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Where does the idea that trading means doing many trades every day, every hour or even every minute come from?
In this interview with Debora Rosciani, radio journalist for the Sole 24 Ore group (which includes the main financial newspaper in Italy), Andrea explains the origin of this cliché and analyzes its implications.
Here are some of the topics discussed in the interview:
- The differences between systematic trading, high-frequency trading and investing
- Why systematic trading can give rise to the idea of trading as a "slot machine"
- The number of trades needed to validate a strategy in the backtest phase
- The best market conditions for trading
Enjoy the video!
Does trading mean making lots of trades per minute? Let's talk about it with Andrea Unger, the only 4-time world trading champion.
Welcome back! We're meeting today on this digital stage to talk about trading. So, what is the scope of our chat with today's guest? The scope is to steer the listener away from the false myths about trading and towards the so-called systematic method.
What do people who approach the world of trading for the first time ask themselves? In other words, what do they expect?
So many questions are asked. For example, does trading really mean doing risky and speculative operations? And also, is trading only for shrewd traders capable of tolerating even very high risks? And also, does trading mean sitting in front of a platform and doing dozens and dozens of trades per minute?
The truth is that these are false beliefs and distorted information that, by the way, often lead many people to rely on non-professional traders – or even real crooks - to perform trading transactions.
As in all professional fields, obviously everything depends on the level of expertise. Today, we're going to focus on the systematic trading method, a method that enables us to make preliminary and upstream evaluations.
The question is why do we need to do this work? Why do we need to use this method? Well, as we said previously, trading is generally perceived by the masses in two ways: a scam or a quick and easy way to make money, and neither of the two versions is true.
The tools to operate in a professional manner in this field, removing the wrong or distorted information that often influences it, are provided by Andrea Unger, the only person to have won 4 times the World Trading Championship in the Futures category. Andrea, welcome back!
Thanks Debora, nice to see you again and hello everyone.
Andrea, let's try to answer the many questions of those who think that working in the field of trading means to work in a hectic way, making lots of trades per minute and working in a very intense way on a daily basis. From what I‘ve understood, instead, on the basis of your experience and of your daily business, the situation could even be the very opposite, for example performing one trade per day or even in a longer period of time. So, why do you think that people tend to believe that trading consists in making many simultaneous trades per hour or even per minute? Why is this belief so widespread?
You know, I was a 6'2", blue-eyed and blond man. Then I started trading and this is the outcome. Well, basically, I think that this kind of information is linked to what we hear and, even more, to the general idea of "algorithmic" trading. When people hear about algorithmic trading, they associate it with computers, and in some way, they also associate it with high frequency trading, which exists, of course, but consists in really high frequency trades that are made in a matter of milliseconds. This kind of trading has nothing to do with what we’d normally do from home or even on the Cloud.
There are specific structures to do high frequency trading. These structures hammer the market with repeated orders, like machine guns, and exploit all the advantages of technology, or rather, everything that technology can offer us in terms of speed but not in terms of smart decision-making, let's just be clear! Because many of these traders generally go belly-up and the number of the survivors is always so small because only the fastest and the best win, while the others are swept away.
So generally, when people think of trading using a computer, they think of something like this. Some years ago, I also wanted to develop a "slot machine" approach, namely a machine that would perform trades with the aid of software and that, thanks to the small profits gained with every trade, would become a sort of real slot machine that throws out money. I haven't done it yet and not because I was unable to do so, but probably because the market is not fit for this kind of approach.
So it's really the general idea of "algorithm" that makes you think that. In reality, however, using algorithms means nothing more than using a computer to do the calculations in a faster way than one could do and making it do things that one could do but probably not to the same extent, in terms of quantity. Because if I can follow 1, 2 or 3 markets, the computer can follow 20 or 30 markets without any difficulty.
So, algorithmic trading as I conceive it - and as many people intend it - means to use the computer to study the markets: feed it with historical data, let it process that data and then decide which trades to do on a statistical basis. And then tell the computer: "you have to do this, this, and this", and the computer does it for me because it's more precise than me. I can be wrong in clicking, you know, but the computer doesn't make mistakes if it's well programmed.
The number of the trades performed can become very large if you trade many instruments, but certainly it still isn't the number that people generally imagine. It depends on the strategy, a strategy that can work 3 or 4 times a day (if we want to exaggerate) but that usually works maybe just once a day, if not once a week. Then if you have 20 strategies, you can do the math and add the number of the trades.
Anyway, you also need to consider the time horizon of the trades that you want to make. The longer they are, obviously, the less trades there will be, and the greater the potential profits of each trade. Because you don't obviously stay in a position for a week to earn as much as if you had to stay there for just 3 hours. In that case, I would prefer the 3 hours because you can exit the positions sooner and so you're more relaxed.
…As for the amount of money earned… My idea of the slot machine was to make many small trades, not necessarily high-frequency trades but many small ones, and that gave me a feeling of security, that is, I take the wins and bring them home. It's a bit like the frenzy of "I want to take my money out because as long as I leave it there, it isn't mine at all". And this is fine, of course, but you need to consider that there are also some limitations to the amount of money you can make with small trades. I'm talking about the average trade profit. If I have too small a profit per trade, this profit will be eaten away by the costs of my infrastructure, of the broker who is paid for what he is doing, and therefore I will lose everything. Even if I were profitable, I'd work for others because I have very little left at the end. So, I have to make trades that are reasonable in terms of results, because from that result I have to deduct the costs, even the costs inherent in the trade, by which I mean the losses due to slippage or market speed and so on.
So, is trading faster than investing? Yes, it is, because in trading the approach is a bit like "pim pum pam" while in investing is more like "take and wait" for years. But there is also a middle ground that is not exactly the "pim pum pam" but that certainly has more frequent entries and exits compared to the classic long-term investment, but it isn't as hectic as it's depicted.
Andrea, I was also thinking about another aspect: certainly there must be some asset classes that are a bit more suitable to be traded performing a large number of trades. Also, a very large number of trades can give you the possibility to build a statistical history of that instrument, which is probably an interesting topic for you traders.
Even in this case, there is statistical data that tells us that it takes a minimum of… 30 trades to "statistically" validate something. While this is reasonable, if I develop a strategy, I look at how many trades it has done in the past and then frown if it has done too few. But if the trades I make are based on a strong and clear ground, at that point I do not need 30 to say "I'm convinced" because there's a reason behind... I may have less than 30 trades and it can still be ok, you know.
Because we aren't in the pure field of mathematics here. I mean, certainly we're in the field of mathematics, but what matters even more in our case is common sense. I establish rules that make logical sense, and if these rules really make logical sense, then I have a reason to perform that trade. One of the trading experts I've dealt with over the years used to make a funny example: if I cross the street and two pit bulls come out of the neighbor's gate and bite my calf, and I know that they're waiting for me, I don't pass by 30 times to get bitten and say "yes, it would be better if I didn't pass by anymore!" The second day I avoid walking by there and there's a good reason for that: the pit bull and his fellow are so angry with me and so I don't walk by there anymore.
The same way in the market: if I have a valid reason to make a type of trade, because I see a certain thing happening and I expect this and that to happen, then I don't need to validate it with a huge number of trades. On the other hand, I use more pure statistics when I reason on a phenomenon that I don't understand, but I see is repetitive. Intraday seasonality, for example. How come the Euro-Dollar in the morning goes down and then in the afternoon goes up? I don't really know why, however I see it happening year by year over and over again, and so I want to exploit it.... In this case, I’d say that it's statistically a "yes". I see that it happens all the time so I'm going to jump in too! Maybe I don't understand why, ok? But in other cases where we're faced with price trends that need reasoning, there I’d say yes, this is what I expect, this is happening because in my opinion this is what has happened, so I’ve explained what is happening and I exploit the trend without looking for crazy validations.
Okay. There's another question I wanted to ask you. Andrea, on the basis of the instruments you use for trading, and on the basis of your approach (the systematic method), what is... I already know what your answer will be, you're going to say "it depends", but I’ll ask you anyhow: what is the best market condition for trading? A very volatile market condition, in which indexes or investment classes move with great fluctuations, with great ranges, or a more stable phase where the market is sideways, to use a more technical term that in newspaper slang could be translated as "boring" or "stable for a long period of time". Which one is better in your opinion?
There are several different aspects here as well: the slow rise of the stock market helps all kinds of strategies, but not so much because they correlate to that trend, but because that phenomenon is what has been most present over the years. A slow climb is what ... Let's say that over time there have been more days of slow rise, so all trading strategies that are based on the statistical movements of the markets can clearly find more fertile ground in the prevailing conditions and therefore work better in that case.
However, when the market becomes stormy with trading you can earn a lot. I have several strategies that when everything goes down, let's say, perform really well: they ride the bearish wave and they do it maximizing the gains.
However, even if in those cases, you generally get very excited, you're happy, you're glad, it is clearly better to trade in a quiet market, especially for a newbie. Throwing yourself in when everything becomes frenzied may lead to significant psychological implications. And I'll tell you more, at the beginning of the downturn of the markets, when the Coronavirus crisis broke out at the end of Winter-Spring 2020 period, I was in a situation where I was really scared by what was happening on the markets and so, I turned off all my systems. I closed the trades, I turned them off saying "I don't feel comfortable because I'm seeing a market gone crazy, gone crazy beyond all logic, and being outside of all logical patterns, I'm afraid that my strategies won't respond to what's going to happen and therefore will lose money".
I turned them back on about a month and a half later. I can't remember exactly now, in mid-April or something like that. Then doing the tests on what I would have done doing, I realized that I would have made a tremendous amount of money. So, I missed an incredible opportunity for the sole benefit of mental health, just to be able to sleep soundly at night. So I was actually wrong because my systems would have made a lot of money in that period.
So I was obviously happy that the systems were good, but I was a little less happy with the decision I made. Anyway, I'd do it again because when it really gets too much and you start wondering "what should I do?" well, in my opinion, in those cases when it's really too much, it's better to take a step back and stop.. In 2008 it wasn't like that! It was different. I mean, as bad as it was, it was different. The market was going down but in a different way, and 2008 was a very good year for trading. Here on the other hand, really, everything was getting crazy.
But Andrea, why did you opt for a radical closure of all your systems? Why didn't you close only a few of them and keep some open?
It would have been a discretionary decision! I chose systematic trading on purpose to avoid having to make decisions linked to my reasoning. I put my decisions in the systems, and the systems trade for me. If I have to decide something, I can be right once, but I can be wrong the other time.
The problem is that if I decide on my own and I'm right it's fine, but if I'm wrong I feel twice as guilty and so the psychological impact (in addition to the loss) is greater, because I also feel down because I was wrong, you know. I accept that a system is wrong, because the loss of the system is part of the its history. Instead, if I make a discretionary decision (maybe just sometimes, for example once a month or whatever) if I'm wrong then I call myself stupid and this makes any approach worse. Maybe I should have said, "I'll keep the strategies on Soybean active. I'll keep those on the Euro-Dollar active as well, but it'd be better not to go and buy bonds". And then, what would have happened? I prefer to say no, to pull out, take a step back and stand at the window and watch, because I'm obviously curious to see what will happen, but if I have no money at stake I feel more comfortable in these cases.
Before we say goodbye, here's a 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, and 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.