Nick started trading in 1985, while working in the Stock broking industry, after seeing a colleague plotting a 5 and 10 day Moving Average on a chart. He opened his first stock futures trading account when he was 18 and has been trading ever since. Nick has worked for numerous international investment banks – from the trading floor of the Sydney Futures Exchange to International Desks in London and Singapore.
Nick now lives in Noosa, Australia and is a keen fisherman who runs a stock market advisory service called “The Chartist” and also does high level mentoring for people who want to build and design their own trading systems.
In the show Nick shares:
- What makes a trading system robust
- How he diversifies his risk using 3 factors
- Two red flags to look out for when assessing strategies
- How commission drag works and how to fix it
Pattern Probability Strategies by Curtis Arnold
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- Mean reversion systems would appeal more to retail traders versus trend following systems due to the higher win rate and more activity
- The problem with mean reversion systems is they tend towards being curve fitted. They require an entry edge and as a result people optimize or data mine in order to find that edge.
- If a system is advertised with a win rate or 80-90%, that’s a big red flag. They appeal to the retail trader because they think trading success is about being right, but generally speaking those strategies will fall apart because they have been data mined or over-optimized.
- Trend following is more difficult to trade but more robust because it doesn’t rely on an entry edge, it relies on your money management edge – let your profits run and cut your losses.
- The problem with trend following is the returns are quite lumpy, especially when you’re trading a highly correlated market like equities, when the broader market is trending more than it’s not. It’s also more difficult to wait out those periods of time where your account is spinning and doing nothing.
- Most of Nick’s students end up leaving his program with mean reversion strategies rather than trend following strategies.
- It’ll probably take you a few months to do a system design and build. The stress testing and back testing is the most important part of whole process and learning those techniques can take a long time
- Nick teaches some serious techniques to ensure his students strategies are robust, and that’s not just looking at the strategy but the data going into the strategy to make sure the strategy will still be profitable if the data is somewhat different.
- The imagination required to come up with strategy ideas is very difficult for some people
- Coming up with a system is quite easy, you can pick up a course, book or stuff on the internet, but you need to validate and stress test it – that’s the point where most traders fall over
- If you have a strategy that runs on a single market, it might look good on paper but chances are, over time, it may fall apart – that’s what you need to really careful of
- If a system is truly robust then you should be able to operate the same strategy across many different symbols, e.g. Nick’s mean reversion strategy uses the exact same rules across all the different markets it trades (500 US and 500 Australian stocks)
- An important part of profitability is trading frequency
- To find good mean reversion books check out Larry Conners, Cesar Alvarez, Howard Bandy and Ernie Chan
- Jerry Parker and these Turtle Traders out there are using more or less trading the same kind of system they have been trading since the 80’s
- Find a strategy that will work reasonably well most of the time rather than be spectacular some of the time
- Markets do one of two things, they either trend or they mean revert
- You commonly hear that 90% of traders lose money, it comes from a study done by a firm in the US called Refco which was a big commodity broker in the ‘80’s. They did a survey from their retail clients that showed 95% of them lost money. But what wasn’t said was that at that time the average retail client had a $5000 account and were paying $100 per trade. Their commission drag was about 50-60% of their account value per year. Of course they were never going to make money. You see this even today where FX brokers allow you to open an account with $500.
- If you’re going to be serious about your trading business you need to allocate enough capital to make it worthwhile
- Commission drag means the amount of commission you pay as a percentage of your account balance per year, and if that value is more than 5% of your account then you either have to put more capital into your account or find a new broker
- Zoom out on a chart to get a better view of the bigger picture trend to try and align yourself with the trend of the stock and broader market – Nick has plenty of research that show’s this approach will greatly increase your returns.
- Knowing when not to trade is a key success factor, e.g. when the market is moving sideways
- Volume is important, especially when combining it with technical analysis
- Feeling uncomfortable is a natural part of trading
- You should back test any strategy you come across before you trade it live
- While he had a futures background, he now only trades equities in the US and Australia
- In 2008 he explored Mean Reversion systems to run alongside his trend following strategies and started trading these in 2010
- These days he manages 4 strategies: 2 in Australia and 2 in the US, 2 trend following and 2 mean reverting
- He’s trying to diversify markets, strategies and timeframes
- His trend following strategies hold positions for 6-8 months while his mean reversion systems hold positions for 3-4 days
- Trend following strategies run at a 45-50% win rate and win:loss ratio of 2 to 2.5
- He only trades the top 500 stocks both in Australia and the US but doesn’t trade any resource stocks in Australia
- His mean reversion systems have a win rate of about 65% and a win:loss ratio of 1 and they do about 1000 trades a year in the US
- All his strategies are programed into Amibroker and execute automatically
- He’s an end of day trader not intraday, he doesn’t look at charts or use any fundamentals… everything is driven by price, volume and volatility
- In the morning he runs his US systems after downloading his data and will then place the orders for the US night session. Exiting orders are carried out when the market opens and he runs an API which limits his exposure during the night. He does the same sort of thing for the Australian market but in the afternoon.
- He runs simulation side by side with the real market to make sure they are both tracking as they should be
- He built his trend following strategy back in the 90’s to trade commodities futures and he still trades that same strategy today, albeit on equities without any substantial changes.
- His favourite entry setup is a breakout
- Check out the ebook on TheChartist.com.au/chat where Nick shares a mean reversion strategy that’s not too far from the strategy he uses on a daily basis