tim-reaTim Rea resides is a Kiwi trader who has automated over 100 trading strategies on 25 odd futures contracts. Tim won the World Cup Trading Championship in 2001 and placed third three years earlier (both years hitting triple digit returns).

In the show Tim reveals:

  • How he trades over 100 strategies at the same time
  • Three strategy building tips you should consider
  • The specific price movement he finds most reliable
  • How he generates returns up to 300% per year

Interview

23: Tim Rea Shares some of his Tips to Building Profitable Trading Strategies
00:00:00 00:00:00

Recommended book

Come into my trading room by Alexander Elder

Platform & Broker

TradeStation & Progressive Trading Group

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Transcript highlights

Tell us a bit about you personally and what first attracted you to trading?

I’m 56, married with three children, some of whom are virtually adults. I’m active in my local church. I enjoy biking, boating and travel when I can.

In terms of what first attracted me to trading. When I was a kid my father bought me one share in Boeing. We use to sit down on a weekly basis and see what my Boeing share was doing. My family growing up was exposed to investing and the share market. Even as a kid in the 60’s I knew what Options were.

I didn’t really get serious about trading until about 2002. I sold down some significant assets – a car business and a dairy farm. So I had the time and money to pursue this.

Can you give the listeners some insight into your trading? Your trading style, strategy, time frames, ave. trade duration, % winner’s, typical risk reward ratio, typical yearly/monthly return, number of instruments you trade, maximum/average number of active trades, typical drawdowns you experience… those sorts of things.

I trade fully systematic and totally automated. I’m mainly short term so I do quite a bit of day trading and short term swing trading.

I also use a lot of different methods, so right now there’s over 100 different charts on the server where I’m trading from, each have got a system on it and I’m trading those. That’s over about 25 different futures contracts ranging from metals, commodities, grains, stock index’s, some of the softs, meat, currency. So a lot of different things.

My typical risk reward ratio would be about 1.5 – 3 times what my stop loss was. Every system has an absolute dollar stop in it. I general I’d target relatively high returns. I’ve had years where I’ve made 2-300% but it does vary, like in this last year. So it’s up and down like anything.

Because I target a high return I likewise have to accept relatively high draw downs in relation to that. My target would be to keep my month end drawdown to around 10-15% of my trading balance.

I trade very actively by a lot of peoples standards. I might trade 50-100 round trips in a day. In terms of contracts I would have trades 1000 times in and out in the space of one month.

What does your typical trading day look like?

 

I get up normally and come to my office. I’ll have a look in a little bit more detail about what trades I’ve done and do a P&L summary. If there’s anything to do, such as roll overs with futures contracts, I’ll sort those out. But in terms of the rest of the day I’m generally pretty flexible with what I do. Most days I’ll do some exercise – go for a walk, bike ride or play golf. When I’m at my desk I’ll do systems development and I also do a bit of portfolio management. I’m trading with a lot of different systems so I’ll scale up and scales down depending of what the situation is. That can sometimes take a bit of time. In terms of the actual trading part, everything I do is completely automated. I don’t trade from New Zealand. I’m got a server in Chicago and everything is running on that almost 24 hours a day but particularly through the European and US hours where most of my trades are going on. I don’t sit at my desk, I use to but don’t any more. I’ve got the technology so good not that all I need to be aware of is if there has been a technical issue or some sort of outage. If nothing has gone wrong, then there’s nothing to do. I can do that from my smart phone, I wake up every couple of hours, naturally, and check it as a precaution. Because if there has been an outage, the earlier I catch it the better.

I have three dedicated servers. One I keep up to date as a back up and if I every have an outage I would switch over to it. The other is for a research project where I’m collaborating with another guy.

In the beginning, what differentiated you from the average “man on the street” trader out there? What traits did you have, what actions did you take? We want to hear your secrets to success.

In the beginning I went to various seminars and course in NZ, Australia and US. What differentiated me was two things. One, a lot of them didn’t actually trade. They had a lot of theories but they never actually traded. But the main thing was I had time to dedicate to this. The other thing was that I had the financial resources to be able to do this. So, this freed my up to do it.

You might just say I was determined or pig headed, but I had a vision around this business and where I saw the future with it. All these things gave me a different perspective from others, so I persevered where others who had been to those courses would have fallen by the wayside. I would have fallen by the wayside too if I didn’t have the financial resource. I cost me hundreds of thousands of dollars over a five year period between courses and software.

The light bulb, or the biggest change I had was when I started working with systems. I tried initially to build some systems myself, then though this was silly. So I went out into the commercial environment and found systems you could lease or buy. One day I found a guy who said I could buy the open code for one of the systems. At that stage it was black box. I got that and didn’t even look at it for a bit but when I did it was enough for me to see (even though I’ve only got high school mathematics) what this guy had done. He’d basically made this thing fit a data set. He’d made all these if, buts and maybe’s for longs and shorts. So he’d just made it fit so it would have a decent back test. Once I got that I was the start of me working with the code in more detail. I got books and that’s when I started making real progress, when I started working with the algorithms.

There are so many methods and concepts out there for building systems, so I start with something someone has already done. So for example, Turtle Traders. Everybody knows about the Turtle Traders, so we can take something like that and say, let’s have a look at it. We can then apply it on a chart and start applying your own philosophy’s. So for me, I didn’t want to have a long different from a short. We can start changing things and experimenting with different types of exits and those sorts of things.

If you were a retail trader working a day job, what 3 steps would you take to start earning an income?

Start by really asking yourself why you’re doing this. Because if you think I’m going to make big money then I’d say forget it. Go and look for something a lot easier and that you’re going to enjoy. Don’t do it for the money.

If you really do have a passion for the markets then it’s likely you’re going to have a long hard, probably expensive, road ahead of you. Most traders who start out down the path don’t make it. So realize these are the realities.

And if you’re going to do this, make sure you trade with a very small risk. Not 5%, not 10%  not 2% of your account a fraction of your account. Because you have to be around long enough to realize if you’re any good at this and if you blow your account in a few weeks/months then you’re out of the business.

Can you explain to the listeners your preferred trading strategy, the ins and outs of how it works and why you choose this type of strategy over others?

I don’t have a favorite one… I’d say the favorite is the one that’s doing the best.

But I do have some things I like because they seem to work well on a number of different things. I’d say the easiest thing to figure out when developing systems are short term breakouts. And to be fair they’re probably the things that make me the most money.

Diving a little deeper, thinking about any price chart, what 3 things would you recommend a novice or intermediate trader educate themselves on when reading a chart

For me I’m not really worried about reading the chart with my naked eye or with indicators or things like that; for me it’s more about finding mathematical ways to read if for me, if that sense, that are absolutely precise. They’re not subjective, it’s an absolute approach to reading a chart.

In a system I might refer to an indicator, e.g. if the moving average is at above a certain level, that might be one of the conditions. Of if the RSI is at some sort of extreme level, like 90, it might be one of the conditions to setup for a trade but I certainly don’t use them in the sense that the Moving Average has crossed over of the RSI is above 90 so I’m going to trade. They’re just part of many things you might look at. They might be in there by not as much as you might think.

I think I have system that refers to a candlestick pattern.

You could look at perhaps trends or extreme movements. You often get extreme movements that can make good trading breakouts but following extreme movements you often get retracements.

But like I say, I’m not really one for reading the charts.

How long did it take you to go from trading newbie to consistently profitable trader?

5 years full time start to get some consistency and a couple of years beyond that to start to get some real traction.

What’s your mental approach to trading and what special techniques do you use to keep your emotions in check?

I don’t really have a lot of issues with emotion. But when things aren’t going so well I’ll get out my excel charts and look at my historical performance and this helps give me a bigger picture perspective. I also see my trading as a business and this also helps give me perspective.

At a practical level, having your risk management inline with your risk profile. Because if you don’t you’re going to be under stress the whole time.

What’s your favorite entry setup?

When the market is consolidated and due to breakout one way or the other, that’s probably a good setup. Or the exact opposite where you get these extreme over brought or over sold conditions you may be due for some sort of retracement.

What strategies do you use to exit and manage active trades?

I do all sorts of things. Some might be a time based exit if it’s a day trading system. I do use pure dollar stops on everything. I might use a range based exit.

A lot of people focus on entries, but an entry is only half your trade so exits are just as important as entries.

What’s your recommended “must read” trading book?

One called “Come into my trading room” by Alexander Elder.

Why does automating your trading work for you?

On a practical level I can manage many methods. Like I said, I’m dealing with over 100 systems all at once. I couldn’t manually work that out. I couldn’t manually trade those even if I had the systems all setup and they triggered and said “Trade Now”. Even pushing a button I couldn’t do it. Sometimes when the markets get really excited I’ll have trades going off all at the same time.

I can also trade over a lot of different hours. I’m not going to sit at my desk all that time, I’m not superman. I can trade over periods that I wouldn’t otherwise be able to trade.

The other thing is, it’s really helpful with discipline.

If there was one thing you would recommend any retail trader spend the next month mastering, what would it be, why and how could they go about mastering it?

I would say discipline.

What trading related internet resource, like bloomberg.com, do you always use?

I don’t use anything like that. My trading is all mathematically based.

What’s the biggest mistake most retail traders make?

They trade to big for their account size and end up losing most of their account in only a few months.

What’s your preferred broker and trading platform?

I develop all my systems in TradeStation. It’s kind of the benchmark. I also use Ninja Trader but that’s really a tool that takes the signal from TradeStation to get it to the broker I want to trade with.

My favorite broker is a place called Progressive Trading Group. The reason it’s my favorite one is because I use to be it’s major shareholder.

If there was one mantra or saying our listeners should reminded themselves of each day, to help improve their trading, what would it be?

Stick to the trading plan you have and do not risk an amount that will not upset you when, and it will, go wrong.

If you could leave our listeners with one piece of advice what would it be?

It’s really about keeping your trade risk and size really small.

We’d like you to help us find a high probability exit point for our trading system. We already have a market to focus on (namely the S&P500), and we’re looking for specific standard indicators, candlestick formations, market events, those sorts of things… what “3 golden nuggets” can you share with us today?

Most of my systems are so complex I can’t verbalize them. There was one thought I could verbalize, it trades gold and is a range based thing and the trouble with that is even I slip myself with the number of contracts I trade on gold so I have an issue there. What I will say it that this is very commercially sensitive stuff for me as this is how I make my living, but what I probably will suggest if you are developing systems there are a number of tips I can give you.

Like I said before, pure dollar based stops and even the targets will often work a lot better than you think, compared with using your percentage based or range based. I still do use range based things but these seem to work relatively well.

One of the things I often say is, when you look at a chart and say, where did it get into today? If I could have got out on the high of the day or the low of the day on a short, now that would have been a good trade. You can’t do that in hindsight, but what you can use that as a level that you might be looking to get out the next day, or even maybe better of worse than that.

Also the time of day, and it depends on what you’re trading, can be worth looking at. For example I trade the S&P Emini Futures, it use to be over 80% of it is just day trading so that’s all got to be unwound by the end of the day and if you ever look at the last half/three quarters/ half an hour, something like that you’ll often see a particular sort of behavior. And if you’re in a day trade it might be that you want to get out earlier than the end of the day because the market may have had a particularly good move and it’s now retracing back as people unwind that. Likewise I find on some of the metals, Gold, Silver, Copper and things like that. I find it’s better to exit earlier in the afternoon than wait til when the stock market closes.

Developing systems is a lot about trial and error. You start with a concept and add your own ideas of even just try your own ideas on a different thing.

Before we wrap up, what’s the best way for traders to get hold of you?

I don’t really have a website or anything so they can probably get in contact you and you can put them in touch with me or something. I use to be a CTA and had a profile and so forth but now I’m just a private trader. I’ve gone behind the green door as they say.

Have a question for Tim?

Leave a comment below… I’ll make sure it gets to him.

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