father and becoming like a billionaire on paper. And that was like the best thing ever.

I just loved the idea that you move around and the market fluctuated and you could buy something here low, and you could sell it high, and you collect dividends, and you build your wealth as you go around. And then something bad happens and you lose a bunch of money, but then you got to make it back. And that was my sort of first introduction to the market and I was like, “Wow, this is so awesome.” It was my favorite game. And I still have the game, it’s in a cupboard somewhere. I should have got it so I could show you. But that was my introduction.

And of course the game makes it much easier to succeed than reality, but when I started working, just after I finished university many years later, I pretty quickly realized, “Oh, I don’t want to do this forever because it’s like 12 hours a day and it’s stressful and I’ve got to answer to someone and all of that.” And I was traveling all the time, which was really challenging. And I said to my dad, “Hey, I don’t really want to work my whole life. What do I need to do so that I can retire?” And he’s like, “Retire? You just started.” “I know, but I’m planning ahead. I want to do this quicker.” And so we talked about investing and setting money aside, spending less than you earn and investing the difference and having an investment methodology that you can follow consistently.

And he invested in stocks and property. I looked at property, I didn’t have that much money and I didn’t have that much interest to be honest, but I loved stocks because I had this game, this sort of founding introduction via the game. And so I started learning about stocks and there’s a whole journey I went through there, which took about three years to figure out. But that’s really how I came to the stock market and started investing with actual money.

Florian Fritz:

Okay, great. And that was successful pretty quickly since you… How long did it take you to get to those hundreds of thousands?

Adrian Reid:

Oh, pretty quickly would be an exaggeration. It does take time. It took me three years to figure out how to be profitable, so I was teaching myself. And when I started, I started by copying the only person I knew who did it, my father. And so I said, “Okay, so how do I invest in stocks? How does this really work?” And he said, “Well, you got to find good companies and you’ve got to buy them and hold them. And they’ll go up over time and you collect dividends and then you reinvest the dividends and you save more money and you buy more stocks and you build a portfolio.” I’m like, “Okay.” So I started doing that. And pretty quickly I realized that A, it was intensely boring, it didn’t suit my personality at all. And B, I didn’t really understand how it all worked because I lost money on every single stock that I bought. I would buy what I thought was a good company and it would just go down in price. It’s like, “Oh, okay, that’s not the way it’s meant to work.”

And I tried for a little while on that strategy and realized that it wasn’t for me. And I started looking around for other strategies and I tried fundamental investing, I tried investing on themes, like companies that I would see appearing in societies and growing. It’s like, “Oh, they’ve got a shop here, and here, and here, and they’ve got storefronts there, they’re growing. I’ll buy that company.” And so I tried that. And then I discovered charts and I started looking at share price charts, the candlesticks and the prices going up and down. And I started drawing trend lines and squiggly indicators and so on, on the charts and trying to do that. And that didn’t work.

And I tried lots of different strategies and eventually I got to the point where I was sort of three, two and a half years in, and I was still losing money, not a lot of money because I’m pretty conservative, so I was just placing small trades, not risking a lot. I always cut my losses so that I didn’t lose everything, but it wasn’t profitable. And I got to about two years, two and a half years in and I was thinking, “Okay, I’ve either got to figure this out for real or give it away because it’s not going anywhere.” And I was spending three or four hours a night working on my trading, my investing, and making decisions and everything.

And I started reading this book, It’s probably down here somewhere, yeah. I can get it, Market Wizards. And I picked up this book and there’s a whole series of them, there was about three or four of them. And the book is a series of interviews with professional traders and investors, and everyone of them is different. And what I learned from reading all of those interviews was that there were many different investment styles. And the one thing that they all had in common is they were all 100% confident and comfortable with their strategy. So they had a strategy that suited them, it suited their personality, suited their objectives, suited their lifestyle. And they could execute their strategy consistently with discipline every day. It’s like, “Okay, cool.”

And so I read through all those interviews several times and I basically looked at those people and I crossed off all of the ones that I could not relate to. So there’s some Forex traders who stay up till all hours of the night watching charts and they had charts in their bedroom, like computer consults in their bedroom and in their bathroom. And they always were looking at the markets literally every minute of the day. It’s like, “Nope, I don’t want that life.” And then there were others that would more like the Warren Buffett style, that would really analyze the companies then go and interview the management and go and really research the industry. And I was like, “That stuff sucks, I don’t want to do that.” And then there were other people that did all these different approaches. And I found in there that I was really not excited about most of the strategies, but when I came to systematic trading, I was like, “Ah, that feels right.” And systematic trading is rules-based trading. If this, and this, and this happens, you buy. If this or this happens, you sell.

And there’s lots of different rules that work, but the key is they’re rules that you can codify and test because for a lot of people, they’re buying into investments hoping that they have a sensible approach, and hope’s not a great strategy, it’s a hook, it might pay off, but three years later you might still be losing money. You don’t know. And so systematic trading really appealed to me because all of a sudden you could test the rules. And so what you can do is you can say, “Okay, under these conditions, this, this, and this, if they all happen, I’ll buy.” You can put those into the computer, into the software and look at the past 30 years of stock market history and test, how would those rules have played out over time? Would you have made money, would you have lost money? How much would you have made? How big would the dips have been? When 2008 happened, would you have been wiped out? When the dot com bubble burst, would you have been wiped out? All of those sorts of things.

And to me, I trained as an engineer, I never worked as an engineer, but I trained as an engineer, so the math and the numbers and all of that really appeal. And so I got to systematic trading, I was like, “Oh, that’s my approach.” And I think this is the first real lesson that’s really important. If you’re going to be active in the market, you’ve got to have an approach that really fits you. And I talk about it in terms of personality, objectives, lifestyle. If you are really a hyperactive sort of want lots of action sort of person, you can’t buy and hold for 10 years, you’re going to be bored out of your mind and you’re sabotaged. And similar for the opposite.

Objectives is like, well I want to spend 20 minutes a day doing this so that I can have the rest of my time free. Well, if that’s what your objective is, you can’t trade a strategy that you have to look at the charts all day because it doesn’t meet your objectives. And similarly, objectives in terms of return and objectives in terms of risk, it has to meet your objectives and it has to meet your life, your lifestyle. A lot of people come to the markets and say, “Okay, I want to be a day trader.” Day trader means you buy and sell, and buy and sell, and buy and sell, and you make heaps of money because you place lots of trades every day, but they have a day job.

And if you have a day job and you’re trying to day trade at the same time, guess what? You can do a bad job day trading and you’re going to do a bad job at your employment, and you’re probably going to get fired from your job and you’re going to lose money in the markets and you’ll be even worse off than you were before.

So I discovered systematic trading, it took me about two and a half to three years to find it. And as soon as I found it, I was like, I was hooked and I spent three months, I took three months off work, unpaid leave to develop my first trading system. And I read book after book on systematic trading, I developed a system, I launched it. And from then on, I made money. Not every day, and not every week, and even every month, but consistently over time I built my wealth. And so from then I knew I was going to succeed. And then it was just a matter of building enough capital, paying down the debt and getting to a position where my trading made more money than I needed to survive.

And that takes time, it takes years because if you start with, I started with seven and a half thousand dollars and you need a lot more than that to survive on your investments, so I added money to my trading account over time and I grew it with profits and eventually my trading account was making more money than I was in my job. And that was when I left the corporate world.

Florian Fritz:

Oh, sure. Great story. Thank you. I think a very important lesson, it does take time. If you want to try to do it overnight with day trading, you’re probably one of those people who will lose their money quickly.

Adrian Reid:

Oh, absolutely. Yeah. And I’m not sure what it is about trading and the financial markets that people think, “Oh, I’ll just quit my job and I’ll just trade for a living.” It’s like, “What? I’ll just quit my job and I’ll become a brain surgeon.” It’s like, “No, you won’t because you’ll kill a few people while you’re learning and then you won’t ever get a job as a brain surgeon.” And people also come to the markets thinking, “Oh, I’ll make some money and then I’ll pay for the course to become a trader.” That’s like practicing brain surgery to pay for medical school. That doesn’t work either. You actually have to learn first. And most people when they realize they’ve got to learn, think, “Oh, it’s too hard.” But the amazing thing about trading in the markets is that it’s absolutely worth the learning. It’s worth the time and the energy and the investment to learn because once you learn, you’ve got decades where you can make money with an extra skill.

If I taught a trading system to someone that might take a little bit of time, a couple of weeks to teach them how to trade systematically and teach them that system or a couple of months if they really want to get everything out of my head and learn trading. But then after that, they’re independent forever and you can trade. My trading takes 20 minutes a day or less most days in fact. And it doesn’t matter if I’m trading $10,000 or $10 million, it takes the same amount of time. So it’s amazingly scalable, which is beautiful because it means you can keep growing your wealth, you can keep building, but you don’t have to take more and more and more time. If you get a promotional work, usually that comes with extra responsibility.

Florian Fritz:

And more work and more time.

Adrian Reid:

And more work, and more hours, and more stress. But trading is not like that.

Florian Fritz:

That’s cool, that’s cool. Awesome, thank you. And on your website you talk about the 10 commandments for consistent profitable trading. So what are those? Can you share those? What do you need to become profitable and consistently profitable?

Adrian Reid:

Yeah, absolutely. I mean, there’s a fair few things. The 10 commandments I summarize in the document, I’ve got the document here so I can refer to it. But the first thing is you’ve got to learn the language. If you want to go into a foreign country and function effectively, you need to know the language or you need to be able to translate. And most people come into the markets thinking, “I’m a smart person, I’ll figure it out.” But then they realize they get confused, they start reading and they hit a term or a piece of information, they don’t understand it. And then they get a little bit confused and a little bit of your attention gets stuck on that. And then they keep reading or keep trying to learn and then something else comes up that they don’t understand what this word means and a little bit of their attention gets stuck on that. And they keep reading and eventually, all of your attention is stuck on the things that you didn’t understand and you have no more capacity to learn.

So the first thing is actually learn the language, you’ve got to understand what drawdown is, you’ve got to understand what compound and your growth rate is, you’ve got to understand what a pullback is, you’ve got to understand… There’s lots of things. And so I put together a document of trading terminology and if someone just reads that once, then all of a sudden they sort of know the language. And then you can go and read a book or listen to a YouTube video from a trading mentor or something and take the messages in rather than struggle with the language. So I think that’s number one. If you want to learn effectively, you have to know the language of the topic that you’re learning. Just like property, just like everything else in investing, you have to learn the lingo.

Florian Fritz:

Absolutely. Yeah, great.

Adrian Reid:

Makes sense.

Florian Fritz:

Great [inaudible 00:17:31].

Adrian Reid:

Number one. That’s number one. Number two is use a system. Most people approach the markets the way they approach everything else. “I’m pretty smart, I’ve got some experience, I’ll bring that experience to bear and I’ll make some sensible decisions and then I’ll make some money and then I’ll be rich.” But unfortunately, when it comes to trading in the market, what you learn from everything else in life doesn’t apply. In fact, it’s almost the opposite. So in school, we’re taught to be right, you’ve got to get the right answer, you’ve got to get 100% on your test, you’ve got to do well, you’ve got to study hard, you’ve got to remember the facts so that when the teacher calls on you, you get the right answer so you don’t get embarrassed.

And that carries through university. And even when you get to the workforce, you’ve got to be correct in your recommendations and you’re going to get the boss the right material. And there’s just no tolerance for loss or being wrong or not knowing or uncertainty. But unfortunately in the financial markets you have to have a high tolerance for loss and for uncertainty. And let me give you a quick example, I’m wrong on my trades about 70% of the time, 70% of the time. “Adrian, you must be a terrible trader. How does that work? What?”

Florian Fritz:

No, you’re not.

Adrian Reid:

Right. But if I’m wrong on, so I’ve got 10 trades, if I’m wrong on seven of them and I lose $1 each time I’m wrong. But then on the three times that I’m right, I make $5 each. On those 10 trades, overall I make a lot of money. But if I want to be right when I buy this stock, I need that stock to go up so I can sell it higher than I bought it for so that I can be right so that I can make money on that trade. But thinking about that one stock, if it goes down, it’s like, “Oh, okay.” I’ll just wait till it gets up to even so I can sell it, so I can be right. And I don’t want to sell it down here because that would be a loss, that would mean I was wrong, that’s bad for the ego, that’s hard for me to take, I’ve been trained to be right. This is just temporary, it’ll go back up because I bought it and I know it’s a good investment so it’ll go back up.

But it doesn’t, it keeps going down. And it keeps going down and keeps going down. And so what happens to the size of your losses?

Florian Fritz:

They get bigger, and bigger, and bigger.

Adrian Reid:

They get bigger.

Florian Fritz:

Until I take them and then it turns back up.

Adrian Reid:

That’s exactly right and that’s exactly what happens because when you give up, it’s too much pain. You give up when there’s too much pain to bear, it’s like, “That’s it, I can’t take it anymore, I’m out.” And you sell. But that’s exactly the time where everyone else sells too and that’s the bottom, but you don’t know that in advance. You just know that you are overcome with emotion. So the reason we use a system is because the system tells us when to get in and when to get out. It bypasses the emotion, it bypasses the need to be right on each individual trade because the system is like a process we follow.

Toyota, when they manufacture cars, they don’t micromanage every single little car and try and maximize the profit on that car, forgetting about everything else. What they do is they have a process that builds cars consistently. They build the car the same way every single time. Now, everything in that car might not be perfect from the customer’s perspective, but overall it’s a viable product and it makes money.

Our trading system, our trading rules are the same. If we run the rules over and over again, they should make money. And we can test by putting those rules into our trading software and looking over the past 20 or 30 years of history and making sure that if we’re to follow those rules over time, we would’ve made money. So user system, it bypasses the emotion, it eliminates the need to be right on this trade because we’ve got a process that works and we’re being right by following the process, not by making smart individual trades. Does that make sense?

Florian Fritz:

Totally.

Adrian Reid:

Yeah. Cool. Okay, great. That’s the second one. Third one, third commandment is use an approach that suits you. If you’re a very patient, long term, considered sort of person, you want a long-term strategy, a trading strategy where you buy and you wait through the big major trend and the stock keeps going up. And then when it’s obviously stopped going up and it starts going down, you sell and you make profit out of the big chunk of the trend. But if you were a really less patient sort of person, someone who wants a lot of activity and action, that’s going to boil you to tears and you’re going to sabotage it, so you need a more frequent trading strategy. So you’ve got to match it to you. And there’s six, I talk about six different dimensions on your trader profile of what you have to understand and match in my program. I won’t go into them here, but basically you have to be comfortable with the strategy. It’s got to fit you so you can follow it.

Fourth one is you’ve to have a positive edge, a positive expectancy we call it in trading. So if you apply your strategy over and over many times, do you get a positive expectation of making profit? And I want to know that if I test my strategy over the last 20 years, do I get a thousand trades and overall on average are those trades profitable? There’s going to be many losses and many profitable trades, but overall on average it needs to be profitable. Most people don’t even have a profitable approach, most people wouldn’t have a clue because they’ve never tested it. And this is why systematic trading is a huge event because it’s systemized, it’s objective, you can actually test. And then you know, “Hey, this is a profitable strategy.” Does that make sense?

Florian Fritz:

Yeah, that gives a lot of confidence when trading, if you know.

Adrian Reid:

Yeah. Yeah, absolutely. Then the biggest mistake people make is they think about making money. And I know that sounds counterintuitive, but if you think about how much money you are going to make as opposed to how much money you could lose if you are wrong, then you get two very different outcomes. Because if you start by thinking about how much money you can make, you’re all optimistic and you’re thinking about, “Wow, this could go to the moon and how much can I justify putting into this investment so that I make the most possible?” Which is exactly the wrong way to do it. You want to think about, “If this trade is a loser, how much will I lose? And therefore how much should I put into this trade such that it won’t hurt me?” So you’ve got to start the opposite to what most people do because we want to make sure that we can keep trading no matter what happens. None of our trades should be able to hurt us. If one of my trades goes incredibly wrong, it shouldn’t hurt me, I should live to trade another day. No problem at all.

Florian Fritz:

That’s a big one, I think.

Adrian Reid:

Yeah.

Florian Fritz:

An important one.

Adrian Reid:

And most people don’t really understand the impact of losing money, but if you’ve got $100 and you’re investing it, and you lose 50% of it, you now have $50. You have to make 100% return on your $50 to get back to where you were, so you lost 50%, but now you’ve got to make 100% to get back to break even. And making 100% is not easy. And if you lose more than 50%, let’s say you lose 90% of your money, now you’ve got to make 1,000% to get back. I mean, the math is mind blowing. And as soon as you understand the math, you then start to… Actually it’s 900%, sorry, not 1,000%.

Florian Fritz:

It’s 900%.

Adrian Reid:

There’s 100 down to 10, and then from 10 you’ve got to get back to 100. But in any case, it’s a lot harder to recover.

Florian Fritz:

900%. Making 900% is still difficult, right?

Adrian Reid:

And it’s still difficult, no question. And so as soon as you realize that, you become much more focused on managing the risk. And the sad reality is most traders blow up several accounts, as in lose the entire account before they even learn how to trade. But staying in the game is the most important thing because if you make 100% this year but you lose 100% next year, you still end up with nothing.

Florian Fritz:

Zero.

Adrian Reid:

Right. And so staying in the game is the most of the battle, but most people can’t even do that because they risk too much. So preserve capital by risking a lot less. And a lot less means if you are wrong on a trade, you should lose less than 1% of your account on that trade.

Florian Fritz:

Okay. So risk management is super important, never risk more than 1% in any one trade. I wonder [inaudible 00:26:27].

Adrian Reid:

That was on five, preserve precious capital. So don’t blow up your account, stay in the game. Number six is reduce your risk. So if you think you should be risking this much, you probably should be risking that much.

Florian Fritz:

Okay.

Adrian Reid:

The ideal amount to risk on a trade is usually far less than you think because unforeseen events happen, crazy things happen in the stock market. Markets crash and stocks have bad announcements and bad earnings.

Florian Fritz:

They do.

Adrian Reid:

And sometimes there’s bankruptcies and all sorts of things. You’ve got to trade with very low risks so that none of those crazy things help you so you can survive and stay in the game, so that you can make money long term. So reduce your risk even less than you think it should be. Number seven is write your plan. Now, would you go headlong into a business without any plan at all?

Florian Fritz:

No.

Adrian Reid:

Of course not. You would have to have some sort of business plan about what you were going to do, how you were going to make money, what your processes were going to be, what your backup plans were, all of those things. Most people go into the markets with no plan at all, no rules, no risk management, no kind of if this happened then I’ll do that. And the trouble is the market is about money and money is emotional. And if your emotion goes up, what happens to your intelligence?

Florian Fritz:

It goes down.

Adrian Reid:

It goes down fast and a lot. So people make really dumb financial decisions when they’re stressed. And so if you make your decisions in advance when the market is closed and you’ve got it written down as a plan and then you just follow your plan, the emotions don’t get in the way. So if your plan was, “Okay, I’m following this set of rules, this system and I’m going to add money to my account on this date every month, and I’m going to keep adding money to my account until I’ve got this much in my account, and I’m not going to withdraw any money to live on until I’ve got that much in my account. And then I’ll only withdraw a certain percentage. And if there’s any death in the family or any emotionally compromising situation, I’m not going to open any new trades. And every day at this time I’m going to check my trades. And so on, and so on, and so on.”

It’s like planned, you know what you are going to do in advance. If you know what you’re going to do in advance when something stressful is happening in life, it doesn’t compromise your trading decisions because you already made the trading decisions. Does that make sense? Do you see how that could reduce the stress levels and reduce the emotional impact?

Florian Fritz:

Absolutely, yes.

Adrian Reid:

Yeah. So write your plan. That’s number seven. Number eight, we’re almost done. Number eight is diversify multiple ways. Now, most people think, “Oh, I’ve got five stocks, I’m diversified.” No, you’re not at all. Nowhere near it. You want to have different strategies, different markets, different timeframes. So I taught in my trade success system, I talk about three different ways of diversification, strategies, markets, and timeframes.

Strategies means, okay, I want to be able to make money when the market goes up, I want to make money when the market goes down, I want to make money from dips in the market. There’s different ways of trading to make money. Markets means don’t just trade Australian stocks or US stocks, trade multiple different markets because they all move a little bit differently. Don’t just trade stocks, also trade crypto, also trade commodities. Different markets because different markets brings better diversification. If you’ve just got five stocks or 10 stocks in your home market, you are very subject to the whims of-

Florian Fritz:

Always move similar, right?

Adrian Reid:

Yeah, exactly right. And timeframes means have some long-term strategies and have some short-term strategies because sometimes you get great long-term trends and sometimes you don’t. Sometimes you just get noise in the market kind of like now a little bit. So having strategies over different timeframes also helps. That was number eight, you’ve got to diversify far more than you think. Does that make sense?

Florian Fritz:

Absolutely, yes. Thank you.

Adrian Reid:

At this point you’re sorry you asked about the 10 commandments, you should probably wanted to ask what are the top three out of the 10 commandments? But anyway, we’ve only got only got a couple more, so we’ll get through them. Number nine is eliminate mistakes. And the trouble is most people don’t know they’re making mistakes. I actually wrote a document, I think it’s got something like 97 common trading mistakes that people have. It’s a trading mistakes cheat sheet. And what you got to do is as you are doing your trading, you journal, it’s like, “Okay, what did I do wrong today? What went wrong? What could I have done better?” And just identify what could be improved or what mistake you made and then fix it.

You’ve got to be conscious about it because even if you’ve got the best system in the world, if you start making a few mistakes, those mistakes compound on each other but in the wrong direction. And so you’ve got to consciously eliminate them so that you can get close to the expected profit of your strategy. So eliminating mistakes, you’ve got to put effort into that. It takes effort to trade perfectly, so we’ve got to do that.

And then number 10, this is the most interesting, most people look for the holy grail. What is the best strategy, the best set of rules, the best stock to buy, the one that’s going to make me rich? But in fact that that search is a full errand because you spend so much time searching for perfection that you don’t make money from good. And if you’ve got a good trading strategy and you follow it consistently with discipline, you’ll make money immediately. But if you spend three or five years searching for perfection, you make nothing in the process, but you could have made quite a lot of money and really built your wealth with a good strategy. So you just need a good profitable strategy to follow the other commandments and you’ll do well.

Florian Fritz:

Any profitable strategy works. Don’t look for the best one.

Adrian Reid:

Yeah, you don’t… I mean, yes, any profitable strategy. And once you find a strategy, you don’t want to keep tinkering with it and fine-tuning and optimizing it and trying to make it perfect because it’ll never be perfect. There is no perfect, because the markets are very uncertain. And this is something that coming from a non-trading world, like coming from the corporate world or coming from education or from university or school, it’s very hard to accept that there’s not a right answer. Should I buy when the stock moves to this level or that level? Or should I set a stop loss at 10% or 15% or 20% below the entry price? So there’s not one right answer for that, it’s all just trade-offs and probabilities.

Florian Fritz:

Probabilities. Very good. Now, we did manage to get through all 10 commandments, not just the top three. Amazing, thank you. Now, if somebody would like to learn more from you or get the mistakes cheat sheet or join your trading system program to learn how to develop their trading systems, where can they find you?

Adrian Reid:

The best place is to look on the website, enlightenedstocktrading.com. And if you go there, you’ll see a message where you can opt in to get a free course, and the trading mistakes cheat sheet, and lots of other resources. I’ve got heaps of stuff on there because I really believe it’s important for people to learn to survive in the markets. Most people try and think about making money before they even know how to survive. And so I’ve got a lot of resources on there for free about how to keep yourself alive in the markets and then start to make money. So go to enlightenedstocktrading.com and grab The Millionaire Trader Code. You’ll see a pop-up as soon as you join the website and there’s a section there for learn stock trading free resources and just download everything and have a read through. And if you are captivated by the markets after that and you really want to learn more, then there’ll be lots of opportunities to speak with me about how to do that.

Florian Fritz:

Awesome, Great. I’ll definitely share the link-

Adrian Reid:

Thank you.

Florian Fritz:

… with this episode so people can find it. Now, one more question before we wrap this up. Just a couple of weeks ago you sent an email out about the market bottom. Now, you actually called the market bottom or predict it or what was that about?

Adrian Reid:

Look, one of the big mistakes that people make is trying to predict. I want to say this right up front, no one can accurately predict the market consistently over and over again because we don’t have a crystal ball and we don’t know what events are going to unfold. I mean, it might have been the market bottom. And so I sent out the communication, it’s actually, if you read all my emails, it’s a bit tongue in cheek about calling it the bottom, but you want to sort of understand the implications, I think in terms of what ifs. If that was the bottom and it goes up from here, what will happen in my portfolio? If that wasn’t the bottom and it’s just a temporary rally and it collapses and goes further down, what would happen in my portfolio? And you know are successful as a trader, particularly as a systematic trader, if you don’t care what happens.

If that was the bottom and it rallies from here, my systems that make money when the market goes up will continue to load in and give me more and more exposure and they’ll make money on the way up. If that wasn’t the bottom, then what will happen is there’s a bit of a rally, I’ve started to buy stocks to make money on the way up, but I’m not fully invested yet because my systems enter kind of gradually as it proves itself. Does that make sense?

Florian Fritz:

Mm-hmm.

Adrian Reid:

So I’ve got a bit more long-side exposure, but if it turns around and falls, then I also have some short-side exposure. And for someone listening who doesn’t know what the long side and a short side means, long side is when you buy something hoping it will go up in price so that you can sell it later at a higher price and make a profit. Short side is where you borrow a stock from a broker and you sell it first. So you sell it at $100 a share let’s say, and if the market falls and you buy it back at $50 and you give it back to your broker, you make $50. So it’s like, the long side when it goes up, you make money. The short side, when it goes down you make money.

So if that wasn’t the bottom and it’s just a rally and it’s going to collapse, then my short side will continue to make money. So I don’t really mind whether that was the bottom or not. And that’s the way you want to be, you want to be agnostic to what’s going on in the market and you want to be able to sleep well at night regardless of what happens. And if you’re diversified across markets, strategies, timeframes, and you have a systematic approach, then it’s actually very easy to sleep well at night and trade at the same time.

Florian Fritz:

Okay, great. So thank you for… That means if I have good systems, I don’t care whether there is a bottom or not or when the bottom happens, actually.

Adrian Reid:

Yeah, you don’t need to predict that, you just follow the rules because over time the rules will get you into the good moves and keep you out of the adverse moves. And over time your wealth will build. We don’t need to project or predict what is going to happen, we just respond to what is happening and the rules will do that for you.

Florian Fritz:

Okay, perfect. Thank you so much for coming, Adrian. I think there was a lot of valuable stuff in this interview. Is there any final comment you would like to add?

Adrian Reid:

Yeah. Look, I would just say that the markets and the stock market and crypto, they’re fascinating. And if you are really fascinated by it, you should learn and you should put the time into it. But don’t be too quick to jump into with your actual money and buy stocks and buy cryptos until you’ve learned because there’s a very high chance that at the beginning you’re going to lose. And until you’ve got a good strategy behind you, then you can do it. Preserving your capital and staying in the game is the most important thing you can do. Most people will start trading and they’ll buy this and buy that. They’re trying to profit without knowing anything yet. Learn first, put in some time upfront and commit to that. It’s like a new career, learn that new career and it only takes a couple of months, particularly if you’ve got a good guide to teach you. And then you can reap the rewards. But don’t try and skimp and figure it out as you go on the fly by the seat of your pants with experience.

You’ve either got to commit to your learning on your own, which means reading hundreds of books and really studying and looking at all the different scenarios and looking at charts over time, or invest in your education and take a course or a program or a mentorship so that you can learn more quickly. But you’ve got to do that, because if you don’t do that, you will lose money. It’s a competition and the unprepared lose.

Florian Fritz:

Great. I think that’s a great tip before you start trading, go learning. And you could do that at enlightenedstocktrading.com. You can find the link right here with this episode. Thank you so much, Adrian, for coming and thank you so much for listening. Talk to you soon in our next episode of Money and Business Hero.

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How systems lead you to trading success – Guest Adrian Reid

Florian Fritz:

You’re listening to the Money and Business Hero Podcast where we’re talking about the three pillars of financial success: money mindset, money management and money making, and how they can help you to improve your financial life.

My name’s Florian Fritz and today I have another very special guest, Adrian Reid. He’s a full-time private trader as well as the founder and trading coach at Enlightened Stock Trading, which is dedicated to educating and supporting traders on their journey to profitable systematic trading in stocks and now in and crypto as well. He started trading stocks over 20 years ago and left the corporate world in 2012 after making hundreds of thousands of dollars a year, working just 30 minutes a day managing his trading systems. Through Enlightened Stock Trading, Adrian educates traders in the principles of profitable independent trading through the development of their own personalized portfolio of trading systems. He’s focused on empowering you as a trader with profitable trading systems, which suits your personality, objectives and lifestyle, teaching you to be independently successful rather than relying on him or anyone else for advice. Now, welcome to the show, Adrian. Great to have you here.

Adrian Reid:

Florian, awesome to be here. Thanks so much for having me, and for taking the time to talk.

Florian Fritz:

Well, wonderful. Because I know you have lots of value to give to people who want to grow their money.

Adrian Reid:

Yeah, absolutely. I love talking about trading. I’ve been doing it a very long time and it’s one of those topics where people get into it thinking it’s easy and they do what is intuitive and obvious to them and lose money and wonder what happened. But unfortunately, as with a lot of things, money in business and investing, it’s a little bit counterintuitive what works and what doesn’t. So we need to learn some skills so that we can make money in the market rather than just fritter away our wealth on bad decisions.

Florian Fritz:

Well, yes, that’s definitely true. And you say traders, well, most traders lose money, right?

Adrian Reid:

Exactly. Yeah.

Florian Fritz:

Before you get into profits, you need to lose money to learn what not to do, or you start with a coach that actually tells you the things you shouldn’t do, right? Now, I read that you got into stock trading by playing a game. What game was that and how did that happen?

Adrian Reid:

Yeah, good question. There was a game… So when I was about eight years old, my family had a holiday house. They still do, but my family had a holiday house and it was a rainy day, boring sort of situation. We couldn’t go to the beach, because the weather wasn’t very nice. And so we were looking around in the house for something to do and we found this game called the Stock Market Game. And Dad, my father was like, “Oh yeah, that’s a great game. We should play?”

So we played, and basically what it is, is you go around the board and each square you land on, the market goes up or the market goes down and you’ve got an opportunity to buy or sell different stocks or whatever. And I remember playing this game with my brother and my father and becoming a billionaire on paper, and it was like the best thing ever. I just loved the idea that you move around and the market fluctuated and you could buy something here low and you could sell it high and you collect dividends and you build your wealth as you go around and then something bad happens and you lose a bunch of money, but then you’re going to make it back.

That was my sort of first introduction to the market and I was like, “Wow, this is so awesome.” It was my favorite game, and I still have the game. It’s in a cupboard somewhere. I should have got it so I could show you. But that was my introduction. And, of course, the game makes it much easier to succeed than reality. But when I started working just after I finished university many years later, I pretty quickly realized, oh, I don’t want to do this forever because it’s like 12 hours a day and it’s stressful and I’ve got to answer to someone and all of that. And I was traveling all the time, which was really challenging. And I said to my dad, “Hey, I don’t really want to work my whole life. What do I need to do so that I can retire?” And he’s like, “Retire? You just started.” “I know, but I’m planning ahead. I want to do this quicker.”

So we talked about investing and setting money aside, spending less than you earned, investing the difference and having a investment methodology that you can follow consistently. He invested in stocks and property. I looked at property, I didn’t have that much money and I didn’t have that much interest to be honest. But I loved stocks because I had this game, this sort of founding introduction via the game. And so I started learning about stocks and there’s a whole journey I went through there, which took about three years to figure out, but that’s really how I came to the stock market and started investing with actual money.

Florian Fritz:

Okay, great. And that was successful pretty quickly since you… How long did it take you to get to those hundreds of thousands?

Adrian Reid:

Pretty quickly would be an exaggeration. It does take time. It took me three years to figure out how to be profitable. So I was teaching myself. And when I started, I started by copying the only person that not I knew who did it, my father. So I said, “Okay, so how do I invest in stocks? How does this really work?” And he said, “Well, you’ve got to find good companies and you’ve got to buy them and hold them. And they’ll go up over time and you collect dividends, and then you reinvest the dividends and you save more money and you buy more stocks and you build a portfolio.” It’s like, okay.

So I started doing that and pretty quickly I realized that, A, it was intensely boring. It didn’t suit my personality at all. And B, I didn’t really understand how it all worked because I lost money on every single stock that I bought. I would buy what I thought was a good company and it would just go down in price. It’s like, okay, that’s not the way it’s meant to work. I tried for a little while on that strategy and realized that it wasn’t for me. And I started looking around for other strategies and I tried fundamental investing. I tried investing on themes like companies that I would see appearing in societies and growing. It’s like, oh, they’ve got a shop here and here and here, and they’ve got storefronts there, they’re growing. I’ll buy that company.

So I tried that and then I discovered charts and I started looking at share price charts, the candlesticks and the prices going up and down. And I started drawing trend lines and squiggly indicators and so on the charts and trying to do that. And that didn’t work. I tried lots of different strategies. And eventually I got to the point where I was sort of two and a half years in and I was still losing money, not a lot of money because I’m pretty conservative. So I was just placing small trades, not risking a lot. I always cut my losses so that I didn’t lose everything, but it wasn’t profitable. And I got to about two and a half years in and I was thinking, okay, I’ve either got to figure this out for real or give it away because it’s not going anywhere. And I was spending three or four hours a night working on my trading, my investing and making decisions and everything.

And I started reading this book, it’s probably down here somewhere. Yeah, let me get it. Market Wizards. I picked up this book and there’s a whole series of them. There’s about three or four of them. The book is a series of interviews with professional traders and investors and every one of them is different. And what I learned from reading all of those interviews was that there were many different investment styles. And the one thing that they all had in common is they were all 100% confident and comfortable with their strategy. So they had a strategy that suited them, it suited their personality, suited their objectives, suited their lifestyle, and they could execute their strategy consistently with discipline every day. It’s like, okay, cool.

And so I read through all those interviews several times and I basically looked at those people and I crossed off all of the ones that I could not relate to. So there’s some Forex traders who stay up till all hours of the night watching charts and they had charts in their bedroom, like computer consoles in their bedroom and in their bathroom. And they always were looking at the markets literally every minute of the day. It’s like, nope, I don’t want that life. And then there were others more like the Warren Buffett style that would really analyze the companies, then go in and interview the management and go and really research the industry. And I was like, that stuff sucks. I don’t want to do that.

And then there were other people that did all these different approaches and I found in there that I was really not excited about most of the strategies, but when I came to systematic trading, I was like, ah, that feels right. And systematic trading is rules-based trading. If this and this and this happened, you buy. If this or this happens, you sell. And there’s lots of different rules that work. But the key is they’re rules that you can codify and test because for a lot of people, they’re buying into investments hoping that they have a sensible approach and hope’s not a great strategy. It’s a hook. It might pay off, but three years later you might still be losing money. You don’t know.

And so systematic trading really appealed to me, because all of a sudden you could test the rules. And so what you can do is you can say, okay, under these conditions, this, this, this and this, if they all happen, I’ll buy. You can put those into the computer, into the software and look at the past 30 years of stock market history and test, how would those rules have played out over time? Would you have made money? Would you have lost money? How much would you have made? How big would the dips have been? When 2008 happened, would you have been wiped out. When the dot-com bubble burst, would you have been wiped out? All of those sorts of things.

And to me, I trained as an engineer, I never worked as an engineer, but I trained as an engineer, so the math and the numbers and all of that really appealed. And so I got to systematic training, I was like, oh, that’s my approach. And I think this is the first real lesson that’s really important. If you’re going to be active in the market, you’ve got to have an approach that really fits you. And I talk about in terms of personality objectives, lifestyle. If you’re really a hyperactive, lots of action sort of person, you can’t buy and hold for 10 years, you’re going to be bored out of your mind and you’ll sabotage it. And similar for the opposite.

Objectives is like, well, I want to spend 20 minutes a day doing this so that I can have the rest of my time free. Well, if that’s what your objective is, you can’t trade a strategy that you have to look at the charts all day because it doesn’t meet your objectives. And similarly, objectives in terms of return and objectives in terms of risk, it has to meet your objectives and it has to meet your lifestyle. A lot of people come to the markets and say, “Okay, I want to be a day trader.”

Day trader means you buy and sell and buy and sell and buy and sell, and you make heaps of money because you place lots of trades every day, but they have a day job. And if you have a day job and you’re trying to day trade at the same time, guess what? You’re going to do a bad job at day trading and you’re going to do a bad job at your employment, and you’re probably going to get fired from your job and you’re going to lose money in the markets and you’ll be even worse off than you were before.

So I discovered systematic trading. It took me about two and a half to three years to find it. And as soon as I found it, I was hooked. And I spent three months, I took three months off work, unpaid leave to develop my first trading system, and I read book after book on systematic trading. I developed a system, I launched it, and from then on I made money, not every day or not every week, or not even every month, but consistently over time I built my wealth.

And so from then I knew I was going to succeed. And then it was just a matter of building enough capital, paying down the debt, and getting to a position where my trading made more money than I needed to survive. That takes time, it takes years because if you start with… I started with $7,500 and you need a lot more than that to survive on your investments. So I added money to my trading account over time and I grew it with profits and eventually my trading account was making more money than I was in my job. And that was when I left the corporate world.

Florian Fritz:

Oh, sure. Great story. Thank you. I think very important lesson. It does take time. If you want to try to do it overnight with day trading, you’re probably one of those people who will lose their money quickly.

Adrian Reid:

Oh, absolutely. Yeah. I’m not sure what it is about trading and the financial markets that people think, oh, I’ll just quit my job and I’ll just trade for a living. It’s like, well, I’ll just quit my job and I’ll become a brain surgeon, right? It’s like, no, you won’t because you’ll kill a few people while you’re learning and then you won’t ever get a job as a brain surgeon. And people also come to the markets thinking, oh, I’ll make some money and then I’ll pay for the course to become a trader. That’s like practicing brain surgery to pay for medical school. That doesn’t work either. You actually have to learn first. And most people, when they realize they’ve got to learn, think oh, it’s too hard.

But the amazing thing about trading in the markets is that it’s absolutely worth the learning. It’s worth the time and the energy and the investment to learn because once you learn, you’ve got decades where you can make money with an extra skill. If I taught a trading system to someone, that might take a little bit of time, a couple of weeks to teach them how to trade systematically and teach them that system or a couple of months if they really want to get everything out of my head and learn trading, but then after that they’re independent forever and you can trade. My trading takes 20 minutes a day or less most days, in fact, and it doesn’t matter if I’m trading $10,000 or $10 million, it takes the same amount of time. So it’s amazingly scalable, which is beautiful because it means you can keep growing your wealth, you can keep building, but you don’t have to take more and more and more time. If you get a promotion at work, usually that comes with extra responsibility.

Florian Fritz:

And more work and more time.

Adrian Reid:

And more work and more hours and more stress, but trading is not like that.

Florian Fritz:

That’s cool. That’s cool. Awesome. Thank you. On your website you talk about the 10 commandments for consistent profitable trading. What are those? Can you share those? What do you need to become profitable and consistently profitable?

Adrian Reid:

Yeah, absolutely. I mean, well, there’s a fair few things. The 10 that I summarize in the document, I’ve got the document here so I can refer to it. But the first thing is you’ve got to learn the language. If you want to go into a foreign country and function effectively, you need to know the language or you need to be able to translate. And most people come into the markets thinking, I’m a smart person, I’ll figure it out. But then they realize they get confused, and they start reading and they hit a term or a piece of information, they don’t understand it, and then they get a little bit confused and a little bit of their attention gets stuck on that. And then they keep reading or keep trying to learn and then something else comes up that they don’t understand what this word means and a little bit of their attention gets stuck on that and they keep reading. And eventually, all of your attention is stuck on the things that you didn’t understand and you have no more capacity to learn.

So the first thing is actually learn the language. You’ve got to understand what drawdown is. You’ve got to understand what compound annual growth rate is. You’ve got to understand what a pullback is. There’s lots of things. And so I put together a document of trading terminology, and if someone just reads that once, then all of a sudden they sort of know the language. And then you can go and read a book or listen to a YouTube video from a trading mentor or something and take the messages in rather than struggle with the language. So I think that’s number one. If you want to learn effectively, you have to know the language of the topic that you’re learning in. Just like property, just like everything else in investing, you have to learn the lingo.

Florian Fritz:

Absolutely, yeah. Great advice, I think. Great [inaudible 00:17:32].

Adrian Reid:

That’s number one. Number two is use a system. Most people approach the markets the way they approach everything else. I’m pretty smart, I’ve got some experience, I’ll bring that experience to bear and I’ll make some sensible decisions, and then I’ll make some money and then I’ll be rich. But unfortunately, when it comes to trading in the market, what you learn from everything else in life doesn’t apply. In fact, it’s almost the opposite. So in school we’re taught to be right. You’ve got to get the right answer, you’ve got to get 100% on your tests, you’ve got to do well, you’ve got to study hard, you’ve got to remember the facts so that when the teacher calls on you, you get the right answer so you don’t get embarrassed. And that carries through university. And even when you get to the workforce, you’ve got to be correct in your recommendations and you’ve got to give the boss the right material. There’s just no tolerance for loss or being wrong or not knowing or uncertainty.

But unfortunately in the financial markets, you have to have a high tolerance for loss and for uncertainty. And let me give you a quick example. I’m wrong on my trades about 70% of the time. 70% of the time, Adrian, you must be a terrible trader. How does that work, right?

Florian Fritz:

No, it’s not.

Adrian Reid:

Right. But if I’m wrong on… So I’ve got 10 trades. If I’m wrong on seven of them and I lose $1 each time I’m wrong, but then on the three times that I’m right, I make $5 each on those 10 trades, overall I make a lot of money. But if I want to be right, when I buy this stock, I need that stock to go up so I can sell it higher than I bought it for so that I can be right so that I can make money on that trade. But thinking about that one stock, if it goes down, it’s like, oh, okay, I’ll just wait till it gets up to even so I can sell it so I can be right. I don’t want to sell it down here, because that would be a loss. That would mean I was wrong. It’s bad for the ego, that’s hard for me to take. I’ve been trained to be right. This is just temporary, it’ll go back up because I bought it and I know it’s a good investment, so it’ll go back up. But it doesn’t, it keeps going down and it keeps going down and keeps going down. And so what happens to the size of your losses?

Florian Fritz:

They get bigger and bigger and bigger and bigger, until I take them and then it turns back up.

Adrian Reid:

That’s exactly right. And that’s exactly what happens because when you give up, it’s too much pain. You give up when there’s too much pain to bear and it’s like, “That’s it, I can’t take it anymore. I’m out.” And you sell. But that’s exactly the time where everyone else sells too, and that’s the bottom. But you don’t know that in advance, you just know that you’re overcome with emotion.

So the reason we use a system is because the system tells us when to get in and when to get out. It bypasses the emotion, it bypasses the need to be right on each individual trade because the system is like a process we follow. Toyota when they manufacture cars, they don’t micromanage every single little car and try and maximize the profit on that car, forgetting about everything else. What they do is they have a process that builds cars consistently. They build the car the same way every single time. Now everything in that car might not be perfect from the customer’s perspective, but overall it’s a viable product and it makes money.

Our trading system, our trading rules are the same. If we run the rules over and over again, they should make money. And we can test by putting those rules into our trading software and looking over the past 20 or 30 years of history and making sure that if we were to follow those rules over time, we would’ve made money. So use a system, it bypasses the emotion, it eliminates the need to be right on this trade because we’ve got a process that works and we’re being right by following the process, not by making smart individual trades. Does that make sense?

Florian Fritz:

Totally.

Adrian Reid:

Yeah. Cool. Okay, great. That’s the second one. Third one, third commandment is use an approach that suits you. If you’re a very patient, long-term considered sort of person, you want a long-term strategy, a trading strategy where you buy and you wait through the big major trend and the stock keeps going up. And then when it’s obviously stopped going up and it starts going down, you sell and you make profit out of a big chunk of the trend. But if you were a really less patient sort of person, someone who wants a lot of activity and action, that’s going to bore you to tears and you’re going to sabotage it. So you need a more frequent trading strategy. So you’ve got to match it to your… I talk about six different dimensions on your trader profile of what you have to understand and match in my programs. I won’t go into them here, but basically you have to be comfortable with the strategy. It’s got to fit you so you can follow it.

Fourth one is you’ve got to have a positive edge, a positive expectancy we call it in trading. So if you apply your strategy over and over many times, do you get a positive expectation of making profit? And I want to know that if I test my strategy over the last 20 years, do I get 1,000 trades? And overall on average, are those trades profitable? There’s going to be many losses and many profitable trades, but overall on average it needs to be profitable. Most people don’t even have a profitable approach. Most people wouldn’t have a clue, because they’ve never tested it. And this is why systematic trading is a huge advantage because it’s systemized, it’s objective. You can actually test, and then you know, hey, this is a profitable strategy. Makes sense?

Florian Fritz:

Yeah. That gives a lot of confidence when trading, if you know.

Adrian Reid:

Yeah. Yeah, absolutely. Then the biggest mistake people make is they think about making money. I know that sounds counterintuitive. But if you think about how much money you’re going to make as opposed to how much money you could lose, if you’re wrong, then you get two very different outcomes. Because if you start by thinking about how much money you can make, you’re all optimistic and you’re thinking about, wow, this could go to the moon, and how much can I justify putting into this investment so that I make the most possible, which is exactly the wrong way to do it. You want to think about, if this trade is a loser, how much will I lose? And therefore how much should I put into this trade such that it won’t hurt me? So you’ve got to start the opposite to what most people do, because we want to make sure that we can keep trading no matter what happens. None of our trades should be able to hurt us. If one of my trades goes incredibly wrong, it shouldn’t hurt me. I should live to trade another day. No problem at all.

Florian Fritz:

That’s a big one, I think. Really important one.

Adrian Reid:

Yeah. And most people don’t really understand the impact of losing money. But if you’ve got $100 and you’re investing it and you lose 50% of it, you now have $50. You have to make 100% return on your $50 to get back to where you were. So you lost 50%, but now you’ve got to make 100% to get back to breakeven. And making 100% is not easy. And if you lose more than 50%, let’s say you lose 90% of your money, now you’ve got to make 1000% to get back. I mean the math is mind-blowing. And as soon as you understand the math, you then start to… Actually, it’s 900%, sorry, not 1000%.

Florian Fritz:

It’s 900.

Adrian Reid:

If it’s 100 down to 10, and then from 10 you’ve got to get back to 100. But in any case, it’s a lot harder to recover.

Florian Fritz:

Making 900% is still difficult, right?

Adrian Reid:

It is still difficult, no question. And so as soon as you realize that, you become much more focused on managing the risk. And the sad reality is most traders blow up several accounts, as in lose the entire account before they even learn how to trade. But staying in the game is the most important thing because if you make 100% this year, but you lose 100% next year, you still end up with nothing.

Florian Fritz:

Sure.

Adrian Reid:

And so staying in the game is most of the battle, but most people can’t even do that because they risk too much. So preserve capital by risking a lot less and a lot less means if you’re wrong on a trade, you should lose less than 1% of your account on that trade.

Florian Fritz:

Okay, so risk management, super important. Never risk more than 1% in any one trade.

Adrian Reid:

Yeah.

Florian Fritz:

Now, what number is this?

Adrian Reid:

That was number five, preserve precious capital. So don’t blow up your account, stay in the game.

Number six is reduce your risk. So if you think you should be risking this much, you probably should be risking that much. The ideal amount to risk on a trade is usually far less than you think because unforeseen events happen, crazy things happen in the stock market. Markets crash and stocks have bad announcements and bad earnings.

Florian Fritz:

They do.

Adrian Reid:

Sometimes there’s bankruptcies and all sorts of things. You’ve got to trade with very low risk so that none of those crazy things help you so that you can survive and stay in the game so that you can make money long term. So reduce your risk, even less than you think it should be. Number seven is write your plan. Now, would you go headlong into a business without any plan at all?

Florian Fritz:

No.

Adrian Reid:

Of course not, right? You would have to have some sort of business plan about what you were going to do, how you were going to make money, what your processes were going to be, what your backup plans were, all of those things. Most people go into the markets with no plan at all, no rules, no risk management, no kind of if this happened, then I’ll do that. And the trouble is the market is about money and money is emotional. And if your emotion goes up, what happens to your intelligence?

Florian Fritz:

It goes down.

Adrian Reid:

It goes down fast and a lot. So people make really dumb financial decisions when they’re stressed. And so if you make your decisions in advance when the market is closed and you’ve got it written down as a plan, and then you just follow your plan, the emotions don’t get in the way.

So if your plan was, okay, I’m following this set of rules, this system, and I’m going to add money to my account on this date every month, and I’m going to keep adding money to my account until I’ve got this much in my account, and I’m not going to withdraw any money to live on until I’ve got that much in my account, and then I’ll only withdraw a certain percentage, and if there’s any death in the family or any emotionally-compromising situation, I’m not going to open any new trades and every day at this time I’m going to check my trades and so on and so on. It’s planned. You know what you’re going to do in advance. If you know what you’re going to do in advance, when something stressful is happening in life, it doesn’t compromise your trading decisions because you already made the trading decisions. Does that make sense? See how that could reduce the stress levels and reduce the emotional impact?

Florian Fritz:

Absolutely, yes.

Adrian Reid:

Yeah. So write your plan. That’s number seven. We’re almost done. Number eight is diversifying multiple ways. Now most people think, oh, I’ve got five stocks, I’m diversified. No, you’re not at all. Nowhere near it. You want to have different strategies, different markets, different timeframes. In my Trader Success System, I talk about three different ways of diversification: strategies, markets, and timeframes. Strategies means, okay, I want to be able to make money when the market goes up. I want to make money when the market goes down. I want to make money from dips in the market. There’s different ways of trading to make money. Markets means don’t just trade Australian stocks or US stocks. Trade multiple different markets, because they all move a little bit differently. Don’t just trade stocks. Also trade crypto, also trade commodities, different markets because different markets brings better diversification. If you’ve just got five stocks or 10 stocks in your home market, you’re very subject to the whims of-

Florian Fritz:

Always move similar, right?

Adrian Reid:

Yeah, exactly right. And timeframes means have some long-term strategies and have some short-term strategies, because sometimes you get great long-term trends and sometimes you don’t. Sometimes you just get noise in the market kind of like now a little bit. So having strategies over different timeframes also helps. So that was number eight, you’ve got to diversify far more than you think. Does that make sense?

Florian Fritz:

Absolutely, yes. Thank you for that one.

Adrian Reid:

At this point, you’re sorry, you asked about the 10 commandments. You should probably be wanting to ask what are the top three out of the 10 commandments? But anyway, we’ve only got a couple more, so we’ll get through them.

Number nine is eliminate mistakes. The trouble is most people don’t know they’re making mistakes. I actually wrote a document, I think it’s got something like 97 common trading mistakes that people have. It’s a Trading Mistakes Cheat Sheet. And what you’ve got to do is as you’re doing your trading, you journal. Say, okay, what did I do wrong today? What could have done better? And just identify what could be improved or what mistake you made and then fix it. You’ve got to be conscious about it because even if you’ve got the best system in the world, if you start making a few mistakes, those mistakes compound on each other but in the wrong direction. And so you’ve got to consciously eliminate them so that you can get close to the expected profit of your strategy. So eliminating mistakes, you’ve got to put effort into that. It takes effort to trade perfectly. So we’ve got to do that.

And then number 10, and this is the most interesting, most people look for the holy grail. What is the best strategy, the best set of rules, the best stock to buy, the one that’s going to make me rich? But in fact that search is a full errand, because you spend so much time searching for perfection that you don’t make money from good. And if you’ve got a good trading strategy and you follow it consistently with discipline, you’ll make money immediately. But if you spend three or five years searching for perfection, you make nothing in the process, but you could have made quite a lot of money and really built your wealth with the good strategy. So you just need a good profitable strategy and to follow the other commandments and you’ll do well.

Florian Fritz:

Any profitable strategy works. Don’t look for the best one.

Adrian Reid:

Yeah, you don’t… I mean, yes, any profitable strategy and once you find a strategy, you don’t want to keep tinkering with it and fine-tuning it and optimizing it and trying to make it perfect, because it’ll never be perfect. There is no perfect, because the markets are very uncertain. And this is something that, coming from a non-trading world, like coming from the corporate world or coming from education or from university or school, it’s very hard to accept that there’s not a right answer. Should I buy when the stock moves to this level or that level? Should I sell or should I set a stop loss at 10% or 15% or 20% below the entry price? Well, there’s not one right answer for that. It’s all just trade-offs and probabilities.

Florian Fritz:

Probabilities. Very good. Now we did manage to get through all 10 commandments, not just the top three. Amazing, thank you. Now, if somebody would like to learn more from you or get the mistakes cheat sheet or join your trading system program to learn how to develop their trading systems, where can they find you?

Adrian Reid:

Best place is to look on the website, enlightenedstocktrading.com. And if you go there, you’ll see a message where you can opt in to get a free course and the Trading Mistakes Cheat Sheet and lots of other resources. I’ve got heaps of stuff on there, because I really believe it’s important for people to learn to survive in the market. Most people try and think about making money before they even know how to survive. And so I’ve got a lot of resources on there for free about how to keep yourself alive in the market and then start to make money. So go to enlightenedstocktrading.com and grab The Millionaire Trader Code. You’ll see a popup as soon as you join the website and there’s a section there for learn stock trading, free resources, and just download everything and have a read through. And if you are captivated by the markets after that and you really want to learn more, then there’ll be lots of opportunities to speak with me about how to do that.

Florian Fritz:

Awesome. Great. I’ll definitely share the link-

Adrian Reid:

Thank you.

Florian Fritz:

… with this episode so people can find it. Now, one more question before we wrap this up. Just a couple of weeks ago you sent an email out about the market bottom. Now you actually called the market bottom or predict it or what was that about?

Adrian Reid:

Look, one of the big mistakes that people make is trying to predict. I want to say this right up front. No one can accurately predict the market consistently over and over again, because we don’t have a crystal ball and we don’t know what events are going to unfold. I mean, it might have been the market bottom. And so I sent out the communication. Actually, if you read all my emails, it’s a bit tongue in cheek about calling the bottom. But you’ll want to sort of understand the implications, I think in terms of what ifs. If that was the bottom and it goes up from here, what will happen in my portfolio? If that wasn’t the bottom and it’s just a temporary rally and it collapses and goes further down, what would happen in my portfolio?

And you know you’re successful as a trader, particularly as a systematic trader, if you don’t care what happens. If that was the bottom and it rallies from here, my systems that make money when the market goes up will continue to load in and give me more and more exposure and they’ll make money on the way up. If that wasn’t the bottom, then what will happen is there’s a bit of a rally, I’ve started to buy stocks to make money on the way up, but I’m not fully invested yet because my systems enter kind of gradually as it proves itself. Does that make sense?

Florian Fritz:

Mm-hmm.

Adrian Reid:

So I’ve got a bit more long side exposure, but if it turns around and falls, then I also have some short side exposure. For someone listening who doesn’t know what the long side and the short side means, a long side is when you buy something hoping it will go up in price so that you can sell it later at a higher price and make a profit. Short side is where you borrow a stock from a broker and you sell it first. So you sell it at $100 a share, let’s say, and if the market falls and you buy it back at 50 and you give it back to your broker, you make the $50. So it’s like the long side, when it goes up, you make money. The short side, when it goes down, you make money.

So if that wasn’t the bottom and it’s just a rally and it’s going to collapse, then my short side will continue to make money. So I don’t really mind whether that was the bottom or not. And that’s the way you want to be. You want to be agnostic to what’s going on in the market and you want to be able to sleep well at night regardless of what happens. And if you’re diversified across markets, strategies, timeframes, and you have a systematic approach, then it’s actually very easy to sleep well at night and trade at the same time.

Florian Fritz:

Okay, great. Thank you. That means if I have good systems, I don’t care whether there is a bottom or not, or when the bottom happens, actually.

Adrian Reid:

Yeah, you don’t need to predict that. You just follow the rules, because over time the rules will get you into the good moves and keep you out of the adverse moves, and over time, your wealth will build. We don’t need to project or predict what is going to happen, we just respond to what is happening, and the rules will do that for you.

Florian Fritz:

Okay, perfect. Thank you so much for coming, Adrian. I think there was a lot of valuable stuff in this interview. Is there any final comment you would like to add?

Adrian Reid:

Yeah, look, I would just say that the markets and the stock market and crypto, they’re fascinating. If you are really fascinated by it, you should learn and you should put the time into it. But don’t be too quick to jump with your actual money and buy stocks and buy cryptos until you’ve learned, because there’s a very high chance that at the beginning you’re going to lose. Until you’ve got a good strategy behind you, then you can do it. Preserving your capital and staying in the game is the most important thing you can do. Most people will start trading and they’ll buy this and buy that and sell this, and they’re trying to profit without knowing anything yet.

Learn first. Put in some time upfront and commit to that. It’s like a new career. Learn that new career and it only takes a couple of months, particularly if you’ve got a good guide to teach you. And then you can reap the rewards. But don’t try and skimp and figure it out as you go on the fly by the seat of your pants with experience. You’ve either got to commit to your learning on your own, which means reading hundreds of books and really studying and looking at all the different scenarios and looking at charts over time, or invest in your education and take a course or a program or a mentorship so that you can learn more quickly. But you’ve got to do that, because if you don’t do that, you will lose money. It’s a competition and the unprepared lose.

Florian Fritz:

Great. I think that’s a great tip. Before you start trading, go learning. And you could do that at enlightenedstocktrading.com. You can find the link right here with this episode. Thank you so much, Adrian, for coming. And thank you so much for listening. Talk to you soon in our next episode of Money and Business Hero.

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