Transcription
You've got to be agnostic. Wake up without any view. Look at the evidence. Be Sherlock Holmes. You've got to love it. Don't do it to make money. You are going to lose most of the time. When you think you've just nailed it, guess what? Market's changed. You get beaten up again. You have to experience it. You can't read books about it. Staying alive is is a key skill. Try not to think them and us. Banks aren't there to stop people out. They've got better things to do. Try and take that away from yourself. Analyze your levels. Are they good enough? Look at price action. The last time it touched that level, what did it do? Did it reject cleanly? How far did it reject? We look at indicators when price approaches a level and we have a process to execute or not. So, if price is hovering around, I'm awful for journaling, seeing what worked, what didn't. But there's this big danger about overfitting and back testing. It can tell you some really bad results. Some of the top quant firms, they've got the best back test in the world. They sometimes get it wrong. So unless you've got technology and the proper code to apply that then don't do it because back tests don't look at narrative and market positioning. These are key things. I mean for a major jobs report to come out twice in 2 months and not move dollar. It's just crazy cuz that's what's happened. Markets don't care. So any back test you can have till 40 years or whatever it's not going to mean anything.
I always felt that the institutional trader has more access, more information, technology and quants and supercomputers and what can I as an individual retail trader do to keep up? But over the years I've come to find out that it's not the case and they have similar level of access, similar level of education and it presents a strong question to me which is if they're looking at the same charts, if they have access to the same news releases and the same Trump tweets, how do they generate an edge that is different to ours or is it the same thing?
Got to just let's take it let's break this down. Ladies and gents, welcome back to another episode. Patrick, a pleasure to have you on. Thank you. Now, reading through your career, uh, from BBC to then floor trader to then the areas that you're in. Now, one thing that I noticed is something that I I do like to consider and I think it's very underrated, which is categorizing a trader or our own self. Are we looking at things that are correlation based or causation based? And I I think people don't even consider where they're at on that on that which side of the fence they're on. If you can elaborate for me causation in the markets, causation in price action, causation in the charts and and how we can understand if we are using causation and how we can navigate it.
Yeah, for me thank you and uh this is my very first podcast. So uh thanks for that. Yeah, for me causation means something causes something else to move. Um and if we take a step back, the key thing to ask yourself is is what is the why of the move? Um and you can do that through overlay charts, you can do it through flow, through rate differentials, through um all kinds of macro events. Um it could just be dollar positioning. But the key thing is just to ask the why. Then investigate. There is no smoking gun. um falling like with charts and uh and confidence never in love. That's the key thing to remember. So um it it's a mix of all of it across all assets and it's a little bit of gut feel as well which is based on years and years of trading in front of screens.
That's interesting because when a new trader navigates fundamentals, it seems to be presented in a way that there are certain things that could be a lagging sorry a leading indicator like interest rates or monetary policy and it's almost like a causation of if this happens with interest rates then this should happen. Uh but you're kind of arguing that it's not the case and there's no smoking gun. It's more a detective uh approach in which case how do you become a detective in generating a bias?
Well, you find a mentor. Uh that's that's that's key and somebody who's really ahead of the curve and it's really important to have that experienced person who um gets sense of what's priced and what isn't. Now um there is obviously the there's this dollar and oil correlation the the quite tightly positive correlation causation as well um affecting other um assets but those two are really front and center macro um we're is really playing sec second fiddle now that is going to stay like that for a while so it's it's really um knowing what is the why what is fueling markets and then adding that into your holistic view and your trade setup. So, um the other thing I do want to mention is narrative is so important that really overarches all causation.
Um, you know, you can uh narrative stamps on logic um all over you just get run over by what the market is telling itself. So that's the key thing that we look at as well. How can we break down and digest narrative? Is it sentiments, headlines, or is it something that can be a bit more mechanical?
Well, it's the reaction function. So, you basically build a model um which can be um coded or not. Um and you you measure the rate of change and you measure the absolute move based on news, macro, events, anything that's happening. And then you measure that and then you you pump that into um a matrix and that is your that is your strength uh RSI if you will in narrative. Um, taco is a classic example. So Trump always chickens out. We had this from tariffs when dollar CAD it went higher for big figures. He chickenened out 48 hours later and then it reversed that and went much much lower. Mhm.
So taco has been a a wonderful um um causation. It's been wonderful uh for our traders. So So it's just measuring uh in in in the rate of change but also the absolute move in in when something new enters the market. When when I think of macro and uh causation in the markets from these this side, uh it seems to be something that you can capitalize upon on a six-month horizon or a one-year horizon, more position trading. Can you translate this also to a day trading environment?
Absolutely. I mean, any anything coming out of Trump is is instant, >> you know. Um and that is ultimately tradable or fadable. So, you know, you can go with it or you can wait. measure the move and then go against it. Um that is absolutely key. Um um the only other thing I would say is if you're looking at causation is >> um everything expires. Now I've been quite lucky to to have pretty good conversations with some of the senior guys at at the quant firms like DE Shaw, Renaissance um you know such like. Um and their job is not really to be first. Their job is to write a code and spot the expiry before other quants cannibalize on it.
Expiry of uh fundamental events or a >> the expiry of uh the inefficiency of that trade of the trade setup. So, if for example, if you're trading taco, um they measure um the the strength of the taco, right? Obviously, we've got this new uh 45day potential um ceasefire with with with Trump. Um they measure that and they measure um the the absolute move, the rate of change and how much it will revert to the mean. Um and they do that very very quickly. You can do that as a human discretionary trader as well based on um your your measurements on every single taco that's happened. Um and you can take that all the way back from not just um the first tariffs in Trump too, but the uh the the recent tariffs in Trump too, but the ones before as well with China.
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When I first started doing these episodes and I I sat across uh individuals just like yourself with more institutional background, I always felt that the institutional trader has more access, more information, insider technology and quants and supercomputers and what can I as an individ individual retail trader do to keep up? But over the years, I've come to find out that it's not the case and they have similar level of access, similar level of education. And therefore, it presents a strong question to me, which is if they're looking at the same charts, if they have access to the same news releases and the same Trump tweets, uh how do they generate an edge that is different to ours or is it the same thing?
It's the same. I mean, look, for every uh if you you get 10 traders, half of them will want be wanting to buy dollar and they'll convince you. The other half will be selling dollar. and they'll convince you. There's good uh good, you know, there's buys and sells in most assets. It depends on the timeline, depends on where your positions. Um some traders have to um come out of trades um de drisk >> just and and and now's a good time. They may not do it for any reason. you know, they may want to um you know, if you've got a a billion dollar fund, you may want to come out of a position um you may you may want to buy dollar, for example, but you you really hate dollar. You may be forced to buy it, >> right? You you know that just because you need to um derisk on on closing your books for that quarter end, you know, there's loads of other things.
Yeah, it's interesting. Off camera, we explored the personal uh agendas within a a hedge fund. For example, um, you know, the end of year bonuses coming. So, let's slow down. Let's lock it in. You know, a common phrase that I've heard from many guests is that uh majority of my profits come from the a smaller portion of the year like two or three hot months create most of my profit for the year. Is this something you've also experienced?
Yeah, 100%. Certainly with my clients who who are in those positions, there's a little bit of um uh danger to that because if you do rest on your uh laurels and you're inactive, that's a one-way ticket out the door, too. So, you you need to be getting on a move. You need to have, you know, if it's if if all the facts are there, you go for it. Um, the other side to that is if you've had a a phenomenal uh track record, a phenomenal few years and you do have a bad year, you you're you're still pretty good unless um you you really uh have a have a horror uh day or a horror month. So just because you you know you're able to make mistakes um and and I think a lot of the traders um you know in today's world won't want to make those mistakes cuz they you know they come accusto um to get their other bonus. Sorry.
Tying this also to psychology, we have the individual on a trading floor as you mentioned off camera that they are paying to rent the space on the trading floor versus in a hedge fund scenario they're getting paid a salary and then bonuses on top. So naturally one is uh paying to trade and the other one is getting paid to trade. Have you observed in your clients or just in general um the ability to dominate or the ability to deploy when uh times are uncertain when somebody has a salary already insured?
Yeah. I mean hedge funds you know you're there to take risk. some of the bank on the south side. Um, you know, you've got the alpha banks, your Morgan Stanley's, your Gmans, um, your JP Morgans. Then you got maybe the the bigger more dinosaur type banks like your cities and your, you know, your Deutsches and and and HSBC's. Um, some of those sit on flow. Some of them h have a certain amount of ability to take some risk in prop. Um, but what I would say is um if you're cut from a certain type of experience and and and age too then you don't want to be sat in a seat just to you know, to execute. Um, and I would just say um coming back to your question I would say it depends on on the style of trader and the and the tenacity and and where they come from. Um, there are some hedge funds that won't really uh or they will spot people just sitting on their hands. It's uh but if you can get away with it some people do.
Are you arguing here that the person with greater tenacity or the ability a greater temperament they are not best served sitting on the trading floor and executing? There areas okay where would someone with a high level of talent really be utilized?
Well, I would say on a futures desk or one of the premium uh one of one of the big risk-taking hedge funds. Um, there's there's obviously certain hedge funds that have certain strategies like basis trade or picking up carry. Um, but there are some that make big bold bets. Um, that's really risky. You know, if you're making a big bold bet like rates are going lower because Scott Bessant said you're going to be losing a lot of money. So, it's like, well, you know, you've got to be um really careful of that as well. It's fine to call the big short, right? But how many years did he lose money before that? Um, you know, it and and we're in a very different time now. Um, you know, um, investors into, you know, sovereign wealth funds that have invested into these hedge funds, they will be quick to exit, you know, so so that's the pressure they're under. M
um so it's a bit of a balance you know but um the the real traders for me um you know are um the people coming out of bre and tuda and more capital and you know these are the big the the the the big tiger you know the these these are the traders that are are exceptional alpha creators
I think then this becomes a nice pivot for me mentally in the episode which is you're a great aggregator because you've you have access through to through your clients that you are helping and serving. But these are all types of characters, all types of personalities, all types of risk profiles. And therefore, you kind of have an oversight or a bird's eye view of the institutional world. In which case, I want to first start off with if you could build an archetype of someone that has excelled in the markets in your experience. What did they look like? What was their day like? What was their temperament like?
Um, you you you got to have thick skin and you got to be agnostic and you have to have grit. um really wake up with without any view, look at the evidence, be Sherlock Holmes. Um, and you just got to take Braming. You've got to be able to scale being tight, aggressive.
Um, the you know, you've got to love it. Don't do it to make money. It's it's this is the big thing that um you know traders go into especially the younger younger traders they go in just to they see the the big cars and the you know the the luxury lifestyles you are going to lose most of the time. Um, don't expect a high win rate. Some of the best traders I know have a 40 45% win rate. It's about sizing being tight aggressive and let new trades run on a on a good riskreward.
Mh. So um yeah grit risk management over everything understand what the market is telling itself the story i.e narrative. Um, take that on board. Know your macro. When I say macro, I mean tradable macro, not pure macro.
What is the difference there?
Okay, tradeable macro is macro that moves markets.
Okay, pure macro is like what's good for the country basically. So if you talk to an economist, they will look at you know the health, the temperature of the patient, the country. They'll look at wages, jobs, GDP. Um, that may not be moving markets, right? They they'll look at some of the survey indicators like ISM. They look at inflation.
Um, if the market's not bothered about that, that's not tradable macro.
Now, at the moment, nobody's bothered. The markets are not bothered about non-farm payroll. They're not. They're really not. They got one thing on their mind, and that's oil, >> right? And dollar follows that. So therefore what becomes tradable does change the seasonality involved or >> 100% 100%. I mean I I've met um you know a senior fixed income trader. We were at trade tech recently and she's she looks at twos fives and I look at twos 10s but I'm not married to any kind of pattern on on bull or bare flat or steepness on on fixed income side. Um, what I do look is interest rate differentials. Now, interest rate differentials, the difference between one yield and another used to work all the time and now it just doesn't.
And the things really changed on on liberation week um back in April. So, so you've got to when things change, you've got to be there to change when they do. And that is why being agnostic, waking up agnostic >> is really really key for any trader.
there certain character characteristics you mentioned of you know someone that would excel grit for example is that something that you can train in an individual is something you're born with nature and nurture basically
um you just have to experience it and and stop listening to your head
it's really hard
because you you you'll go the markets look I I can only talk about my own experience I was this kind of soft character and I got thrown into the Greek crisis. I was on the bund desk, >> okay?
And markets >> beat me up a lot and sometimes I'd have to take a walk around the block, just calm down, do a little cry. I have actually cried. Right? So, um, I came back, got myself together, dusted myself down, do it again, do it again. You know, there's this you've got to turn up, right?
And when you think you've just nailed it, guess what? Market's changed. you get beaten up again. Um, that's what it's you have to experience it. You can't read books come out of it. Um, and you know staying surv staying alive is is is a key skill. Um, but you know, if you >> if you can manage your own risk and and do it effectively um which means not trading too taking time out >> um and and avoid your ego leave your ego at the door. Um, and and you know revenge as well just just that is a big killer in markets uh in trading
getting getting your own back on the market because you're right and the market's wrong >> is a one-way ticket to the poor house.
Does a particular experience come to mind or when we speak about times that you were feeling beaten up, maybe even shed a tear or two?
Yeah. What were you going through at those times and how did you balance out?
Yeah, my own stupidity. I traded non-farm for about 12 months and lost every single time.
And um my me wanting to make money, me wanting to um put it right, me wanting to >> to dig myself out of a hole. I'd have a really good month and then I'd lose it on non-farm. That was my own painful, tedious experience. Um, but I came through it and I don't trade it now. I think it's just, uh, yeah, not tradable. So, um, I learned how to do other things.
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We were speaking earlier about uh correlation and causation. And I'm curious to see because um you mentioned also earlier off camera that institutions are adopting technicals. Now I I always foolishly thought that they were all about uh macros and fundamentals, but they have now looked at the charts. So when I'm looking at the same chart as them and I have my own beliefs on my technicals, what is the consensus on institutional technicals or does each one have its own beliefs?
Well, look, you you you've got to just let's take it let's break this down. You got to understand what technicals are, okay? They they're things that define risk, right?
Define risk. Okay.
Yeah. Yeah. Technicals define risk. Macro moves markets. That's my experience. So you have to uh understand that um technicals from banks which I look at most quarters uh from all the banks they are there to give you a technical picture of risk and uh and price. So you lean into a technical uh a level where you can put an entry, you put your stop and then you put your uh take profits. Um, so that is key to understand. Um, the actual moving of the market is is down to macro and and narrative and flow.
Meaning to say that trade ideation is from fundamentals or macro and trade execution is simp simply on the charts. It's you don't generate ideas from technicals.
First and foremost, no. That said, there are exceptional people that you can if you have uh a bunch of indicators and some really good levels and everything else fits, trade it. Absolutely. If you don't have any of those levels, then don't do it. Um, and that is the key. Um, I would not I would not trade any technicals alone. I'd need other other things on the plate definitely. Um, interestingly there are a few huge uh traders like Stanley Jocken Miller who um gets like 273 charts delivered every morning. He will get trade ideas and he's on he's on camera to prove that he will get trade ideas from the technicals >> sometimes but it's it he's quite rare. Um
is that a form of intuition then? He he's got a a way of digesting all these charts and generating an idea.
Yeah. So, he'll look at something cheap or expensive and go, "Hey, what's that?" And then he'll go, "Well, that's pretty good." He'll look at other types of technicals that support that and uh that idea and go, "I'm going to take this further, >> you know, um and if there's a decent um sort of confluence on technicals, um you know, the the other then he'll do it. But the other thing I will say is there's technicals and there's institutional technicals. So, you know, Tom Fitzpatrick is is for me a a bit of a legend. He used to head up technicals at City. Um Brent Donnelly, he's a legend as well. Um all of these guys use technicals. Um
so how would you differentiate technicals and institutional technicals?
Yeah. So institutional technicals involve rates.
Okay. They involve u key uh uh key trends on on on on differentials on macro like jobs plentiful, jobs scarce.
Um, uh, you know things like this. They'll involve um, you know looking at various time frames of the 10-year differential for example where euro dollar is. They'll look at the sticky points say 200 basis points how long that's remained sticky around there. They'll use obviously volume profile. They'll use a lot of that stuff as well that they will, you know, factor in a lot of rates.
Um, and they'll, you know, they'll use, you know, your your more linear technicals like Fibonacci and things like that. Um, so but they'll use that also, um, you know, with with market positioning, with the narrative, with flow, with month ends, you know, all these things as well. Not just those alone.
generally in your own trading and then also with by proxy your your clients uh what is the average trade duration because this is going to help me understand all of these technicals and fundamentals that they are building towards a trade idea is it to be in and out within a day or two or is it usually longer time horizons
um I I wouldn't say uh it's short or long so when you see a trade idea the people I I teach and and certainly for myself it's um you know you you have some trades will be one to three days, some will be in and out, some will be pure event trading like the Fed, some will be just um you know a a Trump tweet. Um, it's really you you take the trade as it comes. If you're on side and you've got money on the table, he takes some off. That's as simple as that.
Um >> trading has differed a lot in the last four or five years. The big macro calls are just losing money. Um, so those those have changed a lot. Um, the the big dollar trends have really really changed. So and and and and that has changed a lot of the institutions in in getting money uh on the table.
You mentioned uh another moment ago that uh futures or derivatives was let's say harder. Was that the correct choice of words?
Um >> yes
compared to FX. Now when I've always looked at futures let's say let's say a futures of an index uh at least there you have a bakedin trend you know over time it's appreciating whereas something like a euro dollar it's going to be naturally consolidating maybe it's a large consolidative box but there isn't a bakedin trend why does trading uh futures in an index for example become harder when it seems to me at least a a big uh consolidating assets class would be a little bit harder.
Yeah, we're just there's a bit of a um a perception or or a meaning of futures. So, when I say futures, I mean all assets.
So, you're trading the three-month contract with with FX, with bonds, with rates, with um equities and and whatnot. When you're when you're trading more accessible futures, you think of S&P, right? It's slightly different. Got it. Um, so, that's the kind of difference. Um, what I would say is within a futures environment which is institutional you have to pay your rent you have to get access to uh you get access direct access to the exchanges um you don't get a salary you know you're on an 8020 split your favor um you've got to kill and then you eat otherwise you know you don't eat basically just like you know in the old days on the floor of life. So um, you know, the guys that taught me um were from life um you know that then they went to screens and and uh so there's that kind of mentality with with futures. So a lot of um um day traders are are futures traders too. You have to close up every night.
So a few things that I've um navigated with other guests is this idea of intraday or scalping. And it seems like in an institutional world it's not so common place unless it's a quant algorithm. Uh is is this something uncommon in your experience? Because the reason I bring this up is most people in the audience would be more on the intraday scalp side especially when they're leveraging certain things like um online prop firms to have other people's capital on their side. Is this something common place in a professional world?
Um I used to scout in futures. Um, but the the it's it's not is it good or bad or or or is it profitable or or um or not. It's the way you do it. So, a lot of scalpers will have an inverse riskreward. So, they'll have a stop that's double their their take profit. That is not sustainable. The math maths won't relies on very high win rates. Yeah.
Yeah. So, definitely don't do that. Um, but if you're if you're having a big event and you can make some money off that, then close up your books in the end of the day. That's absolutely fine. Um,
what was your back in the day your scalping framework?
Yeah, I I used to just take um I didn't have an inverse risk reward. I had a posit, you know, it was a minimum 2 to1.
Nice. And uh you know I would always look for a free trade and that you know I wouldn't uh completely shoot the lights out but I'd make something most days. So
I would be at a high trade frequency also.
Um, not necessarily. I would take profit quicker. So you know if you're scalping you can scalp say two 3 to one. um you're taking maybe 33% or even 50% uh at um at at at the third or even 2/3 and then you can either reduce your your stop loss slightly >> um and then you can get away with a cheap or or or free trade and then you just move on to the next trade.
What would uh specifically forex would that be or or currency would that be more if you're scalping based on technicals?
No. No, because market flow I mean market profile is quite >> quite uh popular in futures desks. So, you're looking at time price opportunities. You're looking at where fair value is, value area high, value area low. Um, and you would just scalp around those those value areas having the point of control which is the most traded price in volume um at at the the time it goes really slow in price movement
and for your exit because you're looking at asymmetrical risk to reward would it be based on price action points similar profiles or would it be average session average day ranges?
Um, at okay but I wouldn't be married to it.
Okay. Um, I'd look at a volume like a normal distribution curve and and just work out the value high and low. You can get those off most most charting packages now. You don't need, you know, you can get them on Trading View or whatever or some retail chart.
Interesting.
Yeah. Um, when when we were speaking about uh the institutional trading flaws which is where your initial experience was was there a specific guidance of your people around you the your peers maybe the risk side that was done for you maybe does having that team environment in a professional uh sense help in your journey uh or was it still you're thrown in the deep end and you got to figure it out.
Yeah. Yeah. You are thrown in the deep end but you do you get assigned a mentor. Um, you just learn learn from the desk. Learn from when the markets really go crazy. Um, and you know, you just >> you get the scars. That's it. You know, I've uh I've had many an ulcer. Uh, and and you I used to have a full head of hair. Now I don't.
You still do.
But with that in with that in mind, you know, you got to throw yourself in the deep end. and through immersion, through mistakes, trial and error, you you do build that resilience and you build an understanding in the markets. But how do you do that? Because I think that's what most people do. It's trial and error and and you eventually learn how to swim.
But how do you not blow up in the process and and individual level lose all your disposable capital in in the learning process? How do you do it in a controlled way? In your case, it's other people's money, which is obviously more uh detrimental.
hard work will it's good but it's not going to make you better unless you work with somebody more experienced. Um, I have a mentor. I mentor people.
You know, it it some of my mentors have mentors.
Um, and you're always looking for that extra different type of oxygen in the room, that different kind of take on things.
Um, and understanding, you know, sometimes somebody or, you know, some of the I there are a couple of fixed income people I go to that I love just understanding where the curve is. and I use that with my dollar trading. Um, and then, you know, there's there's one guy I really like who I really understands yen. So, I he's he's my go-to for for Japanese yen when I'm I'm trading yen crosses. Um, so there's, you know, this ability to actually ask for help as well.
So, so yeah, that's what I'd say about that.
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when we think about um trading psychology, there there is components that are amplified by the markets. you know, as you mentioned, revenge trading, there's fear, there's there's greed, all of the regular ones, but then there's also emotions tied to the journey and and in your own words, it was imposter syndrome. Uh, you know, moving, I guess, to the trading world fairly late, which it was in your 30s, right?
Late 30s.
It's not super late, but it's also later than I guess most would be. Um, let's separate both of them and then have a conversation on either side. So first of all on the journey elements, what emotions were you feeling in your younger days alongside uh imposter syndrome?
Um I just I realized that I I wasn't clever enough. I I was like no I can't this is for like clever people basically and I was like how am I going to do this? And I realized that that was just utter BS. Um, because you know half of it is your head >> when you get in there and surrounding yourself with really experienced people and then making your first big win. Um, then it's really helpful. Then you realize that even the most senior traders um don't they don't know everything you know they may work at Gleman's or you know JP Morgan not everyone knows everything you know and also the market has a funny way of um making you wrong you know um one of the the big you know things I wanted to do is to learn every crisis inside out now I came in the Greek crisis But there was 2008, there was 98, there was 92 where we came out the exchange rate mechanism in the UK, there was the LTCM crisis, there was 87 crash, there you know all these all these um uh periods I wanted to learn a lot more. 2008 obviously I missed that but I wanted I feel like I lived through it because I I know exactly what happened. Um, you know, we I've experienced trading the mini crisis like Liz Truss in 2022. You know, I I understand perfectly well what happened. Cable went to 103. You know, the these are things that I I really recommend doing. Um, but they help the with the imposter syndrome. Um, and as I said, um, I think I've mentioned this before, no interest rates, rates. Learn the short end, learn Sonia, Sulfra, Esther, learn the Treasury curve like it's the back of your hand. Honestly, that will help. Um, you you'd be I was really surprised that I just thought everyone on the institutional side knew everything about interest rates. They don't.
They just don't. um have a really healthy work rate. Like do it for fun. My job is fun. It's not work.
You know, I and and the guys that you know, look, I'm 56. The guys that I really respect who are big traders, they're in their 50s.
You have to tear them away from the screens. They they they just love it. They live and breathe it. They've been doing it 35 40 years, you know. They worked in all the top shops. Um, that's the attitude to have, you know. Um, and you'll learn a lot.
Does falling in love with trading and the markets come from winning?
No. No, absolutely. No. It's getting it right. It's different, >> right? So, it's it's getting a trade setup and and being correct. That is more satisfying. The money helps, but it's not the >> feeling of, let's say, solving the puzzle if you're in Sherlock Holmes mode and then you get it right.
100%. 100%. That's why detectives uh they love their job. You know, it's it's it's understanding that you're slightly ahead of the curve, but you're not too far ahead. So, you get run over by the market and then everything pieces together and actually you called it, you know, you called it correctly and and that really is satisfying.
What was the reason for choosing the professional routes as opposed to being an individual retail trader especially because your background was not in let's say traditional finance and the normal normal routes to becoming a institutional trader.
Um, it was just I was kind of at a stagnant point in my previous career and um, you know I I had these uh images of where Wall Street traders were and you know obviously I saw the movies and all that stuff and I just had a chance meeting with someone who who got me an apprenticeship. Um, I was their oldest apprentice at a big futures desk. know and then yeah I just jacked in the the safe job >> I'd had for 15 years as a as a kind of mid manager and um yeah I was into the lines then >> yeah and and navigating the other side of the fence which is uh the normal emotions that come out from from trading itself. Number one, what would you say is actually the most apparent or the the largest emotion that holds people back within trading?
Um well remarks are run on fear and greed. Um, they're not efficient. So that's the those are the two emotions, fear and greed. Um, you know, it's very easy to go to those extremes as a trader. One minute you're God, the next minute you're you're nothing. So, it's just balancing those extremes and knowing that look, you can have a a phenomenal run and you just think you can't put a foot wrong until next week and when everything you touch turns to mud.
Mhm.
You can't put a foot right and you're like, why isn't it working? It's because the markets have got a different idea. Um, so that's that's the key thing. So with that in mind, does having an ego in the markets serve or preserve uh or is it something that can also lead to your demise?
Um, it's really good question. I think there's a bit of both. Um, you need to be sure of yourself, but you need to really clip that ego when it's right. Um, because there are big big traders that have suffered. You know the there was the guy from Templeton lost like two yards that you know the some of the big UBS traders obviously bearings Nick Le what generally happens is you'll have a phenomenal run and then you you know LTCM honestly if you want the best um instance of Egos together read when genius failed you will learn more about that book and LTCM in 98 than anything else. It's amazing.
Okay, very interesting.
Yeah. So that is basically you get a bunch of um Nobel prizes in economics. You get huge quant guys who basically invented a lot of the quant codes. You get some of the top bond traders from Solomon's all together in one fund >> thinking they're untouchable. They were outside of Wall Street. They disregarded Wall Street and you know they got too big for their boots and
what was the takeaway you took from that book?
Um ego is not your amigo right you know you can have the and they had 45% years and they back then they were trading you know four five billion >> and that was like in 1998 which is you know it's a lot of money now but it was huge back then. Um, and you know they wouldn't say no. I mean one of their um trades u not to get too technical but they they did a thing called relative value I do believe and when spreads widened they would they they would bet on the spreads closing to the mean the reversion. Um, and uh and then you know there was the tai deval Russian default then all all blew up and spreads just ballooned wide and they were just adding and adding to their positions and you know that was it.
So I'm I I want to explore this concept of ego a little bit further and I'm going to share a story which is in summer 2024 uh a project that I started was just giving my trades live ahead of time just posting on social media and I was doing it for uh at this point about a year and it I was about I was decently up so it was going well and my philosophy was because it's my reputation and it's publicly I wanted to start off at a very high win rate uh so therefore just giving my best setups and then uh as I built the buffer of profits I could manually bring my win rate down by uh giving a little bit more riskier setups. So at the time of summer my win rate was floating around 40%. And uh you know I'm sitting on a good amount of profit. I wanted my trade frequency to increase by lowering my win rate. I could deploy more uh opportunities and then I faced a summer of five losses in a row and that didn't happen to me before and in a public sense when the comment section is there it felt amplified. So then I took a oneweek break and then I came back and then I took another loss. This is not going well. Then I took two weeks off, recalibrated and I thought instead of taking these lower quality setups, let's go back to a high quality trade. Gave it out again and it was another loss. So I faced in the space of six or seven weeks, seven losses back to back >> and I felt very defeated and also being on the public sphere was was an emotion that I felt. Uh and then I continued on I battled out of it and and that was that chapter. uh about a year after the fact I came across a table online which was essentially
Speaking about the the based on your win rate, what is the likelihood of consecutive losses? At the time I looked at the table, with a 45% win rate, the chances of four losses in a row in a 100 trade sample size was 95%. So, if you just rolled the dice for 100 goes with that win rate, you will face four losses in a row. And I looked across the table, what are the chances of seven losses in a row? And it was about 80% chance. So there's a very high chance I will encounter, with my win rates, that many losses in a row. So what felt for me a dent in my ego and a bit of confusion, frustration, all of these regular emotions, felt very normal in the end. I was like, this is what should have been accounted for, and it was not a crisis. It was just baked into the math.
There's a long story to summarize. The idea being that you can navigate emotions in the market through psychology, conversation, having mentors and so forth, but also, you know, knowing the data side. In your experience navigating fear and greed specifically, was it having the mentors around you, your trading flow, maybe a risk team, you know, taking your hands off the markets and taking the markets out of your control, or was it these data sets that maybe you encountered?
For me, it was just understanding your margin and keep really putting your arms around it. Get used to losing, right? You're going to lose. It's fine. It doesn't matter. Have a decent risk-reward. Size when it's applicable. I mean, size aggressively and scale. Is it repeatable? Is it scalable? That's all you need to do. You know, if you look at some of the big profitable hedge funds, they'll just do the basis trade, right? Very simple trade. You buy and sell the same sort of asset on different tenors, right? Or they'll just revert to the mean, or they'll just pick up carry. And there's nothing. And you run the numbers, you know, you just do it for a year. Get used to losing. And also the other thing that you do is with your margin, which is you've got your AUM, which is 100%. Slice it into margin and the rest of it. And that means if you're deploying 20% of your total capital, you never dent that, you never move that. That means you can do anything you want. Generally, what we do is we set the 20%. If you have 10 trades or even 20 trades losing, that's fine too. The markets can do that. But you don't breach your 20%.
So that means you reduce your clip size on every consecutive trade after that, and you take your days off. But what are you doing on your clip size? You see your choice of trades, you know, is it, is there a problem in your understanding of analysis? You know, I would always say, you know, I've been on various panels and whatnot, and the common theme is just understanding risk. That's it. Risk sorts your head out. If you can define your risk, you can accept it. If you can accept your risk, your head will follow. It's fine.
What about this idea of, I'm going through a losing period, or my returns are not reflecting what it should be on paper, and deciding, is that alpha decay? Is that your performance is not there? That could be just adherence to the plan versus just this is a rocky period in my edge, this is baked in, I've just got to see it through?
I would get eyes on it, that as you know, someone you really respect. You can't. The thing about it is, there's only so much you can do within yourself, in your own head. Because it becomes an echo chamber, I guess. Yeah, exactly. And it becomes your worst enemy. You just need some fresh eyes, fresh oxygen in the room as well. Often, if I'm having a particularly bad run, I'll just, I've got some go-to people I call, and they just talk it through. I did a post this is about a year ago that, you know, for like six months, I couldn't understand foreign exchange, and I was like, FX is dead. This is the reason why, I listed all these reasons.
Curiously, what were those reasons?
Macro wasn't working at the time. Differentials weren't working. Dollar was choppy. Markets would come, you know, be victim of crosses on dollar. There was no sense of trend. There was, you know, no follow-through. I mean, it was like, and then things turned on a dime, would pretend to trend, and then come back. And they wouldn't. They, you know, they would wake up one side of the bed one day, and then on a Tuesday, and the third, fourth, or sixth Wednesday, they'd do something else. There was no kind of like nailing your view to the post. And there were a bunch of other things, and I'll have to dig the post out. But I was feeling pretty sorry for myself, and I was like, "Oh my god, am I meant to do this?" And I've been doing it a long time. So that's all normal. So, you know, I spoke to a couple of old spot traders, ex-Goldman's, and they were like, "Look, don't worry, macro will be back, it will change, these things happen." And dollar will perform as it should be. So, yeah, that was a period for me.
Do you believe at all that the markets can be manipulated?
Well, that's tricky to say. I would say spot, no.
Is it because of how liquid it is?
Yeah, it's deep. I mean, there is insider information. And I'm not really going to go into that today, but there is information out there. You can just see it minutes before a huge announcement, right? I mean, it's happening lately with Trump stuff. Certain bets made minutes before. Yeah, I mean, look, you don't need to be a rocket scientist to understand that, you know, what's going on somewhere.
In the on CNBC, I think Becky Quick interviewed the ex-SEC chairman.
Okay.
And they were talking about, you know, how can we stop this? And it was interesting what they were saying in that certain assets are easier to stop than others. Oil is quite tricky in futures. Spot is very hard to manipulate. It's almost impossible. You can get insider information, but with the actual manipulation of the price moving it, it is virtually impossible just because 7 trillion a day gets traded.
So, this is a paradox that I battle with, which is there are certain areas in the charts in technicals that would be naturally having more orders placed concentrated, a typical support level, or a Fibonacci level, or a round number. And you see price does hover around that area, and often price does reverse from these areas. But more often, I've started to see is that price comes to these obvious areas where there would be concentration, and then price just shoots lower first, before then going the other way, indicative of what could be a manipulation or some sort of a stop run. How would you describe that phenomenon?
Try not to think them and us. Try not to think that the market's trying to stop you out, right? Banks aren't there to stop people out. They've got better things to do. Try and take that away from yourself. Analyze your levels. Are they good enough? Right? Look at price action. The last time it touched that level, what did it do? Did it reject cleanly? How far did it reject? What you don't want is, so we look at indicators when price approaches a level, and we have a process to execute or not. So generally, in a broad way, if price is hovering around, I particularly like Fibonacci. It's just a thing I quite like. Doesn't mean that they're amazing. It's just I know how they work, right? So when there's a setup and price comes to a certain fib level, if it does a certain thing, I'm not going to trade it, right? And generally, you'll find that markets will try and hang around the level and then push on through, take the stops and reverse. But there's certain, the market gives you clues. You just have to listen, really.
So, if I'm to continue on that, that you follow, you add filters that could be different technicals, it could be indicators, it could be time of day, you could add all of these things on top. And I've done that myself where I'm going to add this, I'm going to add this, I'm going to add that. And then you end up, let's say, overfitting, where now a good trade, and you wanted the A+ setup, but it was an A, let's say, but you missed it because you're waiting for a few more things. How would you battle the sweet spot of not enough versus too much?
Look at your margin. Look at your P&L. If you fancy it, do it. Don't worry about losing. Losing doesn't matter.
Okay. So, this also implies being absolutely mechanical to a system is not needed. It's a gauging where is your account at? What's your recent performance like? And a mix of it all.
100%. Usually, and Brent Donnelly does this, it's getting away from zero bound first. It's really, really good. And then when you're up double digits or whatever for a quarter, then you've just got more oxygen to play with. Your straight jacket is nice and loose. You can just hang back a bit. And you can do those trades that are just an A, not an A star. But then when you get a few bad runs and you get say 7% up, 5% up, then you straighten up. You know, it's being tight, aggressive. It's all about your margin not eating into that 20%. And you know, when you do, you look at your year. If you're doing 10% and you're in your sixth month, you look at your DNA. You like, well, do I want to push this on, or do I want to just coast it a little bit? Many a time I've had phenomenal Q1s. I had a phenomenal Q1 this year, for example. You just need to sit on your hands and just really cherry-pick those key key trades and then see how you go. Sometimes the worst feeling is giving it all back, especially at the end of the year when the performance bonus is due.
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I'm curious now to the idea of risk management, but more so dynamic risk. So, let's say on a winning period, what should you do? On a losing period, what should you do? Should it stay static? Because just playing the devil's advocate of what was just mentioned, why would someone take a setup? Why would someone take a B setup when you have A+ setups? Just bet bigger on them and then sit on your hands for the rest. How do we navigate standardized risk versus dynamic risk?
There's no right and wrong. It's down to you. The way I do it is, if I'm winning, unless I've given so much back, I'm just a bit down in the dumps. If I'm winning, I generally scale up. That's generally how I would try.
Why is that the approach? Because my immediate knee-jerk reaction to that is if I've taken four or five wins in a row, the chances that I that five wins is going to turn to seven and 10, that win streak is going to continue would seem unlikely. Therefore, if I'm sizing up each time I take a win, then eventually when that win streak comes to an end, the loss would be felt greater.
Yes and no. But it depends on how many trade setups are there. So if something is juicy and you want to do it, and you're plus, you need to be scaling.
Referencing earlier what we said of when the market is hot, is to dominate on those 20% of the year.
Exactly. So, you know, you're there to create alpha, and a lot of that is risk management. Now, risk management is not about being defensive. It's about being tight and aggressive. And when there's an opportunity, let's just say you're minus 10% on your AUM, you're not going to take any risk. You could just want to, you don't want to hit the 20. But if you're plus 10% and you know it's an open goal, you want to really go for it. Because you've got the bullets, right? So that's not to say you're going to throw trades away, but what I would say is, look, if you've got it, use it. All hedge funds run like this, you know, basically, especially the tier one that the alpha creators.
Interesting. What about in a losing period where you know you're feeling beat up and you're five in the hole? Is it once again depending where your overall P&L is at?
Yeah, it usually tightens it up. I mean, it's survival, right? So, you'll get through this. You can have a bad run sometimes. If you equate it to playing in a football game, you know, you're a striker, everything you do scores, right? You're going to want first team, and then you're going to want to be in a position where you're going to score. That's exactly. And if the manager takes you off, you get really upset. It's the same with trading. When you can't score at all, you've got to factor that in as well. You've got to dig deep and go, look, things will change, things will turn around.
When it comes to alpha creation in general, the testing portion of it, because right now, what I'm gauging is you've got to be in tune with the market. You've got to be in tune with where your account is at, your own performance, where it's all at. And it's a holistic approach, managing all of these variables. Whereas if I'm to think of backtesting, then it's going to be stripping back to what is the chart saying, what was the macro at the time. But if you're testing in one environment and then playing in another kind of sphere, how do you bridge that gap?
I'm really, I'm all for journaling. I'm all for seeing what worked, what didn't. But there's this big danger about overfitting and backtesting. It can tell you some really bad results. And it can really, if you imagine some of the top quant firms, they've got the best backtests in the world. They sometimes get it wrong. So unless you've got the technology and the proper code to apply that, then don't do it. Just record your trades. Really dig into the narrative, because backtests don't really look at, a lot of them don't look at narrative and market positioning. These are key things, you know.
I mean, for a major jobs report to come out twice in two months and not move dollar, it's just crazy.
Right? Guess what? That's what's happened. Markets don't care. So any backtest you can have till, you know, 40 years or whatever, it's not going to mean anything.
Yeah, it makes sense. And especially, a lot of backtests just average out, and that's just a killer.
What about, let's say, not backtesting, but live reviewing? What is your process of trades taken this last month and so forth? How would you document it, log it, replay it? What is that process there, or is it just onto the next?
Yeah, look, I will log and journal, and I encourage my clients to do the same, with events that have moved markets, especially if they're repeated. Taco is a great example. There was a diminishing return on taco, and we saw that with tariffs. We saw that with the war. What is driving that? And how taco was great before the tariff taco came about. Because before that, for example, we ran some analysis on dollar-CAD for example, that was a perfect phase on most parts of macro in the US and the Canadian side, and we ran that for about a year. We made a lot of money. Then tariffs came in, and we were like, fully prepared for that. And obviously, the first time, bit like throwing a pebble in a pond, the first ripples are the biggest. Then the subsequent ripples are a lot less. That's generally the kind of modeling we do.
I'm very curious to hear your thoughts on overall dollar. Obviously, we have the short to midterm, which is what's happening right now in the world, but also longer term, which is, you know, superpowers and how the world is changing with China and trade wars, but also other things that come to my mind, for example, how the petrodollar or US dominance internationally related to its debts. Where do you see, let's say, short-term and long-term of the dollar? Or as a reserve, or just general?
Well, as both. Would it remain as a reserve? Because obviously, you have the US military might to hold it in place. But then you also have a lot of movers internationally that are moving away from it, and maybe making gold, or with China and others making their new BRICS currency. There seems to be a lot of change that is happening now that wasn't there in the last few years.
First of all, I think you have to look at the euro-dollar system. So, these are not the currency. This is the dollars outside the US. Right? So that's the euro-dollar system. There's an interest rate on that. LIBOR always pegged to it, right? So it's their currency, it's our problem. So, more dollars are outside the US than inside. So, we just want to establish the facts. As a result of that, smaller is just the easiest, right? So, you have to look at what constitutes the easiest, and the easiest is the reserve. It has to be there. There has to be a lot of it. It has to be free-flowing. The market has to trust it. And at the moment, there's no replacement for dollar. Euro, by volume, if you look at BIS reports, is a very, very poor second. On volume, forget Renminbi, forget Yen, forget gold, forget.
Why forget gold?
You can't move it. It's not transactable. It's really hard.
As in, you need?
You can't leverage on it. Yeah. It's just impossible. You know, you can have all the gold reserves you want, but try and convert that into debt. It's really slow. Doesn't pay a dividend. Dollar does. Pays a yield. Right? This is all. And a lot of, you know, I've heard in my 15 years, 16 years trading, and my old mentors who've been spot traders for 35 years, every, there's always a story about dollar losing its reserve status. There's no credible replacement. So you can bash dollar all you want. It doesn't mean that you're going to find a replacement, because that's what you've got. The math doesn't work, basically. So I don't think until we get that. Forget crypto, it's tiny. Right? So it's about, you know, the whole of the Middle East is pegged to the dollar. They can invoice in anything they want, but it's all dollar, right? You've got to change all that. Do you think that GCC will change it? No. No way.
Do you think that global dependence on dollar is just it's culture, it's how it has been, or is there a more sinister side to it?
In what sense, sinister?
I'm just thinking when if somebody, a leader wants to move, let's say in the GCC, wants to move away from the dollar, usually comes with repercussions, let's say. So, it's just the reserve status of dollar is tied to their military might. Would that be a fair assumption?
I don't know, to be honest. Because the reason, because when you're describing there isn't a replacement, the only thing that comes to my head is until someone can overpower the US, then a replacement would come. But until then, no.
No. Okay. It wouldn't be. It's on utility as well. Military helps, but you've got to realize that dollar is separate to the US. They're very different. This is what you need to get your head around, the euro-dollar system, right? So, it's their currency, but it's our problem. And a lot of the most dollars in the world are outside regulation. They're outside the US. This started with the Marshall Plan. The whole euro-dollar system really started with the likes of Midland Bank in London, the whole kind of rebuilding of Europe, right? So they had to store offshore dollars in a place to help rebuild Europe after the Second World War, right? So there's that. And the other thing is, try and find something that's not going to be a real irritation and cumbersome thing. So you can make lots of money as a country. Now, you may politically be against the US, but that doesn't mean you're going to give up what is going to make your country most of my money, and that is having a liquid, deep, free-flowing currency that you can transact in and leverage on, right? And you may be in Kazakhstan, you may be in, you know, GCC, whatever. That's a whole different thing. And you can say one thing, but I can tell you for a fact, if it's going to hurt your bottom line, you're not going to do it. Dollar, that's why dollar is king, because it's just easy.
When it comes to current affairs, including what's happening right now, is your approach more to say, keep up with everything, analyze and make predictions, or is it more reactionary? When things do happen, then your trades are going to be reflective of that.
Well, war trades is the latter. You've got to be nimble. Look, every other day is a different day with Trump, right? So you've got to be really comfortable with squawk boxes. This is, we're in a war, right? So you've got to understand what those headlines mean when they come out and how big the moves are going to be. So, yeah, you've got to be very quick. War trades are on.
And just to kind of wrap up, first of all, you had some notes in front of you. I was curious, is there anything you would want to share from that?
Yes, there is. I've written down four key things to success. The first one is rates over macro, risk over everything. The second one is learn the narrative, i.e., what is the market telling itself. The third one is find a mentor, someone who's been around, who's been there and done it. And the final thing is read a lot. Never fall in love always with like in charts and macro indicators. Be agnostic. And that would be my four final tips.
Amazing. The only question from that list, because we covered a lot of it through the episode, read a lot. What does that mean? What should we be reading? What are the right sources of information?
I would say read journals. Obviously, your each journal source is good in certain ways. I can only tell you what I respect. I like the FT. Some people when I blog about the FT, they're like they've changed over the years. They don't like that. I really like what they're doing in the UK yields with gilts. I think they really nailed 2022 with Liz Truss. Reuters are really good with Japan stuff. Bloomberg is a good all-rounder. South China Morning Post are pretty good for certain things, obviously with Renminbi. CNBC used to not be very good, but I really quite like them now. For Axios is a very good source at the moment with war. So, yeah, there's all of that. Manuals, obviously, you've got my big bromance with Durk Willer. He very kindly mentioned me. He is an expert on emerging markets, rates, and carry. He's just got a new book coming out about macro. So, yeah, read anything he does. Brent Donnelly, classic, brilliant, brilliant trader. And also really knows his stuff as well. So, yeah, that will get you started.
Amazing. Yeah, usually I end the episode with any lasting advice or some message to give, but I think we can just pin that on the screen, the notes that you had. Well, Patrick, your first podcast, you did fantastic, and it was really a pleasure to have you on. It's not often we have someone with such a diverse career. So it became an opportunity for me to not only dig into your side but also by proxy everyone you've also been across the table with, but also helped and guided. So a wicked, wicked episode. Thank you for joining us.
Thank you very much.
Beautiful. There we go. Usually I get up and shake your hand, but you're a little bit far away.