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Transcript of Adrian Reid’s Interview On The Talking Trading podcast

Trading System Confidence

Caroline Stephen:

Hi, it’s Caroline Stephen, financial journalist. Our guest on Talking Trading today is Adrian Reid from Enlightened Stock Trading. And Adrian and I discuss how you can build confidence in your trading system properly so that it’s ticking all the right boxes. You see, the one thing you can do to boost your trading results is systematic trading. And we talk about setting up your system rules, executing them as expected, backtesting data collection, the problem of curve fitting, and the importance of having the stability of an edge.

Caroline Stephen:

For those people who are building a trading system, this will be very helpful information. And for those people who already have a system built, this is a good reminder of all the things that you need in place. But before we go to systems in the show today, let’s start with trading psychology and the resilience traders need to develop, with Louise Bedford in Mindpower with her very funny ta-da story.

Louise Bedford:

I had just finished presenting. It was a huge crowd. There was a roar of applause. I glided happily towards the edge of the stage to make my graceful exit, and unfortunately, high heels, long flowing dress, steps, I missed time the step and I fell down, down, down, right down to the bottom. And there was my skirt practically over my head. I was in a sprawling heap and the audience gasped. There was just arms and legs everywhere and everybody just went, “Oh, my gosh, are you okay?” People came running and I was so embarrassed. I just laid really still just for a little while and I tried to gather my thoughts. After a moment of wiggling my toes and trying to work out that yes, every part of me did still work, with a moment of inspiration, I lifted my feet and I yelled, “Ta-da!” And put my arms in the air.

Louise Bedford:

My microphone was still on so it did carry through the whole auditorium. And I got a standing ovation. Everybody laughed and it was just such a relief because it really was humiliating. The thing is, trading does set you up to be incredibly resilient. The markets are such a great training ground. They teach you strength, they make you take yourself with a little bit of a smile, less seriously than perhaps the other civilians out there. And will you fall down as a trader? Oh, my gosh, yes, you will. Hopefully not as dramatically and publicly as my little feet though.

Louise Bedford:

In the markets, it seems to be like a heap of piranha bites that can erode your confidence and self-esteem. It’s very rarely that one big shark bite. I guess my falling off stage was like that shark bite. But you need to find your own level of resilience, you need to work out what you will do when you fall down. And always remember, it’s not what happens to you as a trader, it’s how you handle it. And the best traders pick themselves up, dust themselves off, put their arms in the air and yell, “Ta-da,” and enter their next trade.

Meredith Jones:

Hi, my name is Meredith Jones, author of Women Of The Street; Why Female Money Managers Outperform (and How You Can Too), and I listen to Talking Trading.

Caroline Stephen:

Adrian Reid is a private trader, as well as the founder and trading coach at Enlightened Stock Trading, a company which is dedicated to educating traders on their journey towards profitable systems and financial freedom. Adrian Reid, hello and welcome back to Talking Trading.

Adrian Reid:

Hi, Caroline. Thanks for having me back again. Great to be here.

Caroline Stephen:

Great to see you again. So let’s talk about building confidence in your trading system. Before we start, can you explain what a trading system is?

Adrian Reid:

Yeah, absolutely. A trading system is really simply just a set of rules that will get you into the market and out of the market, hopefully with a profit. So it tells you exactly what to buy, when to buy, how much to buy, and when to sell. And I want to be clear here because the idea of a system might scare a lot of people off. And a system is not a big, complicated piece of software. It’s not a big coding IT exercise. It’s simply the rules that guide your trading. You have a entry rule, you have a position sizing rule, you have a exit rule, and those things combine together to guide the way you get into and get out of the market.

Caroline Stephen:

So why do so few traders use systems?

Adrian Reid:

Look, I think first of all, systematic trading is not the most prevalent approach out there. If you go and look on the bookshelves, if bookstores even existed anymore, and you look, browse through the shelf of trading system, trading books, rather, there wouldn’t be that much out there on systematic trading. There’s far more information on charting and fundamental analysis and chart patterns and indicators and all of that, because frankly, that stuff is easy to produce, and it’s also very hard to prove or disprove. So I think as an author, you can write all sorts of interesting things about chart patterns and indicators and fundamental analysis and no one’s ever going to prove you wrong. But as a systematic trader, what you’re doing is insisting on measuring and analyzing the performance of your trading approach, and that is not subject to debate. So you can’t be vague, you can’t be nebulous, it’s got to be real.

Adrian Reid:

And I think that level of accountability is something that people need to step up to. If you can step up to confront the fact that you are responsible for your trading results, and it’s not the author’s fault who wrote about the indicator that you’re using that’s losing money, it’s your responsibility to use that indicator as part of a system, analyze its performance, ensure it’s profitable, and then use it consistently. Because if you do that, your trading turns a corner and all of a sudden overnight you start succeeding in making money. But that step, that level of accountability is something that I think people really need to step up to.

Caroline Stephen:

So building confidence in the trading system that you design, how do you do that?

Adrian Reid:

So the first step in building confidence in your trading system is to have it documented correctly. So some traders will say, “Yeah, I’ve got a trading system,” but really, it’s just some rules scratched on the back of an envelope using a pencil. The first step to doing it for real is to get your trading rules documented into your trading software so that you can run the scans and determine objectively where your buy and sell signals are. The second step is to actually trade by trade review those rules and make sure they’re executing in the software exactly as you expect, because it’s very easy to put some rules into your trading software and run a backtest and say, “Oh, the results are good,” or, “The results are bad.” But it takes some effort to go trade by trade and check, “Is it doing exactly what I think it should be doing? And can I replicate what the backtest is actually doing?”

Adrian Reid:

One of the biggest mistakes with trading systems that people make is they have rules that actually you can’t follow in the real world because there’s a cheat or there’s a mistake or there’s a future leak where it looks a tomorrow’s volatility to make a decision about whether I take a trade tomorrow morning. In order for a trading system to be executable, at the point that you place your trade, you must only have information that in the real world you would have at that point. You can’t have any future information from there on because you won’t know that when you’re trading real time. So eliminating those errors, those future leagues and so on gives you that confidence, because you don’t have to second-guess, “Did I do this right?”

Caroline Stephen:

Backtesting. Let’s talk about backtesting, because a lot can go wrong. What do traders need to watch out for so that they don’t have false confidence?

Adrian Reid:

Yeah, a good question. The biggest thing in backtesting, I think, is the order in which you do it. So many people will crack open the trading software and start throwing indicators at the charts and backtesting it to see what makes money. I actually want to take a big step back from there and instead look at what are you trying to achieve with this system? Do you want to try and catch big, long trends? Do you want to try and catch the swings within the main trend? Or do you want to catch the mean reversion snapbacks that happen when the market gets overextended?

Adrian Reid:

Being very clear on what move you’re trying to catch and then intentionally designing the rules to catch that move goes a long way towards eliminating the backtest mistakes, because you’re no longer just data mining by throwing indicators at the software. What you’re doing is intentionally trying to catch a certain type of price movement. And that means that the system is profiting from something real, it’s not just data mining. It’s not just excessive optimization. “Oh, look, here’s one combination out of 256,000 moving average combinations that happened to turn a profit.”

Caroline Stephen:

Data mining, I like this term. Let’s talk about other things traders need to look out for when testing.

Adrian Reid:

So with backtesting, there’s a lot that can go wrong, as you said. Probably something to be aware of that I think is misunderstood is just how much data you need, just how many trades you need in your sample. Again, I’ve coached hundreds of traders, and when they’re looking at trading rules and trying to test them manually, it’s like, “Oh, I did 30 or 50 paper trades and it looks profitable.” 30 or 50 trades is nowhere near enough data to determine whether or not the method is profitable. When I run a backtest, I want to see 500, 1,000, 2,000 trades over 20 or 30, 20 or 25 years to determine whether or not the method is profitable. And the reason you need so much data, it’s way more than you would think, it’s because there is so much variance in the market.

Adrian Reid:

There’s different market states. There’s bull markets, there’s bear markets, there’s volatile, there’s quiet. You’ve got winning trades and losing trades, you’ve got breakeven trades. And by the time you look at all of those different combinations, you’ll find that if you do a manual backtest, you’ve only really analyzed the performance of your rules in a very select set of conditions. I want to know that my rules are consistent and make money no matter what happens. Now, that doesn’t mean the system is going to make a ton of money in a bear market if it’s a long-side trend following system, that’s not what I’m saying. But it has to survive. And so I have to know, if I’m trading this system, what will happen when the market turns around? Am I going to be comfortable with that?

Caroline Stephen:

Big picture view.

Adrian Reid:

Absolutely. Yeah, you’ve got to step way back now. Now, what’s interesting is you design your trading system, you’re looking at, “Well, I’m looking at 25 years of data.” You’re designing a set of rules looking at this very big picture view. You need to do the optimization and make sure that the system performs in a stable way. If your system’s edge is constant and it’s just grinding profits constantly up the whole time, that’s a really good sign. What often happens though is if you’ve picked up your rules out of a book, the edge in the system might be degrading over time. And so when you look at the backtest, it might be really profitable for a number of years, but then it starts to peter out and slow down. That’s a real warning sign.

Adrian Reid:

To be confident in your trading system, the edge needs to be stable. So stability is really important. But there’s a trick. You run a backtest, you do use a compounding equity curve, right? So you risk say 1% of your account or half percent of your account on each trade and you get this beautiful exponential curve which shows that you’ve made 50 bazillion dollars by the time you get to the present day, which is wonderful, it gets everyone excited. But the trouble is when you’re running a compounding test like that where your trade size gets bigger as your capital gets bigger, it actually hides what’s happening under the surface.

Adrian Reid:

So what I’m going to encourage listeners to do is run that sort of backtest and understand how the compounding equity curve performs, absolutely, but also run a test where you have a constant trade size, or a constant risk per trade, so like $1,000 risk on every trade. And what that does is it eliminates the exponential growth from your backtest results and it shows you much more clearly, is the system’s edge stable? The other advantage of having the backtest where you’ve got a constant trade size is you’ll find that you get far more trades into your backtest, so you get a bigger data set.

Caroline Stephen:

So talking about significance in your trading rules, final question, what do you look for?

Adrian Reid:

Significance is critical and it’s a step that most traders miss, and it leads to one of the biggest problems, which is curve fitting. Because let’s say you’ve got a simple system and it’s somewhat profitable and it looks promising. So what do you do typically? You add more rules to it to try and improve it, to get rid of some of the bad trades and get more of the good trades. And so you might layer three or four extra rules on top of your moderately good system to make it look good in a backtest. Now, when you do that, what you’re doing is fine-tuning the system to perform well in the past, which is not great because performing well in the past does not equal performing well in the future.

Adrian Reid:

What you want to do is make sure that each rule you add to your system is significant, it makes a real difference, it’s not just curve fitting. And so significance means if I have a system that when I run a backtest it generates a thousand trades. If I add an extra rule to it and that eliminates the trade that happened right before the crash of October 1987, the profitability of my system in the backtest will all of a sudden look amazing, but the rule is not significant because it only eliminated one or two bad trades which just happened to be on that date.

Adrian Reid:

So for a rule to be significant, it’s got to affect a significant number of trades in the backtest so that you get a good sample size, and it has to have a significant impact on profitability so that you know that it’s meaningful. Rules that don’t affect a lot of trades are really dangerous, because really, they’re cherry-picking particular conditions, and that’s going to make your system fragile and chances are it’ll break and lose you money in the future.

Caroline Stephen:

Final thoughts, Adrian?

Adrian Reid:

Look, if you’re not trading systematically, this is one thing that I believe that you can do to really give your trading a boost, because frankly, human beings are emotional creatures and trading systems are the easiest way that I know to get around the emotions and start trading consistently. And it’s also the best way to get confidence in your training approach because you can actually test your rules. But if you don’t have your rules written down and systemized, you don’t really know that it’s profitable. There’s a degree of faith, and faith is similar to hope. That’s not really the best strategy. I’d far prefer to backtest my rules, know that they’re profitable and then follow them with discipline. And we just take ourselves out of the equation. It’s no longer about us, the trader, making up clever decisions, making money in the market. That’s an ego play. The profit play is having rules that are profitable and allowing yourself or disciplining yourself to follow those rules consistently to allow the system to extract profit from the market.

Caroline Stephen:

Is there anything you’d like to offer our listeners?

Adrian Reid:

Yeah, absolutely. If you’re interested in developing trading systems or if you’ve already got a trading system and you want to build your confidence in your trading system, I’ve put together a Trading System Confidence Cheat Sheet. It has all of the steps that I go through for every single system I develop in trade to give myself the maximum confidence that that system is profitable and it will continue to be profitable in the future. So if you click the link below or go to enlightenedstocktrading.com/talkingtrading, enter your name and email there and I’ll email you the Trading System Confidence Cheat Sheet. And just by following those simple steps, you’ll find that your ability to follow the trading system that you’ve got improves dramatically, and your willingness to do what it takes to make money in the markets will skyrocket and your results will improve as a result.

Caroline Stephen:

Adrian, thanks for your time.

Adrian Reid:

Pleasure.

Caroline Stephen:

And that’s it for today’s episode of Talking Trading. Stay tuned next week to hear Cam Hawkins from Trading Nut podcast as we have a fun conversation about the markets. So until next week, happy trading. But before we go today, here’s some final words from Louise Bedford.

Louise Bedford:

I’m Louise Bedford. Chris Tate, my business partner, and Caroline Stephen, the incredible host of this show, we adore bringing you every week new episodes to fuel your profits in the markets. Be sure to subscribe to this podcast on talkingtrading.com.au. And also, you might not know this, but on tradinggame.com.au, you can pick up my free trading plan template. So make sure you register your details there. I’ve been watching the iTunes reviews come through and there are so many good ones to choose from.

Louise Bedford:

But here is one from [Ride It Till You Can’t 00:00:19:13]. Great name there. “Talking Trading is so much more than a trading podcast. It provides great insights into the minds of traders and offers terrific tips on managing the all-important psychology of trading and personal development. A must listen.” Thank so much, Ride IT Till You Can’t, I just adore your little review here. And you know what? I would love to see more come through. So go on to Apple Podcasts or iTunes, as you may know it, and give us a big fat five-star review. Can’t get enough of them. And you never know, I might read yours out on a future episode of Talking Trading.

Caroline Stephen:

The views represented on Talking Trading are general in nature and do not take into account your objectives, financial situational needs. Before acting on any of the information, consider its appropriateness in regards to your own situation.

Enlightened Trading

Caroline Stephen:

Caroline Stephen, financial journalist. Our special guest on Talking Trading today is trading coach Adrian Reid from Enlightened Stock Trading. Adrian’s a private trader who escaped the rat race and working 12 and 14 hours a day and he now consistently makes six figures trading. He shares his trading knowledge as a coach, empowering people to take control of their own portfolio. And in today’s interview, Adrian and I discuss resuscitation of your investment portfolio, as Adrian says, “By getting the right habits and by focusing on becoming a better trader, the money will take care of itself and the portfolio will grow.” We talk about why systems are so important and how to do portfolio CPR. But first in Mindpower, Louise Bedford looks at your trading definition and why it’s so important. Let’s hear her now.

Louise Bedford:

How you define your role might very well determine how long you stay with trading. I heard a fantastic definition the other day of trading in an effective way. Here was the definition and see what you think, my job is to take small losses and make big wins. I love that because every year I have so many small losses, but just a few outsized gains. It’s extremely difficult to be profitable in this game if you are thinking that your job is to have hundreds of wins, lots and lots of big wins, and only a few small losses. Flip that on its head, it doesn’t happen that way. Even the Turtles who were the absolute pinnacle of trading groups, they earned the most and they had a fantastic trading system and they really worked well together, even the Turtles only earned, on average, from 35% of their trades, the majority of their profits.

Louise Bedford:

So think about that, 35% win. How would you feel? What would that do to your psyche? I can tell you, it would wrap you up like a pretzel unless you realized that the definition of your job is to take small losses and make big wins. That is what it takes. Often, I hear people get that the wrong way around, and they are hung by their tongue. I also hear people say, “If I become a trader. If I become a full-time trader,” instead of using the word, “When.” Watch the language that you use. Be careful about your definitions because you know how it is, you blink and a day goes past. You blink and, “Oh my gosh, that’s the year gone.” Oh, another blink and it’s 10 years. When you look back doesn’t time concertina like that? We have to take what we can right now and make it worth it. Give ourselves the value that we need. Honor ourselves so that, that will give us energy to continue learning about the markets so that we can keep making those small losses and making those big wins.

Rik Schnabel:

Hi, I’m Rik Schnabel. I’m the author of The Power of Beliefs, and I listen to Talking Trading.

Caroline Stephen:

Adrian Reid is a private trader as well as the founder and trading coach at Enlightened Stock Trading, a company dedicated to helping traders on their journey towards financial freedom. Adrian Reid, hello, and welcome to Talking Trading.

Adrian Reid:

Hi, Caroline. Thanks so much for having me. Great to be here.

Caroline Stephen:

Resuscitation of your investment portfolio, Adrian, why do traders and investors need to resuscitate their portfolios?

Adrian Reid:

Good question, Caroline. I’ve had conversations with hundreds of traders and investors now about getting their portfolio on the right track. And inevitably, most traders follow a similar path to their ultimate success. And usually, that path involves some degree of trial and error, using one approach and then giving that approach up, using another approach, taking some tips, getting some advice from different sources-

Caroline Stephen:

Don’t know what you’re talking about.

Adrian Reid:

Look, as you know, what happens is you end up with a portfolio that’s a whole mishmash of different strategies. And some of those may be profitable, but chances are most of them are not. And really, in the evolution of a trader’s journey, there seems to be this point where you come to the realization that, “Oh, I actually don’t know what I’m doing,” or, “I’ve done a whole bunch of things that are silly and I don’t know how to undo them.” And those mistakes of the past drag you down. And I found that if I just work through a systematic process of reviving the portfolio with these traders, you can get on a solid foundation to move forward and start actually profiting in the market.

Caroline Stephen:

And that’s resuscitating?

Adrian Reid:

Yeah, exactly right. So resuscitating means essentially eliminating the things that are causing you financial pain, putting some rules in place to make sure you don’t get yourself into more trouble, and allowing yourself to move forward. Because let’s be honest, if we’ve been trading for a little while and we haven’t quite figured it out, it’s still a big, even if we know we’re losing money, it’s still a big leap to say, “Oh, everything I’ve done so far is wrong. I’m going to close everything and go to cash,” right? Most people are not willing to do that or aren’t yet ready to make that leap. And to be honest, you don’t have to because if you just revive the portfolio the right way by following a couple of simple steps, which we’re going to talk about in this podcast session today, then you can turn your portfolio around very, very quickly.

Caroline Stephen:

Most common mistakes traders and investors make, what are they in your opinion?

Adrian Reid:

The biggest mistake I think that most new traders make is not having a system, not having a set of rules to follow, and listening to too many sources of information. So I get a tip from Uncle Jim, I read something from Fat Prophets, or some other analyst, [inaudible 00:06:58], or I get it on a trading forum and someone’s spooking some stock, so I decide to buy some of that. There’s just lots of different methods, but no unified system tying it together, the quickest way for most traders to be profitable, in my view, is to put in place a set of rules that you just follow. It’s a trading system that tells you exactly when to buy and exactly when to sell. And as long as those rules are profitable, it eliminates most of that garbage. So the biggest mistake is following lots of different approaches that aren’t proven to be profitable.

Caroline Stephen:

Okay. So you’re looking at a non-systematic trader’s portfolio and you’re wanting to revive or resuscitate it, what do you look for?

Adrian Reid:

Okay. So the first thing that I’ll look for is trades that should have been exited already. And you know the ones. All you have to do is browse through the charts and you see, “Oh, I’m holding X, Y, Z stock. And I bought it at $60 and it’s now at 20.” You probably shouldn’t still be holding it. So it’s the stocks that are obviously in a downtrend. And I’m talking long only here because most new traders are only going long. So I’ll stick with that-

Caroline Stephen:

Good point.

Adrian Reid:

… viewpoint. So it’s stocks that are clearly moving in the wrong direction and have been doing so for some time. And the reason they’re usually still in a portfolio is that people freeze. It’s like deer in the headlights. It’s like, “I bought this stock, I thought it was a good story, and I started losing money. And I froze because I thought maybe if I just wait, it’ll turn around,” okay? Sometimes they do, but most often, they don’t. So it goes down a little bit more, and then the pain gets bigger and bigger and bigger and bigger.

Caroline Stephen:

We all know what you’re talking about.

Adrian Reid:

Of course. And I’ve done it myself countless times in the early years. So that’s the first thing, it’s stocks that you should have exited already. The second thing that I look for is the inconsistencies in the portfolio. So one of the things that really kills a lot of discretionary or subjective traders’ portfolios is the situation where they say, “Oh, I’m really confident in this pick, so I’m going to have a big position,” or, “I’m not so sure about this one, so I’m going to have a small position.” And what I find a lot of the time is when you look at their portfolio, say, “Why have you got such a massive position in ABC stock,” whatever ABC stock is, “and everything else is really small?” And inevitably, the story is, “Oh, I was really sure about that one,” or, “I got some inside information,” or, “I know the industry really well.”

Adrian Reid:

And usually, that stock has cost the trader a ton of money because they had an attachment to it. They had some confidence in it. They thought that they knew something, which meant that they could be confident and go big because they were hoping to make a ton of money really quickly. The differences in size across positions in your portfolio causes a lot of problems because if that position goes in the wrong direction, the financial pain is really significant. So we’ve eliminated the stocks that are going clearly in the wrong direction. The second step is to align the position size so that one trade can’t cause too much pain.

Caroline Stephen:

So these issues, they come up over and over repeatedly in the same cycles, the same ways, the same format with new traders. Why is that?

Adrian Reid:

Because it’s not like we go to school for traders. Most of us come to trading thinking, “Oh, I’m a smart guy,” or, “I’m a smart girl. I’ve read a bit about the stock market in the newspaper,” or, “I’ve read a few books. I’ll have a go. And I’m pretty clever so I think I can make some money,” right? And let’s be honest, most traders, we think we’re pretty smart and usually that’s true, but the trouble is, that’s not what makes money. And it’s because we’re all human that these same things come up over and over again. Humans have certain psychological issues which, frankly, make us very bad traders. And that’s the reason why I trade purely systematically is because I understand that humanity and trading, I don’t believe go very well together. So I’d rather put my trading in the hands of some rules that I know are profitable.

Caroline Stephen:

Very nicely said, Adrian. So what would be some of the psychological issues that are so very human?

Adrian Reid:

We get an attachment to our decisions. So if I commit to something publicly, then I’m more likely to support that later because part of my ego, part of my self-concept, is tied up in that being right. And we go to school and we’re taught to be right. We want to get 100% on our test. And trading is not actually about being right. Trading’s about making money and they’re very fundamentally different things. And related to being right, or the need to be right, a lot of traders will look for profit on a trade to say, “Oh, I was correct on that trade. See, I made money.” That’s very different to looking for profit in the portfolio because if I want to be right on 90% of my trades, it’s dead easy to do that because all you do is you put a really tight profit target and as soon as it ticks in your favor, you get out for a small profit, and I’m right.

Adrian Reid:

But the trouble is the small percentage of time that you are wrong, you lose a ton of money. And the small, small wins aren’t enough to compensate for the large loss. So we need to flip that thinking on its head and instead think about the average profitability across the portfolio. When we try and be right on a trade, we end up losing money at the portfolio level because we don’t allow our wins to get big. If instead, we try and be profitable at the portfolio level and worry a whole lot less about the profitability on a per trade basis, all of a sudden trading becomes a whole lot easier.

Caroline Stephen:

Okay, Enlightened Stock Trader, you’ve addressed these problems in these traders’ portfolios, what’s the next step?

Adrian Reid:

For most traders, the best step you can make for your trading is to implement a system, a set of rules to guide your decisions, to keep you out of this trouble in the future. We want to eliminate all of the different information sources that don’t help us make profitable trading decisions. And in my experience, I’ve been trading systematically for 15 years now. And as soon as I made the leap to following a set of rules that I had confidence in, everything became easy.

Adrian Reid:

I eliminated all other sources of information and my trading became profitable almost overnight. If you looked at my equity curve day-by-day, it was basically volatile going down like most people’s equity curve, I implemented my system, and more or less that month, I started being profitable. So that switch is as easy as putting in place a system that you’re confident enough to follow. So that’s the main thing that most traders should be looking towards, eliminating all the information and putting the rules in place.

Caroline Stephen:

For someone in a new situation, what’s the advice you’d give someone to set them up for a lifetime of trading that’s successful in the markets? That’s a fairly broad question, isn’t it? But we’re going for the big one.

Adrian Reid:

I think the main thing is to recognize that if you’re in this situation, you’re starting out trading, remember this, that most traders wait too long before getting help or really nailing down their approach. So the best thing you can do to set yourself up for success is be ultra clear on your objectives. Clear on when you will trade, what type of trader you’re going to be, and what your financial objectives are. Let’s talk first about the objectives. Most traders think about how much money they want to make. The best place to start thinking is actually how much money am I willing to lose? What is the risk tolerance or the tolerance for drawdown that I’m willing to stomach? Because if you’re making 30% returns per year, or you have an amazing year and you make 50%, that’s fantastic, right?

Adrian Reid:

But if the next month you hit a really big drawdown and it makes you uncomfortable and you freak out and you dump your positions and you end up down for the year, the returns do you no good. We don’t freak out when we have wins, we freak out when we have losses as traders. So knowing how much drawdown you can tolerate and designing your approach to make sure you stay within those bounds is critical. Once you’ve got those parameters clear, the reward and the sort of risk profile that you’re going to operate within, you need a set of rules that you can follow that you have confidence in and that are profitable. The quickest way to get that is to develop it or to find a trading system and learn how to test it so that you can see how it performs and you can look at the equity curve and ensure that it meets your objectives.

Adrian Reid:

Now, the equity curve is when you run a backtest, or you put your rules into this trading software and you run a backtest, it will show you over the last 10, 20, 30 years, this is how the system performed. If you’re uncomfortable with the results of the system in backtesting, there’s no way you’re going to be comfortable with it in real-time trading. So putting those rules in place and testing them to make sure they line up with your objectives so that you’re comfortable with them. If you’re comfortable with them, you can follow them. And if you follow them, you can make money.

Caroline Stephen:

Very, very true. Any final thoughts, Mr. Enlightened Stock Trader?

Adrian Reid:

Yeah, absolutely. If you’re listening and you’re a trader in a situation where you’re not yet systematic, and you’re not yet making the returns that you want, the first step is to tidy up a portfolio. So go through the process of portfolio CPR. And on this page, there’s going to be a link to download my portfolio CPR cheat sheet, which will take you through step-by-step how to do that. And what that’s going to allow you to do is eliminate the positions that are weighing down your portfolio and eliminate the approaches or the decision making approaches that you’re using, which are not profitable. If I can just tell you a quick story. I had a coaching session with a trader named Martin. And his background doesn’t matter too much, but what was interesting, he was a discretionary trader using lots of different approaches.

Adrian Reid:

One of the great things he did was he had records of all of his trades and which approach he had used for each trade. So by taking those records, we were able to look at the 10 different approaches he was using, eliminate the seven that were not profitable, and he was able to immediately become profitable just by stopping doing things that were not profitable. So analyzing your results and how you’re making your decisions and the financial results that you’re getting can turn your trading around almost in an instant. Once you’ve done that, it’s time to get serious about following some profitable rules. And the best way to do that is to develop a trading system that fits your personality, your objectives, and your lifestyle. So step one, click the link below, grab the portfolio CPR cheat sheet, and go through that exercise, and then get serious about your education about trading systems because that’s what’s really going to help you stick it out when things get tough, when the market’s not behaving the way you’d ideally like.

Adrian Reid:

The only way to be consistent is to follow your system. And the only way to do that is to have a system you’re absolutely confident in and you’re willing to follow day in and day out.

Caroline Stephen:

Final thoughts, Adrian.

Adrian Reid:

Look, achieving trading success feels like an insurmountable task when you first start. And it also feels like, at the beginning, it’s not worth the effort because most traders come to the market with five, 10, $15,000, if they’re lucky, right? And if you have an amazing year and you make $5,000, you think, “Okay, cool, but it’s only $5,000.” But at the beginning of your trading journey, if you’re thinking about how much money I can make, I want to do a reframe for you. If you think instead about becoming a better trader, getting the right habits, the amazing thing is when you focus on being a good trader rather than making money, you do the right things. And if you do the right things with a $10,000 portfolio or a $5,000 portfolio, and you continue to do the right things, your portfolio will grow and you’ll continue to do the right things at $50,000 and $100,000 and a quarter of a million dollars and half a million dollars and a million dollars.

Adrian Reid:

But if you’re focusing on trying to make money quickly at the beginning, you’re going to do the wrong things and your portfolio is never going to make it to those bigger numbers. So focus on being a good trader, focus on following the rules, doing the right thing, and eventually, the money takes care of itself because your account will grow. And when it does, you realize this is the best thing in the world because it takes the same amount of time and energy and effort to manage a 10, 15, $20,000 account as it does to manage a half a million dollar account or a million dollar account if you do it right. So you make so much higher returns for effort doing this successfully than anything else I found.

Caroline Stephen:

Adrian, you mentioned the link. What would you like to offer our listeners?

Adrian Reid:

So if you click on the link below, it’s enlightenedstocktrading.com/talking trading, and just enter your name and email there, and I’ll send you the trading portfolio CPR cheat sheet. And what that’s going to allow you to do is to clean up your portfolio and get yourself on a solid foundation. There’s a couple of simple steps on the cheat sheet that you can follow, which will allow you to stop the bleeding and start stabilizing your portfolio so you can move forward from a solid foundation. It’s the first step. If you’re already in the market and you’re not confident that you’re profitable in making money, this is the first step to succeeding.

Caroline Stephen:

And if people want to find out about you more generally, they go to?

Adrian Reid:

So the website is enlightenedstocktrading.com. And if you search Enlightened Stock Trading on Facebook, you can also like my Facebook page and message me direct through there. Or if they want to email me directly, I love emailing and talking with traders, so [email protected] They can email me and I’d be happy to take any questions as well.

Caroline Stephen:

Great. Adrian, thank you very much for your time coming on to Talking Trading. It was a real pleasure to speak with you.

Adrian Reid:

Caroline, great fun. Thanks so much for having me.

Louise Bedford:

And that’s it for this episode of Talking Trading. Make sure you’re subscribed to this Talking Trading podcast on iTunes or Apple Podcast, it makes the world of difference to our ratings. And you know what else makes a difference? It means so much to us if you write us a review on iTunes or Apple Podcast. I love reading those reviews. It tells us what we are doing well and what we need to improve upon. We’d love to see your rating there. And the good ones are going to get read out on this show in the future. So make sure you subscribe, tell a friend, give us a review, and then we’ll keep on bringing you this high-quality resource. This community means the world to us. And I’m sure it does to you too. Have a great week.

Caroline Stephen:

The views represented on Talking Trading are general in nature and do not take into account your objectives, financial situational, or needs. Before acting on any of the information, consider its appropriateness in regards to your own situation.