chris-stanton Jason-GerlachChris Stanton and Jason Gerlach from Sunrise Capital Partners – a hedge fund that has been around since the 1970’s  – discuss their approach to Quant Trading and how it can be applied to the retail trader.

In the show the guys reveal:

  • Why diversification can be hard for retail traders
  • What to check when your system gets the “wobbles”
  • 3 price patterns that signify potential breakouts
  • Several secrets behind becoming a successful trader

Interview

43: Chris & Jason on Hedge Fund Quant Trading & How Retail Traders Can Capitalize | @SunCapPartners
00:00:00 00:00:00

Recommended Trading Book

Reminiscences of a Stock Operator by Edwin Lefevre

Interview Links

SunriseCapital.com
info@sunrisecapital.com
@SunCapPartners

Key Insights

General

  • Trading is kind of like a chess game mixed with a wrestling match
  • Chris believes every trader is a Quant to some degree
  • The best way to achieve diversification in today’s market is to trade different (fairly non-correlate) trading systems
  • As a retail trader it can be hard to get diversification as it requires a large amount of capital
  • It’s important to understand your profitability probability because it’s one way that allows you to size your trades correctly
  • The faster you trade the more money you need
  • Adapt your trading strategies as a retail trader to be a little less entry sensitive, i.e. at the tick level, because big players are moving very quickly in the markets and they can afford to do that
  • Things to look at to work out why a system isn’t performing to its standard: 1) are you making less money on your profitable trades? 2) are you losing more money on unprofitable trades? 3) are you winning less often? 4) are you hitting your stops at a higher rate?
  • Markets tend to herd, as does human behavior – there’s a lot of value in thinking about what everyone else is doing and why they are doing it, then thinking about that independently and deciding if you agree with it
  • “Come up with your own answer before you trust everyone else’s”
  • You need to have a certain amount of confidence to know that you’re right and everyone else is wrong (and add a dash of humility, in terms of your SL)
  • “It’s the ability to think and perform under pressure” that differentiates the top traders from the mediocre
  • Identify real and meaningful momentum and jump on it
  • You need to learn how to locate congestion areas – a wedge or flag formation where price is making lower highs or higher lows – they tend to break out one way or the other depending on the time horizon
  • An Island or tail price formation – where it doesn’t meet any other highs or lows, it’s an outlier – would signify an extremely bullish or bearish move. Or an Island where it breaks away and gaps lower and the next day it continues in the direction of that gap open
  • Chris’ theory is that markets hate gaps, they tend to go back and fill them – this opens up market opportunities, taking positions that will look to back fill that gap
  • Disassociate the money from trading and instead think in basis points
  • Don’t listen to anyone. Don’t listen to panic from the news pundits.
  • We tend to make more of our losers than we do of our winners “psychologically”

Sunrise Capital Partners Trading Style

  • Their trading strategies are among the most complex around
  • All their systems have very different reasons for being in their trades – they can differ by time and inputs (time & price versus volatility or velocity)
  • Their systems can trade the same markets but still get different outcomes which ultimately smooth their equity curve
  • Their shortest terms system can trade 100’s, if not 1000’s, of times per day
  • Their long term systems might have 40 trades on at any one time (either long or short)
  • One system is profitable about 50% of the time but can go down to 49% but it’s always profitable because it has a 10x profit to risk ratio.
  • It’s very rare their shorter term systems hit their stop losses (one such system hits SL only 7% of the time, therefore 93% profitable), but when they hit it can be pretty ugly
  • Their systems aren’t true high frequency, rather ultra short term. They can’t be traded without $15m of capital, minimum.
  • The time it takes them to trigger an order and get it back is about half the time it takes you to blink your eye – microseconds
  • They’ve never had to retire a system, but they have seen performance change and what that means is that whatever inefficiency or statistical opportunity your system has capitalized on has changed and it’s up to you to figure out why it’s changed

Chris’ Strategy of the Week

sandptrade

(Click to enlarge)

  • After the market spends a period of time below the 200 day moving average on the S&P or your favorite stock
  • When it breaks above it, enter a buy trade with a stop loss that’s set a decent distance below the 200 MA (enough so you don’t get whipsawed out)
  • Find an area of congestion and set your profit target just below that point
  • Size the trade appropriately so that you can give yourself a reasonable distance below the 200 MA and one that makes sense from a Risk to Reward ratio
  • The same applies for breaks below the 200 MA

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