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There are two main approaches to investing: one is called "discretionary," and the other one is called "systematic."
In the discretionary approach, the choice of the instruments on which to invest one's money depends on personal decisions based on news items, graphical analysis, gut feeling, tips and clues from friends and colleagues, etc.
In the systematic approach, on the other hand, we use a computer to analyze the historical data of different instruments by applying logical criteria and rules to get a list of the instruments that best suit our investment needs.
In the following interview, Andrea talks about these approaches with Debora Rosciani (a radio journalist from Radio24, Sole24Ore group) and focuses on several important aspects such as emotions and risk management.
Hello everybody! Today we are going to be talking about an extremely important topic: how to invest, how people invest, what's their idea of investing, what's their approach, their strategies, and their methods of investing.
We'll do this with the help of the protagonist of a success story that represents a model, a goal, an objective for many people. However, we really need to say that often, the ambition to replicate other people's successes is not enough, because today we're talking about success in a very special field. A field that arouses a lot of curiosity but to which people often approach with illusions, and so they often end up in disappointment.
If you're watching this webinar, you already know who I'm talking about. Today I have the pleasure of speaking with Andrea Unger, a professional trader who's the only one in the world to have won the World Cup Trading Championships in the Futures category 4 times.
Let me introduce you to him. So Andrea, here we are! Welcome!
Thank you, Debora. Hello everyone! Good morning!
So, why are we talking with Andrea today? First things first, Andrea's not here to give us the recipe or the secret to achieve the same results as him. Today Andrea will explain to us, in a simple but very clear and strong way, that investing is about method and patience. It's a matter of being professional.
Contrary to what many people believe, there are no tools that can make you rich. They believe that taking a one-month course in trading - so to trade the markets - is enough to make ends meet and solve their family's budget issues. But trading is an extremely complex thing. It certainly offers many possibilities and many opportunities, but it's also necessary that you're prepared and have the right mindset. It's essential to have strong psychological and emotional defense mechanisms, as well as a method and a lot patience.
I started this conversation by asking you to take us by the hand and use your professionalism and experience to lead us through the world of trading. So let's get straight into the heart of our reasoning on how to approach investments.
When they ask me about it, on Radio 24, I say: Your approach to investing should be the thing that guides you. Because first of all, you need to consider the purpose of the money that you are putting aside and investing. Because most probably, you would invest it in different ways if you were going to use it to pay for your children's university in twenty years, or if you were saving it for retirement and pension, or if you wanted to buy a house on the beach in five years. What I mean is that there are different tools for different goals. In addition to this, our approach to investing is also affected by the information we're looking for, as well as by other factors. Can you please help us to better understand the difference between the discretionary approach and the systematic approach? Because this concept is also at the basis of your training activity.
Well, to keep it simple, we can say that the discretionary approach consists in making decisions about when, how, and how much money to invest in a discretionary way, that is, either because your cousin suggested that you do a certain thing or because you have a gut feeling that things will go in a certain way, or because you performed a quick analysis of the charts, maybe applying some technical analysis tools, and believe that... blah, blah, blah.
A systematic approach is instead an approach that, in a certain sense, is automated because it's the computer that gives you the information you need to make your decisions. And not because the computer is smarter than you! Yeah, because you know, this is another myth that needs to be debunked. There's no such thing as miraculous algorithms that can analyze tons of data and then tell you who knows what!
What algorithms do is nothing but contain a lot of pieces of information that were entered by the trader, that is, by me in my specific case, and by other financial operators in the case of other people, and those pieces of information enable you to make a comparison between what happened in the past and the current situation. And of course, the point is that a machine can do that much better than us. First, because computers are not influenced by psychology, in the sense that they don't look for what they expect to find, as people do, because computers simply process the data.
And then because it's faster. If I had to compare 50 different instruments using a set of rules that includes, let's say, a hundred rules, it's clear that a computer can do that in a few seconds while a person would need several weeks. That's what used to happen many years ago, back in the 1980s, with the first systematic approaches to the stock exchange world.
The purpose of the systematic approach is to enable me to get rid of emotions when I invest and possibly throughout the whole process of investing. So it's the computer that tells me, "do this and do that". And I know that it tells me to do such things because I instructed it to provide me with the correct information.
It's a bit like when you want to go on vacation and make a list of things to take with you. You already know why you're taking them, don't you? I mean, if you say, “Look, I'm going to Dubai," and you put your umbrella in your suitcase, one might ask you, "What will you do with that umbrella?"
But there's a good reason why you're taking it with you, and that's because it's one of your risk control rules because it once happened to you that, while you were on your way back home, you got wet when you left the airport. And you don't want it to happen again, so that’s the reason. You take it with you, and you just don't think about it anymore. When you pack your bag, pull out your list, go through it, and put the things in the suitcase. I don't go through the list because, in this case, it's the computer that makes it because it's longer than the suitcase list. However, the approach is the same. You put together some information, and the computer analyzes them and tells you what to do. And you do what it tells you.
To continue with the umbrella analogy, if you see some black clouds in the sky, you take your umbrella before leaving. That's a common-sense rule. The computer knows that rule, sees if there are some black clouds in the data of a financial instrument, and tells you that if you want to buy, you have to do this and that, and the black clouds are just an example, they are the analysis of how a certain market is moving.
For example, let's say that this market has been rising for 5 days in a row, and I know that, statistically, after rising for 5 days it usually stops for 2. I know it because I've analyzed 20 years of historical data of that market, and it has almost always behaved like that. So, for example, I won't open a position on the fifth day because I know that it usually takes a break at that point. So the entry would be pretty weak, wouldn't it? So put together, this kind of information gives me some indications of what I can do.
And this applies both to short-term trading - so the one I like to call “Pim Pum Pam trading” – and to investing in general. When you choose the instruments in which to invest your money, even after carrying out some discretionary analysis, reading the financial magazines, and investigating a lot, in the end, it's still you who draws the conclusions based on what you know, such as, "Oh, that head of state is doing that, so I suppose that..." This is not really good enough. Plus, it requires me to make a decision whenever I want to do something.
On the other hand, if I build a system that tells me, “hey, invest in these 4 instruments because historically, by making this type of investment, based on this logic, you would have had a profit of... with a percentage of risk of...” (and this is very important), the computer can tell me what to do, and even in this case, which is probably less speculative and more long-term, the computer builds some matrixes that let me combine the instruments so I can achieve my goal. And my goal is to make money with a limited risk profile. And keep in mind that by 'risk' I don't mean the risk of losing all your money (because that happens with other kinds of investments, such as cryptocurrencies, for example). What I mean by 'risk' is that I want the trend of my wallet to be as quiet as possible.
I don't want to have fluctuations that exceed X%, and I don't want to get a terrible stomach ache because I'm losing 3% of my invested capital in just one day. Of course, this can still happen. Because actually, no one can predict the future. But you can try to minimize the possibility that it happens by calibrating everything in a way that can give you some peace of mind because you have studied what happened in the past and can try to control risk in the future.
Oh, yes, of course.
Andrea. I'd like to point out something for those who are listening to us, because I don't want them to believe that the message we're passing is that if you use the trading system of the Unger Academy, you can simply choose three stocks that move up for 5 days and down for 2 days.
Because it's really not that simple.
No, no, no!
I simplified it a lot, but in addition to this activity, you also continue in your activity of investigation, reading, looking around the world, of course, because it's always fascinating to observe the significant trends. Let's say that using the trading systems enables you to check all those emotions that people usually feel when they make financial transactions directly.
I really need to scold you and all those people who talk about “THE trading system” because, in an extremely general sense, it can even be right, but in reality, I have hundreds of trading systems. Each one is different, and each one was designed for a different reason. In the case of investments, systems – the trading systems - are generally a bit different, in the sense that they try to create a mix of instruments that can work well.
The point is that a system can't give you the names of three stocks that will perform excellently over the next week or month! A system can only tell you what stocks it would be better to hold because those stocks are more likely not to perform badly, let's say. So, they are the ones that are more in line with a certain logic, which is that of helping you minimize the risk the most and hopefully bring home some money, of course.
But a system will never find the three stocks that will make a bang. I mean, consider the “GameStop” case. No system in the world could ever tell you what to do because no system could ever imagine what would have happened. If anything, a system could have told me that historically, given the movements that were happening, in that category of stocks, that is, that of the “small caps”, as they call the small ones, when there's such an increase in volumes, stocks usually keep rising for a long time. At that point, one can decide to open a position.
A system can tell you, for example, that if that stock went up by 60% in two days, there’s still room for a further rise of 200%. At that point, you can open the position. I could have opened a position thanks to this information, but only if I had cataloged it. Because if I wasn't interested in that category of stocks and didn't catalog it, I couldn’t have done anything. Anyway, the point is that no one could predict what would have happened, so GameStop would never have been included in any list of 3 or even 30 stocks, except for pure chance!
A system can never be smart enough to predict the future. What a system can do is give us a general clue about what could be done according to a certain logic. So, if I were to recommend buying 3, 5, or 10 stocks, it would be wrong to say “recommend.” It'd be better to say that those stocks are the ones I would consider a good investment for me.
I'd pick those stocks based on my characteristics. Perhaps, some Mr. Smith would see those stocks and say, “What useless stuff did you give me? I've done much better than Unger, I'm better than Unger.” For sure, Mr. Smith is better than Unger, but when he buys the stocks recommended by Unger, he's buying the ones Unger would have chosen for Unger, and maybe Mr. Smith wouldn't be interested in them.
Well, Unger doesn't like to lose, so of course, he's going to be looking for something that's probably going in the right direction. However, Unger is not Merlin the Magician, and he also takes some bad thrashings now and then. I've got several algorithms that can give me some lists of stocks that it would be appropriate to put together according to different criteria, and from those lists, I can choose the one I want to use. It's called asset allocation, and we often call it that way in Italy as well. I mean, we use the English words, and we don't do it because we want to look nice and cool, but simply because everything came from the United States, and so we tend to use the same terms as them.
Andrea, please promise me that we'll also make a webinar on Andrea Unger's failures because I believe that it could be very useful if you talked about the moments of your trading career in which things didn't go particularly well. It would be a way to prove that even if this activity lets you experience particularly exciting, interesting, and lively moments, at the same time, there can also be some extremely complicated moments.
And what’s more, those complicated moments don't necessarily correspond to the complicated moments of the markets because they could simply be moments when you made some inappropriate choices compared to the times of the financial markets. But maybe we'll make another webinar on that!
Of course! But it could be very long, also because I've taken so many thrashings! But I also believe that it could be very useful because, personally, I prefer to listen to other people's failures because they can teach me more. And this is obviously in line with my philosophy, which is focused on risk control. So when I see that things are going wrong, I draw inspiration from the situation to try to prevent it from happening again.
However, unfortunately, Murphy's law applied to the world of investments always hits the nail on the head because things can go wrong in different ways, and so there's always something that, in some way or another, goes wrong.
Absolutely, that’s an important experience too.
Before we say goodbye, here's the last service announcement. For all the people who'd like to delve deeper into the concepts we have explored during our conversation, you can order Andrea Unger's book, "The Unger Method," which is available on the Unger Academy website. You'll receive the book at your doorstep. It's free, you only cover the shipping costs: so happy reading, everybody!
Need More Help? Book Your FREE Strategy Session With Our Team Today!
We’ll help you map out a plan to fix the problems in your trading and get you to the next level. Answer a few questions on our application and then choose a time that works for you.BOOK YOUR FREE STRATEGY SESSION NOW >>
Andrea Unger here and I help retail traders to improve their trading, scientifically. I went from being a cog in the machine in a multinational company to the only 4-Time World Trading Champion in a little more than 10 years.
I've been a professional trader since 2001 and in 2008 I became World Champion using just 4 automated trading systems.
In 2015 I founded Unger Academy, where I teach my method of developing effecting trading strategies: a scientific, replicable and universal method, based on numbers and statistics, not hunches, which led me and my students to become Champions again and again.
Now I'm here to help you learn how to develop your own strategies, autonomously. This channel will help you improve your trading, know the markets better, and apply the scientific method to financial markets.
Becoming a trader is harder than you think, but if you have passion, will, and sufficient capital, you'll learn how to code and develop effective strategies, manage risk, and diversify a portfolio of trading systems to greatly improve your chances of becoming successful.