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Transcript of Adrian Reid’s Interview On Trader Wave Academy podcast

Adrian Reid, a full-time private trader, also the Founder and Trading Coach at Enlightened Stock Trading. by Trading Conversations

Philip Teo:

Hi, everyone. Welcome to Trading Conversations. You are here, my friend, because you believe that trading can be one of the most efficient ways to attain financial freedom and can be achieved as long as you are willing to put in the hard work to develop your trading competency. Our goal with this show is to introduce you to the traders who have done through the trenches and image at the other end, from the sharing of their trading stories, strategies, workflow, and best practices. I hope to help you shorten your learning curve as you embark on your journey towards trading mastery. Today’s guest is a full-time private trader, also the founder and trading coach at Enlightened Stock Trading dedicated to educating and supporting traders on their journey towards profitable systems trading. Adrian started trading stocks regularly around 18 years ago as a part-time trader, and he nearly left his full-time corporate job in 2012 after making hundreds of thousands of dollars a year from trading.

Nowadays, he takes just 30 minutes a day managing his trading systems while spending most of his time with his wife and three children. Meanwhile, Adrian also continues to educate traders in the principles of profitable independent trading through the development of their own personalized portfolio of trading systems. If you have always been interested in using systematic trading strategies and workflows to become a more efficient trader, you definitely need to hang around to hear about the enlightenments that Adrian has gained and will be sharing with us today. With that, please join me to welcome Adrian Reid, the founder of Enlightened Stock Trading.

Hey Adrian, thanks for joining me in this episode of Trading Conversations.

Adrian Reid:

Hi, Philip, great to be here. Thanks so much for having me.

Philip Teo:

Fantastic. No, I’ve known you for quite a while now because you accepted my invitation to speak in online Trading Summit 2018 and also for the recent online Trading Summit 2019. In my mind, with my interaction with you over these two summits, I felt that you are really one of those rare trading coaches and educators who’s able to articulate your thoughts and ideas really well and in a manner which is really so easy for most people to understand. I’ve always been wanting to conduct a lengthier interview with you to understand more about your trading experiences, the obstacles that you faced, and how you overcame all of them to get to where you are today. So, let’s get straight down to how you actually started your trading journey. Can you still recall how it all started for you in the financial markets, and when was that first occasions that you were introduced to the financial markets?

Adrian Reid:

Yeah. Absolutely. Look, the very first time that I came across the stock market, or the financial markets was when I was about eight or nine years old and I found an old board game that my parents had at a holiday house called the Stock Market Game. And it was supposed to be… It’s like a monopoly, but in stocks. And so, we played this game as a family. My brother, my dad and I played typically, and I remember going around the board becoming a paper billionaire and it was amazing. You buy stocks and their market would go up and down in a very predictable fashion because it was a board game, and we’d make money and we’d retire and escape the rat race and become financially free. And to me that was pretty amazing. That game was definitely my favorite as a child, but I didn’t turn that into a real investment in the stock market.

Obviously, for some time after that, when I was at university and studying, I started tinkering around because I’d realized that I just didn’t want to work in the traditional way for the rest of my life or for all of my life. And so yeah, I started asking people I knew who invested, how they did it, how do you invest, how do you make money, how do you retire early, what do you have to do? The trouble was not many of them actually knew because they were all my parents age, they were all still working, they weren’t financially free. So, I got some advice, but not necessarily the best advice. And so, I started investing along the way and I started in mutual funds and that was very slow, very boring, didn’t meet my goals, didn’t fit my personality. It was very frustrating. And so, from there I just went from on a journey of investigation to try and find methods that worked that I was also comfortable with.

Philip Teo:

I see. And how long ago was that? So, I suppose that you actually went out to work as a full-time employee or some kind of things like that.

Adrian Reid:

Of course.

Philip Teo:

While you look to learn how to actually invest and treat the markets at the same time. So, what were some of the main obstacles that you find other than of course you find that it’s not suitable for your character, and what are some other main obstacles that you identify along the way?

Adrian Reid:

Look, there’s just so many obstacles, but the good thing is with confidence and passion, you can get through all of those, but the main obstacles that I faced in the early days were, firstly that I didn’t know which path worked and I didn’t have someone to lead me down the path. So, there’s lots and lots of books out there. So, I started reading and what I found was it was very time consuming because my investigation diverged. I discovered fund [inaudible 00:05:24], I discovered technical analysis, and then I discovered candlesticks and price action and all of these different things, and all of these concepts kept diverging. And so, it was becoming more and more time consuming to get a little bit more knowledge about a lot of things. But the solution or the trick that I found that really, really helped and will help most people is when I identified a style, a method for me, it’s systematic stock trading.

When I identified a style that I resonated with, then I could converge and focus all my research, all my learning on that. And so, my progress exploded. I made so much faster progress because I was only learning the thing that I wanted to learn that matched my personality, that I understood and resonated with, people who read hundreds of diverse trading books don’t make much progress, but if you read a 100 books on systematic trading, which I did, at least, then you make really good progress and you develop a really solid understanding.

Philip Teo:

I see. So, in a way, while you are working as having a day job, you actually started trading the market in a way trying to learn and being very diverse way. So, you actually use things like analysis, discretionary trading. And then, you ended up focusing more towards systematic trading. Can you share with us that, what was that transition like? What was the key event or the key circumstances that help you decide and be to become sure that, oh yeah, systematic trading is what I want to dive deep in and that’s what I think I will excel in. How did that circumstances came about?

Adrian Reid:

Absolutely. Look at the beginning, when I first started investing my own money, so after I had left mutual funds and decided that wasn’t for me, they weren’t achieving my goals, I started investing and I did what most traders do, and this is a big mistake. I jumped from method to method to method without going deep into any of the methods. And so, what happens when you do that is you start down a path and initially when you’re a beginner in anything, you tend to not be very good at it. And so, I lost a little bit of money and decided I didn’t like it. And so, then I tried the next thing and the next thing. And all the while you get a bit of drawdown, bit of drawdown, bit of drawdown, bit of drawdown. It’s like when you jump from system to system to system, you always end up with drawdown, drawdown, drawdown.

So, you need to stick with something. That was my learning. So, how did I figure out that systematic stock trading was my thing? Well, I discovered the Market Wizard series of books that Jack Schwager wrote and many traders that were fundamental in my development as a trader because the books I interviewed with many, many traders of all different styles from many walks of life. And I went through and I read those books and I realized that the one thing that all of them had in common was that they all had a method that really suited them. It really fit their personality, their mindset, and the way they lived. And some of them had crazy lives staying awake till all hours of the night. Forex trading 24 hours a day. Some of them were way laid back just trading a system a couple of times a week.

And some of them were very heavily intensely focused on the fundamentals. And so, as I read those interviews, I realized that some of those people were people I would like to know, people I would like to be and many of them weren’t. And so, I basically crossed out all of the interviews that didn’t appeal to me and I gradually honed it down. And what was left that I really resonated with were the systematic traders. And so, that’s where I focused my work. And when I made that transition, I had to learn a little bit about how to put a system together. I wanted to trade stocks. Stock trading systems were not really that common at the time. So, I had to adapt a lot of ideas from futures into stocks. And when I went live with my first trading system, you can see in my equity curve to the day where I did it, where I went live because my equity curve was down, down, volatile and then all of a sudden start making money.

Philip Teo:

I suppose that you probably would have done quite a significant amount of backtesting before you even start to run that first system or was it based on some kind of general criteria that should have a certain edge and then you just apply and see how that system goes? How is that program?

Adrian Reid:

One of the secrets for systematic trading and where a lot of traders let themselves down is they don’t test the ideas. If you go into any style of trading with some sort of blind faith that the method works, that the rules work, that the indicators profitable, that the ratio has predictive value, as soon as you go into a drawdown you tend to lose confidence. And as traders, we will always have drawdown. Our accounts will always be up and down, so need as we to have unshakable confidence in our method. And the way you get that when you’re trading systematically is to backtest. So, I definitely, my first system when I launched it. I had backtested it thoroughly compared to what I do today. Not that thoroughly, but it was more than most traders do. I back tested over 20 years of history, I’d done quite a bit of optimization to check how stable the system was to make sure that it would work in various market conditions and all of these things. And so, there was a fair bit of work that went into it several months in fact.

Philip Teo:

I see.

Adrian Reid:

And another mistake traders make is if you rush into the market, it’s like, “Oh, it’s just about a trading, open an account and start trading.” You’ve rushed in and you’re going to miss some of the development points, some of the ways of building confidence that you need to really survive in the market.

Philip Teo:

I see. So, in order to help us understand a little bit more about your evolution from the point where you went into systematic trading to where you are today, which I would suppose that it has been quite a number of years already, can you share a little bit with us about at that starting point where you mentioned that once you go into systematic trading, your performance and your result start to see some positive outcome. So, what was generally that kind of systematic trading strategy that you were using at that point in time that allows you to have that kind of performance immediately compared to what you were doing previously?

Adrian Reid:

Yeah, I think the key is having a system that you’re comfortable with. And what I realized in the Market Wizards books was I liked systematic, but I also liked trend following because I’m a fairly patient sort of guy. I don’t like to kind of have furious activity buy sell, buy sell, buy sell. That’s not the way I like to live my life. And so, I developed a trend following system for the Australian stock market and I launched that and it was in sync with the market when I launched. So, immediately obviously, I started to do well, which was a great bonus. It doesn’t always work beautifully like that because sometimes you’re a bit… The system is out of sync with the market. It could still be a good system, but it just doesn’t make money from day one. But trend following to me was very, very natural. And that’s how good trading should feel. It should feel like a comfortable armchair.

If you see you’re sitting in your system, it’s like, “Yep, it doesn’t cause friction, doesn’t cause stress. It’s just a natural extension of you.” And I think this is the art for, or the magic for most traders is finding that method or having someone help them find the method that is comfortable but also profitable.

Philip Teo:

So, in a way, you are pretty zen about your entire system at a point in time. That’s how you actually realize that there is something that is fit for you. And I suppose that would be from both the angle of the actual strategy itself and also especially in terms of the risk management part of it as well, right. Because risk management is something that is probably the thing that stresses traders the most. And being able to know what kind of risk management that you are really comfortable with that. I would also suppose that it takes a while for you to actually find out or is this something that you realized right from the get-go? Do you ever have a chance to blow up your account, by the way, in case [inaudible 00:14:12].

Adrian Reid:

No, I’ve never blown up an account and I put that down to a couple of things. I’ve coached hundreds and hundreds of traders now, and the ones that have blown up their account are always impatient and always in a hurry to get rich.

I was focused on becoming a good trader because I knew that if I could trade well, the money would follow. But when you focus on the money, and Skoda talks about this and many of the other longtime trading masters talk about this, when you focus on the money, trading is much more difficult, psychologically much harder. And if I worried about every little tick up and down in my account, I would be insane. And so, as a new trader and even as an experienced trader, you’ve got to fo focus on something other than the money. And for me that is following the process, following the system, following the rules, and you asked, do I have a blow up an account? When you are impatient, you tend to want to go big on trades that you are confident in or when you need to make money, or you want to make money.

And as soon as you go big, the game’s over. If you are going all in or feeling like you are ultra-confidant on one trade, you’ve lost your impartiality, you’re attached and that’s what leads to blow up. So, I think the most I ever risked on any one trade was 2% of my account and 2% is way too much. I don’t risk anywhere near that on each trade now because I trade systematically, I hold many, many positions across many markets simultaneously. Each one is just little. And when you go into trading with this idea of becoming good trader, being patient, following the process, following the system and risking only a small amount, it’s actually quite hard to blow up.

Philip Teo:

Exactly. Exactly. I totally conquer with what you have just mentioned and that’s the reason why I’ve always been telling those new traders focus on how to protect your capital while building up your trading competency before you think about how to maximize the returns that you can make from whatever strategy or system that you are actually using.

Adrian Reid:

Yeah. Absolutely. In my system, in program rather the trader success system, when I’m teaching a new trader, the first thing we do, one of the first things we do per personality wise is understand drawdown tolerance. How much can your account dip by what percentage without you stressing about it or freaking out because that determines then how much you can make to many to a large extent. Because if you’re only comfortable to a 10% dip in your account, it’s pretty hard to make very high returns because with high returns comes more volatility. But if you’ve got a bigger drawdown tolerance, then you can design a system that will take advantage of that and make higher returns. But you’ve got to be comfortable, you’ve got to be able to follow the process regardless of what your account is doing.

Philip Teo:

I see. Fantastic. And we would address more about that later on. I want to understand more about your evolution thereafter. You mentioned that when you first started to dive deep into systematic trading after backtesting, and it also happens for you that it happens to be at the best time, some of the good times of the market at that point in time, that’s why you were able to become profitable thereafter. So, how many years ago was that point and was it smooth sailing for you all the way since then?

Adrian Reid:

[inaudible 00:18:08] smooth sailing. Look, there’s always challenge in the market and there’s always ups and downs. So, it hasn’t been smooth sailing the whole way. So, my first direct stock purchase was something like 18 years ago, maybe a little more now. And after three years of trying different methods, I went live with my first system and so let’s call it 15 years ago, I went live with my first system and that was then I had backtested it and had confidence in it and ready to go, but I only had about $7500 worth of capital to trade with. So, in the beginning the evolution was about growing the account both organically and inorganically. And this is another, I guess, key mistake that many traders make is that if you get into trading with a small amount of capital, with visions of living on that money, it’s very tempting to want to take return, take profits out of your account.

But in fact, you should be doing the opposite. If you’ve got a system that works, it’s profitable, it fits you and you’re making money, the best thing to do is actually put more money into the account because then as you grow the account with savings, you grow the account with returns, you get much faster exponential growth. And so, that’s what I focused on for the first couple of years as I was building my confidence, I was adding whatever capital I could, I was earning reasonable money in my day job, but not huge. So, I could add a little bit each year. And I remember when I got to $30,000 in my account, just $30,000 and I was on the bus on M2 freeway going into the city in Sydney and I had this feeling come over there, it’s working, I’m actually, I’m going to be get there, I’m going to be a trader and this is going to set me free.

And I had this feeling with $30,000 in my account and with 30,000, I had no business thinking that I was going to be financially free because there’s just no in there enough money. But that’s the confidence that the systematic approach gave, and the process was working and the great thing about the process is it’s scalable. So, I could do it with $30,000, I could do it with a 100, I could do it with 500, I could do it with a million. So, I knew I would get there. And so that first few years, that’s what it was about. I was about building that confidence, growing the capital, and then I got to a point where I realized that I was leaving money on the table because I was only following one approach in one market. And so, I started to diversify.

Philip Teo:

I see, I see. And how long did it take you since 15 years back to realize that you got a thing about diversifying and start scaling things up?

Adrian Reid:

Yeah. I was trading basically one method for three or four years and then I realized that I needed to diversify. I had left money on the table. And so, what I did, which was another mistake is I did a bit of diversification, but I took this one method, and I made a few variations of it. But subtle variations. So yes, it was some diversity, but it not diversity like I talk about today. It’s not long short Australia, Hong Kong, US Europe long-term short-term trend following, mean reversion, that’s good diversification. I had gone, okay, Australian trend following long-term, and a little bit shorter term helps but not that much.

And so, I was a bit slow and rigid in my approach to the market. It took me too long. And so, when traders asked me now how long till I should start my second system, well you need a couple of things. You need enough capital to support a second system, which is generally around the $30,000 mark, 10, 20, 30, depending on how much commission you’re paying. You need a first system which is profitable and making you money and you need that process down consistently. If you can follow that process consistently, develop a second system, implement your trading will get better.

Philip Teo:

So, you mentioned that it was at that point where you felt that you have left money on the table. So, what gave you that kind of insights and understanding that you might have left money on the table, and you should look at diversification?

Adrian Reid:

Yeah, basically-

Philip Teo:

Market condition or was it some kind of events that you noticed you in the financial markets?

Adrian Reid:

It was really just watching my equity curve and watching my positions move because when you… If you’ve got 20 positions in your portfolio and they’re all stocks in the one market, generally they’ll tend to ebb and flow move up and down in a similar pattern. There’s a lot of correlation internally in the stock market. And so, I would have dips and drawdowns and all of my positions would go down at once and then they’d come back up, say, “Well, surely I can make money from that dip. Why do I have to sit through the drawdown?” Like yes, for this system I do, but there’s other system, other styles that could’ve made money. And when I started to see these patterns, I started to research other styles of systems.

Philip Teo:

I see. So, you mentioned that your first system was actually trend following. So, it means that probably it was during occasions where the trend wasn’t clear, there wasn’t any clear trends that you start to see the draw outs coming in and that’s when you started to realize and think about, hey, if let’s say the market is not in a trend following mode or a trend mode, then does that mean that I’m leaving money on a table when I could be thinking of other systems that I can use to make money during a non-trending kind of phase of the market? Was that what was going through your mind?

Adrian Reid:

Yeah. Absolutely. I mean I would have a strong runup in my equity and then I’d have a volatile period or a drawdown and then another runup in my equity. And I was quite comfortable with the way trend following works and the way the money comes into your account. It’s just part of the way the process, the way of the markets. But seeing the ebb and flow in my account made me want to profit from that as well.

Philip Teo:

Okay. And what do you decide to do thereafter? You came out with… You started to test another second system process?

Adrian Reid:

So, I investigated lots of different systems. I started looking at different markets, particularly in the US market, and I started looking at shorter-term systems. Mistake I made was not really understanding where the systems could be or should be applied. So, I would take some ideas from US stock trading authors and put them into the Australian market and backtest it saying, “It doesn’t work the system no good. How is this guy writing a book? The system doesn’t work.” So, I spent a long time on the Australian market first getting frustrated because the systems didn’t work and then I went to the US and all of a sudden meaner version worked so much better. And actually, I liked longer-term, slightly longer-term positions and I only used daily charts. So, it took me a little while to find the second system that really sat well with me.

But as soon as I did it, then it became natural to trade that way as well. So, I tried mean reversion, I tried shorter term trends, I tried some swing and momentum trading and where I settled on was some shorter term systems in the US and a momentum style system in Hong Kong, both of which I really, really like. But they’re very different to the original system that I was trading, which is great because that brings the diversity into the portfolio. I’ve had months and years where the Australian system is just moderate, but the Hong Kong system has just been astronomical and then the same for the US and the same for Australia. So, I think the key for me there really was just different styles of systems and the right system for the right market because you can’t just take an idea from the US and bring it to Australia or an idea from Singapore and take it to the US. The markets are subtly different.

Philip Teo:

Yes, because the behavior of the market participants in different markets could be drastically different because of the culture, because of the way they look at the market as well, right.

Adrian Reid:

Yeah. And also, what makes up the market. I mean the US I read somewhere that there’s more mutual funds in the US than there are stocks, which is madness, but it’s the way it is, so the behavior of the market is quite different than it would be in say Australia. Australia, I find is trends much more nicely than the US market. The US is really good for mean reversion typically.

Philip Teo:

I see.

Adrian Reid:

You can also trend follow there, but you have to understand the nuance of the behavior and design the system that works in the market.

Philip Teo:

I see. So, at that point in time you started to have a diversification of different trading systems, systems as well as diversification in different markets. And how long ago was that point roughly?

Adrian Reid:

It was around 2007 that I really started to diversify. I also added a short side system, which proved timely because obviously what happened in 2008 with the global financial crisis as we call it in Australia. So, my trend following positions all closed out in early 2008, and then there’s a little bit of drawdown at the peak of the market because obviously in trend following you give a little bit back at the peak. But then I went short and made some good money on the way down and then trend following came back in. So, really around 2007 was when I started to diversify these approaches.

Philip Teo:

I see. And I suppose that since then your trend following should have worked pretty well for you, right? Because we-

Adrian Reid:

Yeah. Pretty well. Absolutely. I’m fairly cautious. Well, my system is fairly cautious getting back into the market so it will wait till the trend is definitely going. But yeah, trend following has been over the long-term, a very solid way to make money. And it’s to be honest, when once you get psychologically comfortable with the strategy it’s very easy money because you are just buying something that goes up when it hits the trigger and you’re holding it for however long until you get a sales signal. And that sales signal might come quickly if it hits your stop loss or it might come very, very slowly if it turns into a real trend. But for anyone wanting to build wealth, grow capital, trend following systems are an astronomically good way to do it.

Philip Teo:

I see. And I understand that you actually left the corporate world in the year 2012. Yes. And you became a full-time trader from there. Can you share with me or share with us a little bit more about how did that decision-making process came about? Did it take you a nice time to just decide to quit your job or was it something that you’ve been thinking for the longest time and you’re just waiting for the right amount of capital that you have to decide that okay, now I can lift off my trading profits, that’s why I decide to leave the job. Can you share with us a little bit more about the circumstances that caused that happen?

Adrian Reid:

Yeah. I had wanted to support myself on my trading since the beginning, since I had $7500 in my account. Obviously, I didn’t try and do it then because there’s not enough capital, but there was always the goal and I could never really pinpoint a number because the challenge is life changes through the years. Single versus have a relationship, kids versus no kids, job versus no job, high pay, low pay. So, it’s hard to pinpoint a number where you should resign from your job. It’s very individual. But for me, for several years I was working extremely hard in my day job punishing unhealthy work. So 12, 14 hours a day every weekend, many, many late nights, way too much caffeine to keep me awake, falling asleep on my keyboard, just crazy.

And in 2012 while doing this, I was writing some very large tenders for my employer. And so, it was very high pressure and my trading, I continued all the way through despite all of this, which is lucky, I was systematic because you can do it in a very small amount of time each day. So, no matter how busy you are, you can still trade as long as you have a process that supports it. And in 2012, despite working 14 hours a day in my day job, my trading made more money.

Philip Teo:

Wow, fantastic.

Adrian Reid:

My day job. And I was paid pretty well. I earned a few hundred thousand dollars a year at the time and my trading made more money than that and with dramatically less stress. And at the end of that year or towards the end of that year, my wife and I were looking at our life and we were both working exceptionally hard, and we just realized it couldn’t continue and we didn’t want it to continue. We had to change something. So, either she was going to quit her job and I was going to keep working like a maniac and trading as well, or I was going to quit my job and use trading as the sole source of income. And so, we decided to go with trading and that has been a really great decision. It’s really freed us a lot because it gave us the ability to travel. We did last year, we were on the road traveling with our kids for most of 2019, which was amazing. And you can’t do that when you’ve got a job. Yes. But you can’t do it if you’ve made systematically.

Philip Teo:

I see. So, it has been about close to about eight years already since you left the job. How has life been like for you? How has that eight years been like for you? How do you actually make full use of your time? Of course, other than spending time with your family and managing your trading, which according to you, you are spending just like let’s say 30 minutes a day, just maintain your systems and stuff like that. So, what keeps you going since then until today?

Adrian Reid:

Yeah. Good question. I think this is really important because if I was just trading, just following my systems, it’s literally 20 to 30 minutes a day, some days less. If I have today, I had to place one order to sell a stock. That was the only thing I had to do today that doesn’t take 20 minutes, it takes about 30 seconds. And so, you need something else to fill the time for me. I’ve tried a few different things. I did spend a bunch of time working on some different business ideas, but really my passion is trading.

And when the kids are at school, I spend time thinking about trading systems and I spend quite a bit of time teaching and developing my programs to teach other traders because I wish someone would’ve taught me. I had to read 200 odd books, spend months and months playing with ideas and backtesting and failing and not really understanding the psychological traps. And so, to be honest, most of my time when the kids are at school is around that teaching process. Not live necessarily face-to-face, but creating the programs, recording the videos, sharing, and then also running live coaching and mentoring.

Philip Teo:

I see. Fantastic. We’ll talk about more about that later on, but just to round off what you have actually experienced, I mean from being a full-time employee to becoming a full-time trader, that transition is actually something that I believe that many, many new traders out there envision and is definitely trying to aim for. So, what would be your suggestion and advice for those traders out there who’s looking to get financial freedom, the ability to decide that I’m going to leave my job and just lift off my trading. What would be some of the key advice you have for them in order for them to transit on the right footing, on the right foundation towards what the kind of life that you have right now?

Adrian Reid:

Yeah. Good question. And I don’t think enough people talk about this because that transition is not easy. I want to come back to the original point we were talking about blowing up our accounts. One of the biggest problems was, is traders in a hurry impatient to make money to get rich. Same problem here with quitting the day job. If you’re impatient to quit the day job and you do it too early, you put so much pressure on your trading results and with pressure and expectation and need comes stress. And with stress comes mistakes and with mistakes comes losses. So, that migration if not done well can be challenging financially. So, I think the biggest recommendation that I would have first of all is delay as long as you can. Because the more you can save money from the day job and build your account, the more likely it is that you’ll be able to be a full-time trader forever and never have to go back to work.

So, my goal is to never ever have to worry about going back to work. And we’ve got a pretty large buffer and I’m pretty confident that that will never happen. Good year, bad year doesn’t matter. So, build the account bigger than you think, be patient and add money to it. Second one is make sure that you’ve got your expenses under control. And this is not a trading thing, it’s a financial management thing because the more controlled your lifestyle is from an expense perspective, the easier it is to support it with your trading. If it’s very lavish and unpredictable and you know, decide you want new cars and holidays and travel everywhere, it’s very hard to support lavish lifestyles at the beginning with trading until you have a seven figure plus account. So, I would say aim for a lifestyle, support it with your trading, become free, and then continue to grow your trading account as you get better and then grow your lifestyle with it.

Philip Teo:

I see. To grow your account even while taking money out from-

Adrian Reid:

Oh, yes. It’s very important. You must always be growing your account. Not always in every day, but over the long term you can’t afford to have your account be going down because you’re withdrawing money because then it’s not sustainable. So, your plan to migrate in into becoming a full-time trader has to allow you to keep growing your account. You can’t take out more money than you make in the long-term. Month-by-month you can, but if you go for three or four years taking out more money than you make, you are not sustainable.

So, another way that many people can really assist with going full-time is to phase into full-time wind back the job, don’t do so many hours in the office, drop Friday, drop Monday, then become gradually less and less of an employee and more and more of a trader. For me, I remember I said on the bus going to city when I realized I had $30,000 in my account and I knew it was going to work at that moment mentally I was free because I knew I was going to get there. I wasn’t going to be tortured for the rest of my life in my day job. So that to me was freedom. So, take that freedom and use it to worry less about the job.

Philip Teo:

I see.

Adrian Reid:

I use the job to build the account.

Philip Teo:

Yeah. That I think that that’s a fantastic advice. In fact, I think that the point you have is something that I’ve not really heard other traders mentioned before, is to how to actually slowly lessen the amount of effort and the work that you do in your day job while slowly transiting into your full-time. Rather than thinking about straightway, I quit this and just go full-time into trading. Maybe you can think about lesson the workload and then slowly transit today. I think that would also be much more smoother as well in terms of transition. So that was really some great advice.

Now, I have a lot more questions to ask you, Adrian, about the current kind of tradings that you have right now. But before that, now to those of you watching this interview right now, before I move on to post more questions to Adrian with regards to his trading experiences, I also like to take a moment to let you know that Adrian has kindly prepared a free trading mistakes cheat sheet to share with you. All right, and Adrian, can you briefly share with us what these trading mistakes cheat sheet is about, and how do you think it’s going to benefit those traders out there?

Adrian Reid:

Absolutely, Philip, thank you. Something I noticed in my own trading and also in the many, many traders that I’ve mentored and coached now is that many of the losses are not just caused by poor method, poor system, they’re caused by the mistakes the traders make. And if you eliminate one mistake that you make on every single trade that you do, then every single trade gets more profitable and your results lift. But the trouble is you don’t necessarily know what mistakes you’re making because you haven’t identified them all yet. You haven’t been coached by someone who’s seen them all. You haven’t been trading long enough or you haven’t done the introspection.

And so, I put the trading mistakes cheat sheet together after evaluating my own trading over many, many years and looking at the mistakes that all of my students were making because I wanted a quick way to give people a list of things to consider to raise their awareness. And if you look at this list, you say, “No, I don’t do that. No, I don’t do that.” or “Yes, I actually, I do, do that.” And if you identify a mistake and eliminate it, your results get better.

Imagine you’re paying $20 per trade to commission, $20 to buy $20 to sell. It’s almost like changing brokers and going for a $10 broker, $10 to buy, $10 to sell, you make more money all else being equal. So, if you can take as many mistakes out of your trading as possible, your trading gets better. And so, this is why the trading mistakes cheat sheet is there. There’s several very significant mistakes I cover and then there’s lots of mistakes that you would never have thought of.

Philip Teo:

Fantastic.

Adrian Reid:

[inaudible 00:41:04] them from your trading, then yeah, absolutely. You get better results.

Philip Teo:

Fantastic. You know what, Adrian, personally, I always believe that learning from other people’s mistake is actually one of the best strategies for a new trader to shorten his learning curve. So, I’m sure your trading mistakes cheat sheet will be very helpful for all the traders out there. And you guys out there watching this interview right now, be sure to click on the link provider below this interview video to download Adrian’s free trading mistakes cheat sheet is free by the way.

All right, so Adrian, back to more questions on your trading experiences at this point in time right now. So, I understand that you are now pretty comfortable. You have been traveling over the past one year with your family while still running your trading right now, and I’m very sure that many of the audiences will be very keen to understand what is the kind of trading workflow, trading strategies and the trading best practices you are currently applying considering the past 18 years of your trading experience. Can you share a little bit more with us, your current trading workflow right now, how do you actually manage that whilst you have a lot of times to actually teach traders and still go traveling with your family?

Adrian Reid:

Sure. So, all of my trading decisions are a 100% systematic, systematic not automated. So, I place my trades manually, but the system generates the rules. So, the workflow is surprisingly simple. My system rules are all in my trading software. I use Amibroker and I teach on Amibroker. And so, in order to generate my signals for buying and selling each day, I’ll first update my data and that takes about a couple of minutes. So, I’ll just update my data, go get a cup of coffee, come back that’s updated. Then, once the data is updated, I’ll open up Amibroker, review my open trades for selling signals, I’ll evaluate how much capital I’ve got available for each of my different systems. And then, if I have capital available for a system, then I’ll run a scan again using Amibroker to find the trades that meet that system’s criteria today. And then, I’ll place the trades.

So, if I have to sell anything, if I have to buy anything, I’ll just place those trades in my platform as market’s opening and that’s it for the day. So, the process once you’re systemized is very, very simple. I mean, I have a watch list of my open trades, I have a scan for new trades, I have a capital management matrix that tells me how much money I’m allowed to have in each system in each market, so that I can very quickly tell where I need to run my scans and place trades. And once I’ve placed my orders, I don’t do anything else. Like I’m sitting here at my desk, the market’s open, but my broken platform is not open. I don’t need it because it’s an end-of-day system. So, I only look once a day when I’m placing my trades.

Philip Teo:

I see. So, I understand that you are actually using multiple trading systems right now, but in order to keep this discussion more concise, can you share a little bit more with us about your current favorite trading system or the one that you probably allocated the most capital to? What kind of system is there, and what are some of the general parameters that you are looking at to help you filter now for what stocks to buy and when to buy and sell as well?

Adrian Reid:

Sure. So, for everyone listening, you must remember that each market is slightly different. So, you can’t take one method from Australia and put it into each of the different markets without backtesting. So, I just want to have that caveat to start with.

Philip Teo:

Sure.

Adrian Reid:

But my favorite method has always been and is still trend following. And so, most of my account and most of my wealth building is in trend following systems. So, my favorite trend following system in the Australian market right now is quite a long-term system. So, it takes very few trades. I’m looking for a very long-term breakout, several hundred days new hires high. So, the stock is very clearly going up. I trade low volatility stocks because they tend to trend much better. If you have a high volatility stock, the trend is like this, if you have a low volatility stock, the trend is a bit more like that.

So, low volatility stocks combined with a trend following system tends to outperform the market and I’ll have a very wide stop loss. One of the mistakes I made early on was thinking that I had a tight stop loss to limit my risk, but the trouble is the tidier stop loss the more often it gets hit. And I found in my testing over the years in many different markets that you can get a smoother account growth by having a wider stop loss. So, I have quite a wide stop loss. It depends on which system, it’s in the vicinity of four to six times the average true range, which is quite wide by most people’s standards and a very long-term trailing exit. So, I use a long-term moving average as an exit. And so, that basically gets you into a stop that’s going up and it’ll just ride it for as long as the trend is up.

Philip Teo:

I see. And I suppose you probably do not apply any profit taking targets to get out, or it’s just simply a drilling stock kind of exit, is it.

Adrian Reid:

No, profit taking with trend following is a definite no-no, because with trend following, what you’re trying to do is capture the oversized moved, the stocks that go to the moon and as soon as you put in a profit target, you are eliminating most of that growth. If you put in a 20%, 30%, 50%, a 100% stop on profit target in a trend following system, the very small number of trades that are monsters, I’m talking going up 50-fold or a 100-fold, which happens in the market, you don’t catch them anymore. And so, you lose so much of the profitability of the system.

And I believe that profit targets is due to… They’re popular because many traders are uncertain about their profitability. And so, when there’s a profitable trade, they want to snatch that profit to say, “Yes, I made money, I must be good. I’m a good trader because I made money on that trade.” But I want to encourage… I certainly talk to my students about widening back their view. I don’t care about the profit on that one trade, I care about the profit over the next thousand trades. And when you think about it like that, it’s more about following the process that makes the most money, not trying to catch some profit on one particular trade, one trades irrelevant.

Philip Teo:

I see, I see. So, you mentioned earlier on that one of the key criteria you look out for is that the stocks should… Ideally have low volatility and because trend following works much better in low volatility stocks. So, what some of the criteria that you use to filter out those stocks that are low volatility compared to those high volatility stocks, even on this trading system on?

Adrian Reid:

So, I use average true range a lot. The trick is to normalize it for share price. Average true range of Google compared to the average true range of some tiny biotech stock is going to be quite different. Like Google is a several hundred dollars share price, and you might have a 10 cent share price. So, the average true range in dollar terms is not relevant. But if you divide it by the share price and make the average true range as a percentage of the share price, it’s normalized across all stocks.

And then, you can compare stocks. So, if you’ve got one stock that’s very volatile and you’ve got another stock that doesn’t move very much, then the one that doesn’t move very much will typically give you better results in a trend following system because it doesn’t go up and then come down so far before it hits your exit. The exit tends to trail a little closer to the price. So, the trend following systems work much better. So, I’ll normalize volatility, but for share price and then select the lower volatility stops and obviously you backtest that to find out what levels of volatility kind of make the most sense.

Philip Teo:

I see. And you mentioned that this trend following system of yours tends to be much longer term as long as the trend is still in place. So, does that mean that, do you actually use any kind of fundamental filters as one of the parameters and the criteria to look at as well? Because without very strong fundamentals, the kind of trend might not be lasting as well. Do you actually take that into consideration?

Adrian Reid:

Really, really good question. And when my dad was around, we used to have this debate all the time because he was a fundamental investor, and he would come to me with his fundamental ideas. It’s like, “Yeah, I found this stock, really good story, great fundamentals, really strong growth.” And my response is almost always, “Yeah, I bought that six months ago, or I bought that three months ago or whatever.” The technicals tended to beat the fundamentals into the decision. And so, I’m a 100% technical. It’s only based on the system and the price volume movement of the stock. No fundamentals. Most of the time, I don’t even know what the stock does. I trade stocks in Hong Kong, wouldn’t have a clue what the companies do. Now, why can I do that? I can do it because I’m trading systematically and I’ve tested that system over thousands of stocks, over decades of market history.

And I’m taking a very small trade, very small amount of risk on every single stock. If one of my stocks is fundamentally unsound and goes to zero because it’s a fraud, which has happened by the way, it doesn’t matter, because I have so little exposure in that stock that even if it goes bankrupt, it doesn’t hurt me too much, but it doesn’t happen very often. So, I can take many, many trend trades and have the whole portfolio growing and if one stock turns around and goes bad, doesn’t matter. So, no need for a fundamental filter in when you’re trading a system.

Philip Teo:

I see. And can I also just check with you, so let’s say you are looking to get into a long trade for a stock that is showing signs of trending higher, do you actually look out for stocks that has been falling a lot over the past, let’s say one year, two year, three years, and showing signs of bottoming up and starting on the new uptrend before you get in? Or do you actually focus us more towards those very strong stocks that’s already in very strong trend to get in? Do you focus on those turning around ones or do you focus on those that’s already very trending well, right now?

Adrian Reid:

I focus on the ones that are trending already. The other style is a different type of system which you can develop. So, you can develop a system that when the stock bottoms out and starts to rally again, you buy that there. But that’s not what I’m talking about. I’m talking about a very well-established trend that has proven itself for months and then you’re getting in and riding the trend. Sometimes of course, you get in and that’s the end of the trend and it goes down and hits your stop loss. But that’s just part of the game because you make your money from the smaller number of trades that go to the moon, and you have a very big, very long trend.

Philip Teo:

I see. So, how about those names that turns up on your system, on your screener that tells you that, “Oh, it has actually been in a trend for the past one year and two years, right now it’s showing size of breaking up again.” So, do you actually enter into those kind of stocks? Because I mean it has been going higher for the past one to two years already, so which means that there is technically this possibility that it might run, it might be near to the end of his cost soon. So, is that some kind of criteria that you look at those kind of stocks as well?

Adrian Reid:

Yeah. Solid question. Whenever my students ask me a question about what should I do? Should I take this trade? It’s been trending for so long, the answer is always, what would your system do? What would your backtest do? And so, when you’re trading systematically, most of the agonizing, the worry disappears because all you have to do is do the same thing that your backtest would do because that’s what you’ve tested. And the good thing about that is if you have this situation that you’ve just described, which is quite possible and happens quite a lot, you say, “Well, maybe this is a bad trade, maybe I shouldn’t take it, but I’m a systematic trader so I should follow my rules. What do I do?” Well, the answer is you take that response, that emotional reaction you’ve had to that trade based on what it’s been doing, and you convert it into a hypothesis to test.

So, let’s say the hypothesis is if it’s been trending for a year or more, it’s not a good move. It’s probably already almost finished. I shouldn’t take the trade, convert that to a rule. Let’s say the rule is if the stock has been above the 200-day moving average for more than 12 months, don’t take the trade that that’s a objective rule. You could test that, put into your system, run a backtest. Does it make your system better or worse? If it makes your system better, you’ve just struck gold. If it makes your system worse, you ignore the reaction and you follow the system.

Philip Teo:

I see. That’s a fantastic advice. Great. Great. So generally, we have an idea right now about how you actually approach your trading systems and your workflow. So, you look out for your systems on a daily basis, if there’s any ideas that come up, do you even question any of the ideas that comes up on your system at all? Or do you just simply, if it comes up, I’ll just take it, I don’t care, whatever. Is there any criteria or circumstances that where an idea comes up and you decide not to take it?

Adrian Reid:

I have one rule which overrides the system, which is if the stock is in a corporate action that will take the stock off the exchange. I don’t take the signal. So, if it’s a takeover stock, I won’t trade it because the money ends up, locked up somewhere and you lose control of it and it’s quite dangerous. And you may end up with shares in some other stock that you didn’t expect. So, if it’s a takeover candidate, I don’t take the stock. Apart from that, I’ll always take the trade. But back to the previous question, I do sometimes still have those reactions like, “Oh, I don’t like this one. What do I do?” Same thing, generate a hypothesis, convert it to a rule, test it, and then either incorporate it into the system or throw away the hypothesis and take the trade again. And over the years, what I found is when I invented that process at the beginning, I was testing things all the time.

Every week I would have many hypotheses that I was testing because I was less comfortable. Now, very seldom because I’ve tested so many ideas and I just know that my reactions, my human judgments to what trades I should take are not good. And for most traders, our intuition, we’re not trained in a way school doesn’t teach us, our parents don’t teach us, our jobs don’t teach us the skills to be a good trader. In fact, the opposite. So, most of our intuition is typically not helpful in the markets. So, I will just do this hypothesis testing and accept or reject it, and I just accept that I’m not the magic, the system I designed is the magic.

Philip Teo:

I see. So, how about the situation where… Let’s say the market is trending very strongly and all your open positions are still in positions because they have not hit any of your trading stops, and yet another idea came up and you have run of capital. So, what do you do? Do you stop taking the idea or do you go into leverage to actually take on this additional idea as well? What was your decision-making process in such a situation?

Adrian Reid:

Yeah. Good question. So, I have absolute capital management rules. So, I have a total exposure cap and I have an exposure limit for each system. So, when I turn on my computer and at night, I do my analysis at night typically, and I place the trade in the morning. So, I split it up. And the reason I do that is because it gives me more time to do the hypothesis testing if there’s something I have to investigate. But at night I’ll look at my balance from the day, my exposure in each market and my exposure for each system, and I’ll compare it to my rules. If there’s no capital available for a system, I don’t scan for entry rules. So, no ideas come up. I’ll look for exits. If I have a system that has some spare exposure, some spare capital that I can use, then I’ll scan for entry rules.

So, on a day-to-day basis, that’s how I do it. There’s absolute rules. I do use leverage, not much though. But that leverage is included in that exposure limit. I will never go over because oh, that’s a nice-looking trade, I might just take a bit more leverage, so I can take this trade. No, because that’s breaking the rules and that leads to trouble because you are adding more leverage than you backtested more risk. And if you’re a trader trading for a living, you cannot afford to put your capital at risk because that is your lifeblood. If you blow up, it’s game over, you’ve got to go back to work. You’ve got to get a job and definitely want to avoid that at all costs.

Philip Teo:

I see. So, the easy way for you to manage that, is that once you know that this particular trading system has fully utilized the capital that you have allocated for this particular system, you are just stop looking for new ideas until there are some traits that has gotten out and you have cash coming back.

Adrian Reid:

Yes. Then I’ll run the scans.

Philip Teo:

I see, I see.

Adrian Reid:

Yeah.

Philip Teo:

But that means that there is this issue that I suppose that as a systematic trader you’ll probably face is that when you are actually doing backtesting, you are backtesting with the assumption that you have unlimited capital and you’ll take every single trait, right. So, when this situation come up where you don’t have in finite capital, that means that there are some traits that you might not take as a result, and that could actually skew the kind of performance from your backtesting as well, right? So-

Adrian Reid:

Yes.

Philip Teo:

How do you reconcile that?

Adrian Reid:

Yeah. So, my backtesting, I do two styles of backtesting, unlimited capital and also limited capital, so portfolio backtesting, unlimited capital backtesting. So, I call it unconstrained capital backtesting. You do that because you want to get a complete understanding of all of the full range of signals that those rules could generate. Very important for risk management because you want to know the absolute best and the absolute worst that can happen as a result of those signals, the entry signals. But the unconstrained capital test does not tell you how your portfolio will perform because if you’re unconstrained, you can take as many trades as you want, like you say. And in fact, that may look very, very good or very, very bad. When you assemble it into a portfolio, the backtest can look quite different.

So, say for example, I have with a trend following system, if you have an unconstrained capital backtest, the drawdown that you get when you go into a bear market is humongous because you have thousands of positions open. But when you do a portfolio backtest which is more like simulation of what you would do in your account, then the drawdown is nowhere near as big because you’ve got limited positions. So, I do both stars of backtesting. The reason I do the portfolio of backtesting is to understand the way the equity curve moves, the smoothness, the drawdown, and to make sure I’m comfortable because you must be able to trade through your worst drawdown, otherwise you’re at the worst possible moment.

Philip Teo:

I see. And on the front, just the question just pop up in my mind as you’re mentioning the deepest drawdown. So, what is the longest winning and losing streaks that you have experienced in your trading system over this area.

Adrian Reid:

The longest losing streak in terms of how many trades I lost on-

Philip Teo:

Yes.

Adrian Reid:

27.

Philip Teo:

27 trades. Okay.

Adrian Reid:

Yes. And the reason I got 27 losing trades in a row is because my stop loss was way too tight. In my backtest this is very early on, very early. In my backtesting with a tight stop loss. What it showed me was that the returns were very, very strong. Drawdowns were also big, but when I’d first started out with systematic trading, I was focused more on what the equity curve did than the day-to-day movements, my psychology, the feeling of it and the catastrophic risk. So, these are all things that I’ve learned along the way. And so, I had a very tight stop loss. It was 1.25 times the average true range below my entry price.

Philip Teo:

Whoa.

Adrian Reid:

That’s on a long-term trend following system. So, I was getting 82% losing trade, which is crazy. It’s psychologically extremely hard. The system was incredibly profitable. I made a lot of money with it, but when I hit a 27 losing trade streak, that was it. It’s like, “No, I have to change something because that was uncomfortable, and I don’t want to do that again.” In terms of drawdown, my biggest drawdown has been 32%.

Philip Teo:

Okay.

Adrian Reid:

For me, quite comfortable, 35% is probably about my limit, and I designed my systems for 30 maximum, and then when you add multiple systems together and combine them, then the drawdown should reduce. So, 32% was my biggest historical drawdown. And in terms of drawdown duration, probably nine months.

Philip Teo:

Okay.

Adrian Reid:

Yeah. Again, early on when I was less diversified.

Philip Teo:

Okay, cool. So now, let’s move on to the risk management prep parameters and the criteria that you look at both in terms of how you actually size your trade and in terms of the percentage risk that you take in each trade. So, generally, what you are currently doing right now in terms of risk management?

Adrian Reid:

Each of my systems is different. So, let me start by talking about how I think about risk management. You need to do more than what the books say because you need to think about your catastrophic overall risk, the risk of a market dislocation, and what would happen to your account. So, I always start with that. If the market gap down 50% tomorrow, I want to be okay and I want to be able to keep trading and keep feeding my family. So, that’s my starting premise. So, I need to be conservative, particularly with my leverage. And so, my overall exposure is generally capped because of that rule, that requirement.

Then, I come down to the system level and I have a drawdown tolerance for a system, which is about 30%. As I said before, that’s the limit that I designed to. And so, when I’ve designed a system or backtest a system, I’ll adjust the position sizing and exposure limits the number of positions, simultaneous positions held, so that the drawdown is less than that level, and I’ll try and get the maximum return I can for the level of risk that I’m comfortable with. Typically, that means taking very little leverage, maybe plus 30%, plus 40% on top of my cash and risking on each trade something like half a percent, a third of a percent of my equity.

Philip Teo:

So generally, each trade, even across the different systems ranges from about 0.5% to a third of a percent of your equity, of a total equity, right.

Adrian Reid:

Generally, some more, some less. I have some mean reversion systems that are very high probability, so like 70% win rate for example, 75% win rate. Those I have a slightly higher position size, but not too high because when they’re wrong, the losses can be fairly big. So, you’ve got to be careful with the worst-case loss. So, I guess another hint or tip for survival is think about the catastrophic risk at the account level, the market level, like I said earlier, but also make sure that for every strategy you trade, every system, every set of rules, how big the worst-case loss could be, and make sure that your position sizing on each trade is small enough such that worst-case loss doesn’t stress you out, doesn’t cause you financial damage, doesn’t hurt your account. And so, that generally means keeping exposure on any one trade to market.

Well, 20% is a lot. 20% of your account on one trade is a lot. That’s very high exposure on one trade. So, much less than that, maybe 5%, 10% when you open the trade, if you’re trend following and you take 5% of your account on one trade, if that’s a really monster trade, obviously at the end it’s going to be a much bigger percentage of your account before you close it out. That’s okay.

Philip Teo:

Yes.

Adrian Reid:

That’s the system, but at the beginning just have a very small amount of your account in each trade. I think 5%, maybe 10% max would be a good guideline depending on the style of system, how much brokerage you have to pay and how much money you’ve got in your account.

Philip Teo:

Yes. So, how many percent of position against your entire portfolio. That also depends on how close you set your stop loss.

Adrian Reid:

Yes.

Philip Teo:

Level to your entry level, right. The closer you put it, the bigger the size is going to be compact against your entire portfolio. And that is the reason why you probably having a wider stop loss is also a way to actually control your risk by making sure that each position doesn’t take up too much of your equity. Is that-

Adrian Reid:

Absolutely. Yeah, absolutely. I think that’s really critical because most traders think about their risk in terms of what they’ve seen happen before as in hit your stop loss, hit your stop loss, hit your stop loss. Oh, okay. So, I don’t want that to be too big a loss, but if you’ve never had a trade that went to zero overnight with no chance of getting out, you probably don’t consider that as part of your risk management plan. But let me tell you, if you trade long enough, you will have a stock that goes to zero and it will not be the stock you expect. So, you’ve got to keep your exposure low. And I’ve had it happen to me. I have an old account, the account’s still open because there’s stocks in there, there’s three stocks.

Philip Teo:

Okay. What happened?

Adrian Reid:

They were delisted because one of them, there was a corporate fraud, one of them that was in Hong Kong, one of them they didn’t… Something happened with the accounting in Australia and the exchange suspended them and another one, I can’t recall the story, but basically, they’ll probably never trade again.

Philip Teo:

But I suppose that would be a long time ago. Right? Because I mean, based on my experience, any stock that actually goes bankrupt or goes delisted overnight as a result of all those bad negative things, they usually will be endowed trending more even before that happens.

Adrian Reid:

Usually. Usually, good assumption.

Philip Teo:

It happens for this.

Adrian Reid:

But not always, see one of these trades. One of these stocks was my best and worst trade simultaneously.

Philip Teo:

Okay. Excellent.

Adrian Reid:

So, how that happened was I have two variations of the one system and one of them gets out quicker than the other. One of them has a shorter term, like a tighter exit, tighter trail. And so, I was in this trade, and it made an absolute bucket load of money. The stock moved so fast, so fast, it was like you could not keep up with it. And so, I was in this stock and it dipped a little bit and my first half of the position exited with a huge profit. Three or four days later, stock went to zero.

Philip Teo:

What happened?

Adrian Reid:

The corporate fraud, there was an accounting fraud.

Philip Teo:

So, it went up a lot. You managed to take profit out of it and then-

Adrian Reid:

It’s not a profit target, it was a systematic exit based on a different concept, not a profit target, but half my position exited.

Philip Teo:

I see. So, you still have half your positions in it and then suddenly there was a trading hot investigation started and that it just duly went bankrupt as a result, even before you had a chance to exit the balance of your position.

Adrian Reid:

No chance to exit.

Philip Teo:

Wow. That is really a very, very rare scenario a part of life.

Adrian Reid:

See, and this is why I think this is so many traders don’t survive long term because that has to not matter. And you might say to me, but if you did fundamental screens and you would’ve investigated, maybe you wouldn’t have taken that stock. Maybe, but I wouldn’t have made the profit on the first half of the position either, and I would’ve been able to hold far less positioned in my portfolio. I can hold comfortably 60, 70, 80 positions in my portfolio and no problem. And it still only takes 20, 30 minutes to data manage.

Philip Teo:

I see, I see.

Adrian Reid:

But if I was investigating every single one of those stopped to make sure it was real and fundamentally sound, I mean, that’s a full-time job at least, right? With an army of analysts and-

Philip Teo:

Yeah.

Adrian Reid:

… that’s not how I trade. But in order to survive, you’ve got to think what is the worst thing that could happen? And you’ve got to make sure that you can survive that.

Philip Teo:

I see. And imagine that if that half positions that you were still left with in that particular stock, it was about… Let’s say 10% to 20% of your portfolio size, you would’ve seen a 10% to 20% drawdown just over that night.

Adrian Reid:

Right. It was a few percent enough to be annoying, but not enough to be stressful. And I think that’s the key.

Philip Teo:

I see. And I think that’s really some important lessons that I hope that whoever is watching this video should learn as well is never assume that a stock will not just suddenly overnight go bankrupt because Adrian has already shown that it can happen. And if that position ends up being a huge percentage of your entire equity, you could see that significant drawdown way more than what you expected to happen.

Adrian Reid:

I think one of the psychological traits that you need to develop as a trader is simultaneous optimism and pessimism. And it took me a long time to figure this out. You need to be optimistic and unshakably confident in your approach. So, you need to have that confidence that you will… Yep, I’m going to make money. My system works, I’m going to follow it no matter what happens through the drawdown come hill or high water, unshakable confidence, but insanely pessimistic about what could happen, so that you can design your rules, so that you can survive whatever could happen. And this is why some traders don’t blow up and many do. That’s the difference.

Philip Teo:

Fantastic advice. Now, Adrian, let’s move on to the part where you mentioned that you are actually educating and training and coaching traders as well. So, when did that happen? So that, I suppose that probably happened when you started Enlightened Stock Trading, right. So, how long ago was that when you started Enlightened Stock Trading and you started to go into actually training and coaching traders?

Adrian Reid:

Now, so my teaching, it came on gradually actually, because what’s interesting is when I left the corporate world and I was at home in 2012 trading, it was very, very lonely because everyone I knew had a job. So, I’m at home, I trade for 20 minutes a day in the morning and then I got the rest of the day and there’s no one to talk to. So, you’ve got to figure out what to do with yourself and how to get social interaction. You go to work, you get social interaction, you meet people, you have lunch, you have coffee, all of that. I didn’t have that.

And yet at the same time, I knew a lot of people who didn’t want to be working, they wanted to be financially free and they’re like, “Adrian, how did you do that?” So, I started talking to them and sharing about my trading and how it works and so on. And I even coached some people at the beginning for free just because it was fun and it got me out of the house. So, it was well before I started a business out of it. And what happened was I took on several mentees, if you like, and they didn’t take it seriously.

And it took a lot of my energy to do… and it felt like I was dragging them through the process. You’d think if you got a free mentor who was going to show you how to get wealthy and make money in the stock market, you’d be excited about spending time with them. But no, people need skin in the game. That’s what I learned.

Philip Teo:

Exactly.

Adrian Reid:

My first student who paid not even that much money, but my first student who paid was so much better, made so much better progress than anyone. I’d tried to coach for free. And so, I thought, okay, well I like trading. I like talking about trading. I don’t want to sit in front of the screen all day buying and selling because that’s not my style. So, I’m going to teach people how to do what I do because there’s obviously a demand. I really enjoy it. It helps people and it gives them a better quality of life. If I can help people get free, reduce their stress levels, no longer rely on a job, pay off the debt, spend time with their family, travel, great. How good is that?

Philip Teo:

Yeah. Exactly. And what’s more you can get to add more capital into your trading account to compound it further.

Adrian Reid:

That’s exactly right. That’s exactly right. And-

Philip Teo:

It’s a win, win, win for everybody in a way.

Adrian Reid:

Exactly. And people will say, “If you’re so good, why do you teach?” Well, actually, there’s lots of reasons to teach. Just because I’m making money in my trading doesn’t mean… I’m making money in my trading, but I would also like to build my trading account further. I’m trading seven figures. I’d like to be trading eight figures or nine figures, but that will take long. If I just gradually grow and build, I’ll get there, but it’ll be slow. So, why not build a business that helps other traders get there and reach my goals in the process as well? It just makes sense. It’s like having a job that you love, right?

Philip Teo:

Yes.

Adrian Reid:

Because I get up in the morning, it’s like, “Okay, well who have I got meetings with today to help them with their trading?” I mean, that’s so much better than getting up in the morning and getting on the bus and spending two hours commuting every day to go into an office doing a job you don’t like. I would much rather be focusing on helping people get financially free.

Philip Teo:

Yes. Absolutely. In fact, I think I really agree with you on the part where people or the new traders need to have skin in the game and if they have not sacrificed anything to actually learn from somebody, they don’t really take it seriously at all. So, it’s really about finding the right balance, about setting at a very reasonable price point for someone to actually start learning and to have them have skin in the game as well, so that they know that they have given up something to actually learn this and they should really make the effort to go and try.

Adrian Reid:

Early on in my trading career, before I got to that $30,000 point, that sort of realization I was working, I took some time off work to focus a 100% on trading because I just wanted to create massive momentum. And so, I took three months leave without pay from my job. That was my skin in the game. Basically, said to my employer, I’m taking holidays, I don’t have any holidays, so don’t pay me. I’m just not coming into the office. I’ll see you in three months. And that was my skin in the game. I had to get it working. You don’t need that much skin in the game. To me, that was a big step, massive commitment. And there was no mentors around. It was a long time ago, but now all you need is someone who’s got a step-by-step structured process to show you how to get there. And so, if you’re actually earnest about wanting to learn how to make money in the markets, it really can be done.

Philip Teo:

I see, I see. All right. So, Adrian, you mentioned a lot about trading mistakes earlier on. Okay, so right now, if you were to provide… Let’s say three important advice for someone who wants to learn and apply systematic trading, what are the three things that he absolutely kind of focus on in order to actually get started on the right footing?

Adrian Reid:

So, for systematic trading, the key to all of it is to be able to consistently follow the rules. Number one, that means you must have confidence that those rules will make you money and will not hurt you financially. So, we need to do enough testing to understand ourselves that the system is truly profitable, how big the drawdown could get, what the worst-case scenario on an individual trade is. I want to contrast that where you do all of that testing and build that confidence with what most frankly lazy traders do by a signal service. And if you subscribe to a service that tells you by this, sell this, buy this, sell this, send to an email alert each day. If that’s all you do, yes, it’s easy, but you have no understanding of the strategy and what could happen. And so for me, I don’t support that because it doesn’t build the required level of confidence to be able to follow through when things go bad.

So, you must test the strategy yourself and people will say, “Oh, but I don’t know how, but I don’t have trading software, but I’ve never done backtesting, but I’m not a coder,” so I don’t care. Learn. Because those are the critical skills required to succeed in the markets. And frankly, if you don’t want to learn it, don’t trade. If you don’t want to learn the method, this is my method. If you don’t want to learn the method, don’t trade. Because you will get to a point where the drawdown is bigger than you expected, bigger than you can stomach, and you’ll quit. It’ll be the worst possible moment and you’ll lock in a massive loss, and you’ll walk away from trading saying it doesn’t work. But what didn’t work was you as a trader because you weren’t confident enough, because you didn’t do the testing. So, there was one big one. How’s that?

Philip Teo:

Fantastic.

Adrian Reid:

Great. The second one is, any deviation from the rules is a mistake. You may not like the way the chart looks, but if it’s telling you to buy, you’ve got to follow the system. Unless you’ve done this testing, the hypothesis testing that I talked about earlier, you do that. If it still confirms the fact that you should take the signal, you should take the signal and you may not want to get out of this stock. You may have made so much money in this stock and it’s been in your portfolio for 12 months and you’re up a $100,000, $200,000, $500,000 on that stock. But if you get an exit signal, you have to exit the stock. You cannot love the stock, the stock doesn’t love you, the stock doesn’t care about you. You’ve got to follow the rules.

And so, you know what, I can ask so many questions from all of my students, and you always need to ask yourself whenever you’ve got a question, what would my backtest do? You’ve coded the rules, you’ve run the backtest. If you ran that backtest, what would it do? Would it take the trade? Would it take the exit? Would it take this position size or this position size? And just by following the system over time, you’ll get the expectancy of the system as your award. But if you have the system and you make mistake, mistake, mistake, mistake, mistake, you don’t get the expectancy of the system as reward, you get something dramatically less. And this is why the trading mistakes cheat sheet is so important.

Philip Teo:

I see. Right. So wonderful, Adrian, I think you have shared a lot of very enlightenment moments. Even for myself, there were some things that you actually helped clarify my initial thoughts about some of those processes and some of the ways that we could potentially look at the market, especially the part where do not expect that, that most people wouldn’t expect a stock that has been trending higher very gradually will suddenly it’s just go delisted or go bankrupt as a result overnight. So-

Adrian Reid:

Not common, but it can happen.

Philip Teo:

Yes.

Adrian Reid:

You have to be prepared for anything and comfortable with everything.

Philip Teo:

Yes. Exactly. So, always be prepared for black swan events that could happen and want to make sure, that even when black swan event happens, it’s not going to create a huge dent in your portfolio. So once again, thanks Adrian, so much for your participation in this Trading Conversations interview.

Adrian Reid:

Thank you, Phillips. So much fun. I really enjoyed it.

Philip Teo:

Fantastic. So now, for those of you watching this interview right now, before we end today’s Trading Conversations, I’d like to remind you again that Adrian has kindly prepared a free trading mistakes cheat sheet to share with you. So, please don’t forget to click on the link provided below this interview video to download the cheat sheet and remember to internalize those mistakes and avoid making them.

All right. So, that’s it for now, my friends. I’m your host Philip Teo and I hope to have you joining us again in the next episode of Trading Conversations.