In this podcast, Alistair discusses the Tao of Trading with author and trader, Simon Ree.
Hello, and welcome to another ACY Securities podcast. My name is Alistair Schultz. I'm going to be a host for today's trading journey. Now in today's podcast, I have Simon Ree, a bestselling author of “The Tao of Trading”, which is all available at good book retailers through this book here, it is a fun and exciting rate to have. Simon is a vivid trader and investor for more than 28 years, so far with more than 14,000 hours in front of the charts. So he has got some of the best wisdoms and insights. You'll be able to find on the internet at this day and age. And of course his book has got a little bit more than just trading ideas and information. It's the wisdom, the experience and everything that makes the big details here. So thank you for joining us today, Simon, it's a pleasure to have you here now to get sort of that's your, absolutely now to get things sort of started off the back end, and working out a little bit about who you are and the industry for some of the fans, you know, what's your history in the industry, how have you gotten started with trading?
Was it a natural progression for you from an early stage, or was it something that you sort of developed an interest in over time?
I think it's something I'd developed an interest in fairly early on. I was in my second, last year of high school, you know, when the movie wall street hit and, you know, that made an impression on me that the 1987 stock market crash made an impression on me. I just found these things fascinating. And I was always, even as a teenager drawn to the, you know, the share price tables at the back of the newspaper and that sort of thing. I just found the whole idea of markets and finance, quite stimulating and exhilarating. And my, I did a, an economics and finance degree at university. My first job out of university was with a futures broker. Now this is back in 1992 depths of the recession in Australia. And my boss was a, he was a big technical trader. And the first thing he had me do when I started the job was read Jack Schwager, his market was it's book.
And, and really, and truly from, from that moment on, I was pretty much hooked. And I was very, very fortunate in that. I got to see my, my boss trade. He was a technical trader. He was a real Elliott wave guy. But he, he used to trade quite frequently and you know, he used to make lots and lots of losing trades and then every now and then he'd make a big winning trade. But what, but what I noticed was when, whenever he lost money, he'd lose a couple of hundred bucks whenever he made money, he'd make a couple of thousand dollars. And I just, I, I was very privileged to, to kind of see that upfront, that how somebody who wins at trading loses quite often, albeit a small amount. And so that it made an impression on me. And, you know, I got to deal with certain clients who, who were full-time traders.
And I, I just thought, wow, you know, this is, this is really cool. You get to be stimulated and interested in what you're doing and you get lots of free time. And it really planted the seed. Anyway, fast forward, a few years later, I was working at Goldman Sachs, went through the global financial crisis. I was head of the head of the market's desk in Sydney at the time. And I had a, you know, I had a portfolio that was fairly substantial going into 2008 at the end of 2007. And then throughout the period of 2008, I was I was listening to whom I thought were the smartest guys in the room and an analyst at Goldman Sachs saying, buy the dip. The stock looks cheap. That stock looks cheap. And I, you know, I, I mean, I lost a life-changing amount of money listening to those guys that year.
And that was when I really thought, you know, there will be a better way. And I sort of thought back to my early days and technical analysis and thought, you know what, I'm going to go back to this. And, and what happened during that period and, and sort of towards the end of that year, I, I befriended a number of the proprietary traders at Goldman at the time. And that this is when Goldman was like in its heyday for, for prop trading. And I talked to them about their approach to markets, and they're like, nah, we don't give a crap what the analysts have to say, we do this, we follow price, we watch price section. And that was when I really got serious about, I guess, reeducating myself on technical analysis and, and price action and how to find an edge using price rather than people's opinions. And I was fortunate that you know, I was in a role where, where I got to spend, you know, 10, 12 hours a day in front of a Bloomberg screen. And in my spare time I could test systems and try things out. And so in a way, what I'm doing today is, is I guess in a sense, something I've been preparing for for many years. Yeah.
And I mean, it's, it's always kind of a journey I've always found when it comes to traders. You know, having worked on, you know, some, some trading desks, myself, over many different places in different countries. I've always found that every trader usually you can put one chart up and you'll quite often find that a number of different traders will have a different opinion about what they can actually see on that chart. So I've, I've always found that really for traders, that it's really a journey of finding what works best for that individual, because there's no right or wrong way to actually conduct trading. It's just the ones that I suppose you resonate with the most. And of course you could say there's probably a wrong way, which would mean that, you know, you're using gambling or Martin Gayle sort of techniques or things along those sort of lines, but naturally, you know, once you sort of start to develop your own edge as you call it it, it does start to play a pace in how you actually progress forward as a successful trader.
Now look, just, I wanted to, you said a couple of things, well, just there before, and I thought it might not be about opportunity. So when you, when you started trading, you know, sort of 28 years ago and first got introduced to it and getting your prices out of the back of the paper, so I'm assuming back then that was kind of still paper trading. So you dot, plotting all the prices each day, starting with daily sort of charts, or was it moving closer into the sort of realm of, of computer technology at that time?
No, it was, it was, you could still get access to stock market data. It's just that back then, it was quite expensive, you know, you'd to pay quite a lot of money to get a, get a feed from, you know, the Australian stock exchange or whatever it was. I mean, these days data is, is basically free. Yeah. Whereas, you know, back then it was, you know, hundreds, if not thousands of dollars a year.
Yep. And so when it's come to that style of trading that you sort of were seeing back then, has that impacted how you try today or is it vastly different on that journey?
I'd say it's, it's broadly very similar. I mean, when I, when I think back to trading, you know, 20, 25 years ago, one popular trading style and I mean, it's still popular today, but I'll talk about it is trading breakouts. So you buy stocks that are breaking apart from new highs, short stocks that are breaking below new lows. That used to be, I think quite effective 20, 25 years ago, I think it's dramatically harder to trade in that style today. Because of algos, you know, algos manufactured, false breakouts day in, day out, sucking people in and then just sell stock to people buying the breakout, caused a stop run and, and the, and they go home making money. So I think breakout trading, I'm not saying it's, you can't do it, or it's impossible, but I think it's much, much harder than it used to be. And that's, that's probably the only real difference that I've noticed. I'm really, really particular these days about buying when price is what I call close to the main, I don't really trade breakouts at all anymore. So that's probably one, one stark difference. Yeah.
Yeah. So I mean, that, that progression for you. I mean, obviously it's taken till now, but you may have, I mean, I know from having read number of chapters in your book that you talk about the idea of your, your trading bounce 2.0. And so when do you think you sort of started developing the idea of the bounce to a 1.0, I suppose you would call it, would you be able to walk us through a little bit as how that's evolved as a part of your journey? Has it been something you've done after sort of the 2007, 2008?
Yeah. It really, and truly that's right. It was sort of after, after 2008 was, that was really kind of the final store for me, as far as fundamental analysis goes, in terms of making trading decisions. I'm not saying fundamentals can't work for long-term investment decisions, but if you've got a timeframe of sort of weeks or months or shorter, that tend to not be very helpful. Yeah. And yeah, so that was when I started to think about it and, you know, moving averages, everybody kind of uses moving averages, put some on their chart. The traditional way to use moving averages is looking at crossovers, you know, your buyer when one moving average crosses above another and what have you. And that can work there is, yeah, they've actually been proven to be statistically significant, but using moving averages as support and resistance was something I hadn't really seen, done very much, but it was something I was just, just observing on the, from looking at hundreds and thousands of charts every day. Oh, wow. This stock seems to pull back to the 21 EMA and it'll, it'll hold there is support and, and really developing a system around using moving averages as support and resistance rather than purely just trend. Yeah.
Yeah. So w well, when it actually comes to your moving averages that you are using I sort of stood out to me cause I'm quite familiar with sort of the Fibonacci sequence and I've certainly experimented with moving averages with, you know, Fibonacci numbers as well. Are they, are you using very similar sort of things? I see the 21 and the 55, the 34. Absolutely. Yeah. Yeah. So do you, is there a reason for that or is it more of a, if there's any lock-in Fibonacci? I want to have a part of it.
Well, I mean, the reason is it works, and it was, there was a bit of trial and error and then, you know, I was able to back test as well, you know, cause I had had a Bloomberg terminal at the time and they just seem to work with, with more rates than other kind of more randomly chosen numbers or round numbers. And I mean, I use I'll use Fibonacci levels for support and resistance as well. And I mean, I cannot count the number of times I've seen price lineup to a confluence of Fibonacci levels and then bounce, it respect that level. I mean, it used to be chills looking at it, you know,
Especially if that 61.8 line that I've always found them to make the most impact. When, when, I mean like when you've obviously gone through the process of developing all of, all of that, and you were talking before about the, the fundamentals and the technical of trading. And, and so when you first started out, you were, I'm getting the sense that you were more on the fundamental scope of things. And now you've moved more to the technical. What sort of a role does do each of those analysis types play for you in today's trading? Because you do, you do talk in your book about the technical side of fair bit. There's a lot of in-depth graphics and images are of that nature and your descriptions are usually quite heavily involved on the technical side and you do allude to some of the fundamentals. But you also note that, you know, you, when you find an options trading and, and, and you know, most of our traders here will not be options traders, but the idea of, of options in general and the fundamentals, not really aligning as often.
So, you know, you were saying that you may not pay attention to what a central bank does on a particular thing, because it has almost no effect on the actual option market or at least on the particular you know equity that you're looking at at that time now for you, when it comes to the actual trading process, having gone, like on the opposite, I've gone from technical and I've incorporated fundamentals. So it's interesting to see the contrast. And I still focus and use a lot of technical, but I, I would say I'm probably more on a fundamental side these days and that's worked well for me, but it was definitely interesting getting the idea that from you, it's kind of the opposite. So, so how much do they influence your decisions now? Like, is it a case of, you will look at a, you know, a fundamental and then use the technical to make your trading decision from there, if you've got a sort of inkling of it or is it very little,
Well, let, let me, I guess perhaps define what I consider fundamental and technical. So when I talk about fundamentals, I'm talking about stock fundamentals, you know, things like earnings growth, Eve bit PE ratio, price, cash flow. I, I do not care about any of that. I just don't care. Central banks. I sort of put that more in a, I guess, the macro basket. And I care very much about that. I think what central banks are doing is something everyone needs to watch, whether you're fundamental technical trader investor. I think that's very, very key, but in terms of making a decision about, do I buy or sell this stock? To me that's a hundred percent technical. Yep. Goldman Sachs back in December, 2017 they published a research paper looking at how valuation impact stock price performance. And they found that valuation on a timeframe of 12 months or less has got an R squared of 0.09 with stock price performance.
So, what it means is valuation basically can describe 9% of a stock markets of a stock's performance. In other words, 91% of a stock's performance on 12 months or less can be explained by things other than valuation. Coincidentally, JP Morgan did a very similar piece of research. They come up with an R-squared of 0.1. So 10% were very, very similar. So if you're in, if your timeframe is days to weeks, which is what mine is, it just doesn't matter. And when I look at, I mean that the stock that was hands down, the most profitable stock for me in 2020 was Tesla. I think I made seven, you know, triple digit trades on Tesla. Not a stock that that many people were enamored with from a fundamental perspective, you know, it was expensive and it was it's market cap was great and all the other auto makers and you know, it really wasn't too, there weren't too many fundamental analyst sticking their hand up saying this stock looks cheap. Well, this stock is a buy, but from a technical perspective, from a momentum perspective, it was amazing. Yeah. Other stocks like Shopify, for example, it looks, it looks obscene on a PA, but it's been an amazing trading stock. And there, there are many stocks like that, that are, they look out righteously expensive through, through a fundamental lens, but through a technical lens, they've got lots of momentum and great technical setups. So
It's almost like on one side, you've got, you know, they're almost two contrasting or conflicting schools of thought when it comes to the sort of trading side in your sort of philosophies is, you know, that it one, one S you know, the fundamental side or the macro side, depending on what those numbers may actually end up being, or what the, the picture in one's head that they formulate about that stock price is always being controlled by the behavioral biases of the person. And then on the technical side, you see an obvious signal that says, you know, if we don't, if we ignore that side of it, then we do find that we get into positions like Tesla, because they've actually got the evidence behind them. They're continuing with their growth. And there's no other reason to sort of say no to the trade. So it almost sounds like it keeps you in the trade not only longer, but also prevents you, it gives you more opportunities. Are there any times where you do pay attention to the fundamentals in, you know, for, for any of obvious reasons
Personally? No, because I think that generally, if something is going to get better or get worse, you'll see it in price first. I mean, as, as you know, retail participants in the market, we, we D we don't have access to, you know, the CFO of these companies. We, we don't have access to the sort of data that we'd need to have access to, to, to, to gauge whether something was going to change imminently, but, but PR you'll stay it in price. You know, you, you you'll generally find that analysts expectations and earnings estimates, price targets, they're always playing catch up to what's happening in the market. You know, the, the, the, the narrative comes after the price action, not the other way round. Yeah. it, it happens so often.
So, I mean, just referring back to the idea of sort of bounce fee to, and, and where you started, or 2.0, sorry. And where you started with the 1.0 version, what was the big difference that's migrated along that you've changed it to the newer and better version for you?
So, version one was more, it was a bit more long-term, it was a bit more for somebody who is trading stocks, I guess, which is what I, what I was trading when I was employed, because I had holding periods and that sort of thing. So to worry about a version two is a bit more short-term focused and more options trading related. And I, I, I only trade options now. Yep. Yep. I mean, there was a w when I, when I first started trading options, I still had a, you know, a long-term portfolio of stocks purely through habit. But when, when you start to see sort of how much better your returns can be through regular compounding trading options you know, I, I just, I, I, there was no point holding a long term stock portfolio anymore. I felt, you know, I, you know, I was, I was making in a, in a month trading options, what I was making in a year, you know, with my long-term portfolio. And then once you start, you know, I used to say, compound interest is the eighth wonder of the world and compound interest. Like, it kind of sucks when interest rates are 2% or lower, right. You know, you save your money and you'll, you'll, you'll double it once every five generations. But if you can start making decent returns and compound decent returns on a monthly basis, compounding almost does work like magic. You know, it, it, it really does.
So, I mean, moving probably a little bit further forward now, the trading psychology side is, you know, used a lot in your book. I mean, you know, there's a lot of different instances where, where you do use it. Do you have a philosophy that helps you guide in your own trading? Is it similar to what you find in the book and perhaps maybe for some of our listeners, give us a bit of an idea of, of what that philosophy might actually be.
I mean, it all, I think if you were to boil it down to one phrase is there is a very famous cliche, do you want to be right? Or do you want to make money? And, and I think as somebody as an aspiring trader you've, you've got to figure that out. All right. If you just want to be right and tell people how right you were calling the top in this, or calling the bottom in this, your chances of being profitable are actually quite low because the trader's job is to make lots and lots of small losses. And what you've got to be able to do as a trader is, is fess up to yourself when you're wrong, you go into a trade that isn't working, you've got to, you've got, got to be able to say, you know what? I was wrong. I didn't make a mistake, but I was wrong.
And it all comes down to having a probabilistic mindset versus a deterministic mindset. So we, we grow up in life with a deterministic mindset. If a happens, B will happen. Yeah. It's not like that in trading, we've got to have a probabilistic mindset that says if a happens, B is more likely to happen, but anything is possible. And, and I'm prepared for that. And if what I expected, isn't happening, I'm out. I to cut that trade, take a small loss and move on, and you've just got to put the ego to one side and be okay, being wrong plenty of the time.
And, and I suppose, I mean, it is, you know, when it comes to that, it is almost like a behavioral bias from one way of growing up. You know, I can think of plenty of people I know and have met in the world that will look at the world as being black or white, but it's really 95% gray. And the more, you know, that's more truthful in, in trading where, you know, that that's exactly right. And I think that's the one thing in my own trading that's actually led to me, being able to be profitable is by, you're not worrying about when I have losses or how many losses I have, it's about actually killing them off early when I'm feeling uncomfortable with them. So, you know, I, I certainly resonate with that very much. So now one of the elements of the trading psychology that I is, you know, you've mentioned in your book and I'm quite interested in this as well. I've got a bit of a background in similar sort of places myself, but nowhere near as masterful as you, but on, on your sort of Reiki and, and, and the meditation and side of things, you know, how does that influence your trading and what sort of prompted you to, to go down that path as well?
Yeah, I I've, I have had a sort of fairly strong martial arts background. I started in the martial arts at age nine with, with judo, and I've done a whole bunch of martial arts, junior cheek. Kondo is the one that I kind of stuck with. And that's always been a fairly important part of my life. And I've always found that whenever I'm involved in martial arts, kind of everything else just seems to work, work better. And I think that the kind of the, the Reiki and the meditation is sort of a little bit of an extension of that. Martial arts to me is a bit like a moving meditation. Whereas meditation is sort of more of a sitting meditation and, you know, we've, we've got a, got a newborn in the house at the moment. So, my meditation practices are kind of slipped off a little bit at the moment, but just being able to approach the markets in a calm, relaxed manner, that what you want to cultivate as a trader is, is a state of mind of calm focus.
Because if you, if you are angry or fearful or agitated, it is going to impact your emotional state what happens w whenever you have a, an emotional reaction like that, without you even knowing it, the emotional brain is calling the shots and the emotional brain is just not adept at trading. All right, it's going to the market will suck you in, into buying at the wrong time and selling at the wrong time. If your emotional right brain is running the show, and that's why most traders lose money, you really, really want to make sure that your prefrontal cortex, your executive brain is running the show. And he can only do that if you're in a state of mental state of calm focus,
I suppose, where we sort of see, you know, I mean, a lot of traders talk about the fear and greed elements that really traverse, you know, through plenty of online trading communities and forums. And, you know, people do talk about, you know, the bulls and the bears all the time. And, and, and even if you think about, you know, I even known a trader who calls his trade room, the war room. So you tend to find that there's a lot of, you know, terminology and language that as traders, we tend to use that do imply some level of emotion. You know, if a position is, is in the negative, then it's going against me or it's, or in that sort of align. So trying to reduce that as much as possible, obviously seems like the most obvious solution to it, but we don't, sadly, we don't all manage to get there on, on that front. What are some of the techniques that you, you, I mean, other than, you know, sort of using Reiki and meditation, that you've practiced to sort of manage those perhaps anxiety sides of things, or even the discomfort that you might find in a position that's gone the wrong way and naturally killing it off and ensuring that the tray doesn't continue is one, but in this scenario, that one gets loose. What's something that you would practice doing.
Okay. Great question. So just, you're absolutely right, that there's this real kind of almost combative attitude. A lot of traders have it's you know, you've got to trade is a zero sum game, and you've got to win because if you're losing the other, guy's winning and it's dog eat dog and, and all the rest of it. And that, that may be correct, but it's not, it's not helpful for your psychology and, and the way I think about trading and the way I encourage people to think about it is the stock market or whatever market you're trading. It is just river of abundance. You know, the stock market turns over what 400, $500 billion a day. All you're trying to do is just scoop your hand into that river and take out a tiny little piece of that. You don't need a large piece of the action to make a really good living.
So instead of thinking about trading as a zero-sum game where one person dies and yet only the Victor survives, just think of it as a river of opportunity. And you're, you're just, you're just going to be in the right place at the right time to make sure you seize that opportunity. And if it doesn't work out, it doesn't matter because there's always going to be another opportunity. Yeah. The next minute, our day. One thing that I've focusing on more and more, and it's sort of my mantra for 2021 is, is cutting my average loss size. So in, in 2020, I'm happy to share with you, my, my average winner, my average winning trade was 77%. And my average losing trade was 35%. So it's a more than two to one risk reward, which, which I'm happy with. But my, my ambition for 2021 is to get my average losing trade size down to 25%. The reason being it's, it's just easier than trying to extract every last ounce of juice out of Olivia winning trades. That actually can be quite stressful. Whereas if I know if my losing trades are getting smaller and smaller, you know, my average loser there's less pressure on me on the winning on the winning trades to make as much as I possibly can on each one.
So do you think that could also impact your system sort of on the other side, you know, on the profitability side, because, you know, if you've had, you know, an average of, I think it was, you said 34% on the losing all of those ones there. I mean, will that impact, you know, if you're, if you're cutting them that much earlier and they may have in fact gone in the right direction, cause I can imagine a lot of traders out there and I've certainly been guilty of it myself. And when I was first starting out, when I suppose when I was still in that emotional circle of, you know, when you've got a trade coming down, it goes with a little bit of drawdown. You think now it's going to bounce and you get locked and married into that position. So is that to sort of stop, like you have a stop loss in place or that you sort of go now I'm out at this point, which you would obviously have to do with, with options trading anyway, but you know, is there, it does that to you, does that feel like that's actually going to impact what you're doing with your trading already on a huge level and is it going to affect the profitability as well?
It will. It'll it'll enhance the profitability. So, you know, my, my win rate is, is already quite good. Some, you know, my win rates are currently around 70% and that's, that's sort of been been like that for a while. But if I can, instead of saying, well, I want to increase the average size of winners. I just think that that's harder to do that than reducing your average size of your losers and, you know yeah. If you, if you stop out of a stock and it turns around and goes in your favor, so what, yeah. It, it, it just doesn't matter. And the fact is you can always, you can always get back in, you know, brokerage these days are pretty small, you know? Yeah. So, you know, if, if, if the only obstacle to getting back into a trailer is the brokerage costs, there's really, there's almost no reason not to.
And I suppose to a degree, I mean, that question would probably resonate with people who, who may have found themselves, you know, married to that position before. And, and, and I suppose they, they get stuck in that belief that it is going to, that they've got to be right. Which w you know, going back to what your initial thing about being, being right or, or, or making money is really where it sits at that at the end of the day now to sort of move a little bit further forward again you know, we've been talking a fair bit about options, obviously it's your main preferred class to sort of deal with why, w what, I mean, what's the big appeal for you when it comes to that it's, is it because, you know, you've obviously spoken already about the stock side of things, and it doesn't make too much sense from that point of view. I have, and you've obviously traded other markets as well, futures and ethics and things like that that have similar sort of behaviors and, and similar ways of, of controlling a position. So what is it that, that sort of attracted you more so to options markets than say something like FX or, or any of the others that are available there,
Options are incredibly capital efficient, which means you don't need a lot of money to start trading them. I, in the book, I, I liken, you know, buying a call option to renting a house or renting a property. What you're doing effectively is renting a stock. Now you might want to you might be looking at a, you know, a beautiful beach side property on the, you know, the Northern beaches up at whale beach or something like that. All right. Maybe, maybe a can't afford it. All right. Price tag is just too big, but maybe you could afford to rent one for a week or two, you know, and all of a sudden you get all the benefits of, of sort of owning that house.
You get to stay there for two weeks for a beautiful holiday, and let's face it. You didn't really want to live there anyway, because it's too far to commute and it's too far away from your family and friends and the upkeep on it would be, you know, very expensive as well. And it's like, that's what buying a call option is like, you get to rent a stock for a finite period of time, and he gets to minimize your risk as well. Cause the, the maximum you can lose when you buy a call, option is your option premium. So again, using that beach house at well beach, for example, you buy that property. And all of a sudden the capital that you've put in there is exposed to risk. All right, that property value can rise and fall. Whereas if you rent it for a week or two, the most you can lose is the amount of money you pay on rent.
And it's very similar with an option as well, though. The most you can lose is the option premium that you buy, which is sort like the rental fee. Now that brings us to the real feature of options is what we call asymmetric payoff. I know it sounds complex. It really isn't asymmetric just not symmetrical. What it means is your, your upside is, is unlimited while your downside is limited. So I can spend $500 on an option. That's the most I can lose. How much can I make on that option? Maybe it's 500 bucks. Maybe it's a thousand bucks. Maybe it's 2000, maybe it's $7,000. You know what I mean? Your upside really is unlimited. And that to me is the real appeal of option. Trading's small cost of entry limited downside, unlimited upside.
And it does obviously offer all the leverage opportunities as well. If you decided to go down that path, I mean, like, you know, I mean, I know in my own instance, like I, I prefer the one-to-one options if I can ever get them and stick to as lower leverage as possible. But just because of the element of it being a bit of a double-sided sword, you know, one side you can fall and definitely catch the wrong blade because you've gotten the bad side happen, but the other side is, is limitless potential as well. It's just that those, there's no limit set for either side of it. Now, when, when we sort of look at your options trading and what we've spoken about so far with your high probability sort of setups, do you think you could give some valid, this has a bit of a rundown on how you go about approaching your trade, your trade general trading day. What is it that you do when you first wake up in the morning to start trading on that day to till the time you finished for the day and you decide to hang up the traders had, I suppose,
Some days I might get no results. Some days I might get one or two other days, I might get 20 or 30, and that'll sort of depend on how much time I then spend on looking for the next trade. The other thing that I'll do is just look at the relative performance of the major stock market sectors, and then look for the strongest sectors and then the strongest stocks within the strongest sectors and just sort of people watch lists of them for what if, and when they sort of pull back to the mean, and present me with it with an opportunity. And then so that's, that's kind of my, I guess, research and analysis done. And then when the, when the market opens, I, I live in Singapore, so the market is telling me your U S market opens at 10:30 PM. I'll always try to live in the open market and I'll usually trade the first half hour of the first hour of the market, just what's what's happening. Check, check my current open positions, make sure there's nothing I need to do there in terms of taking profit or stop losses, or I've always got a, you know, a worksheet with my profit targets and stop loss targets in place. And then if there are any new orders that I want to place that day, I'll, I'll work them in the market.
Okay. And is it you know, are you very rules-based focus because a lot of technical traders can be rules-based so you are. Yep. And you just keep that sort of list paper form, digital form, any other form that sort of comes with it available too. Yeah.
So, I keep I mean, I literally, I keep a, I keep a note pad and everything just gets written in here and I just keep that on my desk and yeah, I just call me old school. I mean, it's probably not the most environmentally friendly way to do it these days, but yeah, there's something about pen and paper that I, I still, I still like, I mean, I, I keep a trading diary and a large part of what I do at my trading diary is if every stock I enter, I'll print out a full color chart and I'll scribble on it and make annotations and write the reasons why I entered the trade. But why I find that so powerful is that at the end of the month, I look at my winning trades and I look at my losing trades and I look at the charts in front of me and it just helps build those neural connections about what a winning trade looks like versus what a losing trade looks like.
Yeah. And so when, when it sort of moves into that, you know, picking where your markets are going to go and your rules based sort of strategy, do you, do I feel like you're the type of guy that would have a couple of different strategies, not just the bounce 2.0, so do you, do you, do you have to sort of flip back and forth between them or, and obviously I suppose at the job as the trader is really identifying, you know, the phase of the market that is most appropriate for the strategy that you plan to employ on that given time. So how do you go about, you know, I suppose identifying those phases of the market and picking which one or strategy you're going to use?
Well, so really, and truly in terms of the phase of the market, I want to know do it too. I want to be primarily Polish or primarily perish. So at the moment we've got the S and P the NASDAQ, the Russell 2000, the Dow transports, the Dow Jones, industrial they're all in up trends. All right. So I want to be focused on long trades, and then it's just a case of finding the right time, finding that high probability moment in time to join the trend. And you're right, I've got a couple of other trading methodology methodologies that I use other than the bounce, and they all compliment each other quite well. You know, the bounce works really well in strongly trending markets. I've got a valance volatility, expansion trade, which sort of works really well in consolidating markets. And then we're in earning season at the moment I've got specific earnings related trades that I employ employed during earning season.
And so, I mean, when it comes to earning season were saying just before that, you tend not to focus on, on the numbers that you hear out of earning season. So could you tell us a little bit about how you actually go about sort of your earning seasons sort of trades? Because I mean, they usually do get a lot of attention. It's hard to sort of, and I think, you know, the biggest challenge, you know, I suppose back in when you probably would have first started trading, there's been an imperative difference between, you know, the use of information back then, it was getting the best access to information was the best way best traders were being produced. But now it's so much access to information so easily. Can we see reports from companies that it's kind of become, who has the best filter or the best way of at least eliminating which pieces of information aren't useful to them anymore. So how does that sort of work with your earning season sort of control of things?
So with earning season, so I don't hold a position over earnings because I've got no edge in knowing a, whether the earnings are going to beat or miss and B, whether the market's going to respond favorably or negatively to a beat or a miss, you know, 70 times you'll see a stock the headline will be, you know, XYZ beats earnings and the stock stand 20%. And, you know, the average sort of retail investor look at that and think it doesn't make any sense. Hmm. Well, it happens all the time, so I never hold earnings, but, but there, there are a bunch of stocks that exhibit, what I call pre-owned is optimism, so that they will tend to rally into the earnings results, regardless of whether that result is going to be good or bad. And we don't care whether it's good or bad cause we sell before the earnings result.
But what happens to are in earning season and this really only applies to options is you get a surge in implied volatility in the lead up to that earnings event because that earnings event, it's an uncertainty event that can cause a much, much, much larger than normal move in the stock price and options will account for that by ever higher implied volatility and applied volatility is, is, is, is the market's guesstimate of how much a stock is likely to move. And, and as you get close to that earnings state the potential group for that stock or that gets priced in gets bigger and bigger. Okay.
Yeah. So that's kind of become a little bit of a, is it like a go-to sort of thing for you now? Whenever it comes to earning season?
Oh yeah. Four times a year. I love it. And it's traits that they're very high, very high edge and they can be really successful.
Yeah. So 2020, I mean, it was a weird year for, for everybody, right? I, I w we talked earlier about how I, I don't place much faith in, in fundamentals. I don't think fundamentals are really that helpful when you're trading short term 2020 was a year in which even I was scratching my head at how utterly divorced the stock market has become from fundamentals. You know, the, the number of times we saw, you know, non-farm payrolls or weekly jobs claims disappoint in the market rally. You know, it just happened week after week after week. Now I, I use a number of tools, you know, to, to assess where, where I think the market's going to head, including studying market internals or use things like, you know, Bollinger bands and count the channels and all of those things that I've discussed in my book.
And I became quite well. I, I got long the market about a week before the bottom, and I I'm, I'm quite active on LinkedIn. And I was writing bullish posts back in sort of mid to late March saying, I think, I think the selloff Stan and I got people sending me hate mail. Like people were sending me direct messages saying, you're an idiot. You don't know what you're talking about. You're a danger to your followers. How dare you say this? And I mean, I guess, you know, I'm doing a bit of a victory lap now, but it, it sort of became fairly clear to me that the market was horrendously oversold, but what was the trigger point for me was when the, when the fed basically stepped in and said, we're going to do whatever it takes. And they unleashed, you know, nine programs in a very short space of time that enabled monetization of treasury deficits.
And, you know, the, obviously the, the treasury came forth with stimulus checks and that sort of thing. And it became very, very clear to me that the market was going to price this in fairly quickly. And so we, we, you know, we did see a massive recovery. So fortunately I was on the right side of that. And in 2020 was, it was my best year ever. It was just a, an amazing year for trading. What has happened is evidently a heap of new retail traders just started trading options. And, you know, they're making hay while the sun shines, but, but the history would suggest that through the cycle the environment will not be that kind to them. Yeah, because this, this won't the market won't rise forever, that there are terrifying imbalances building and they're getting worse by the week. And I think that the market could, could have another nasty fall this year.
And I think, again, getting back to the fed, watching what the fed has to say is going to be absolutely key. Now Powell said last week now is not the time to start withdrawing liquidity. That's exactly what the market wants and needs to hear. But as soon as the fed start to change their tune, a watch out now, what could cause that in, in, in, in, in a perverse way, I think the vaccine could, could actually be what sows the seeds of the next big market fall, because you could, you could imagine a situation where we get middle of the year. So say second quarter, the vaccine rollout has been successful. Economies are reopening. Borders are reopening and the trillions of dollars of liquidity starting to hit the real economy, stoking massive inflation concerns. The fed will be under enormous pressure. I don't say to raise rates, but to at least drain back the liquidity and recommenced balance sheet reduction. So that would make
Doing bond purchase programs or tapering those up.
Well, we are reversing that yet. So taping the balance sheet, and I think that will sow the seeds of the next market decline. And I think it will be, you know, I think it'd be quite ugly. So I think w w we're, we're in a very bullish environment, unless, and until that happens, but, but yeah, watching the fed, I think it's going to be re it'll. It's been key since 2008 and, and that hasn't gone away.
One of the, I mean, interesting facts is, I mean, I suppose, I suppose in that regard, like, you know, you, and I both have sort of very similar views on what I expect out of 2021 whilst I'm bullish for now, I'm certainly concerned with, you know, where it's going to go. And, and, you know, the fed side of things has been very, very important. I suppose, one of the things that I have actually was playing with over the weekend, there was a rate simulator where you could be the fed and it was, you know, called the game. It was a game called chair, the fed, and literally the only control you had was actually dealing with, you know, their rates. So you couldn't do the bond purchases or anything like that. It's very simplistic sort of a game, but you know, it just for a giggle, I thought let's set rights to where they are now and see how hard it is to maintain it just above, you know, even though they're going to let it run a little bit hot at the fed above that 2% Mark, you know, just seeing how hard it is to actually control it via the right only it's next to impossible.
Like, I certainly wasn't able to get a good result that left me feeling confident for whatever economy of, of little thing, lemmings that I was looking after in the game, but certainly something for people to have a trial. And, and I would encourage you to have a look because you can, you will look at it and go, yeah, this has got to be a very interesting scenario for the future of the fed. And it sort of supports that idea, even though it's just a game. It certainly supports the idea of the fed has a very hard job ahead of them for this year. So for 2021, w w what are you thinking from that standpoint beyond? So w when, when do you think it's going to happen? I suppose there's never the right answer to sort of ask, but you know, obviously we're going to be looking at the fed. They've already said, they're not planning on doing things until perhaps another year or two out, maybe even three years out. Do you think it's going to be earlier than that?
Yeah. Well, the, the fit you got to remember the fed and all central banks, they are never proactive. They are always, always, always reactive. They're always responding to it, to, to what's going on now. Like I said, if we get to a situation in the middle of the year where economies are really kind of overheating and, and inflation concerns are really starting to pick up, the fed is going to come under a lot of pressure, political pressure to act and, and indeed in terms of their mandates, all right. They can't afford to let the inflation genie completely out of the bag. So I, I would say earliest is second quarter, third quarter is probably more likely.
Yeah. Okay. So w w we're thinking towards the end of the year, or at least the second half of this year as being, when we might see some challenging times from the fed coming through,
That would be my best guess, but, but if you do see the Fed's rhetoric changed before that make sure you've got, you know, some, some risk management policies in place. Hmm,
Absolutely. So, I mean, just also thinking about the psychological side of what's happened through 2020, and now that we're inching into 2020 and 21 2021, and where that's playing out now, what are your thoughts on the psychological thing? Cause I mean, obviously with some of the markets that we've seen, and I suppose from a fundamental perspective, you would look at some of them and think they are incredibly over sort of valued on, especially on some of the macro fingerings. And then on the same side, we'd also look at that and think, is there some level of, of mania, because I know that there's an emotional sort of response to every single time that a, sometimes doesn't just defies logic. So what are your thoughts from a psychological point of view on the behavior of the market throughout the last 12 months and even now, and for the future?
Well, the market is if you want my opinion and I'm probably not the best person to ask, but I think it's, I think it's bonkers in terms of valuation. I think, I think it's a grievously overvalued. And we we're at that point in the cycle now where people are starting to come up with justifications for, you know, why it is like it is and why it's different this time, you know? That's, it, there are still far too many people that hate the rally, you know, that there is still a very strong chorus of, of bearishness out there. I mean, a lot of these people have been buried since 2009, but there's still a lot of people who are calling for the end and you don't generally find markets top when, when there's still so much perish in the suns and uncertainty around.
So, I don't think that w we're kind of in, I think, I think valuations are challenging here, but have we gotten to a euphoric bubble in terms of sentiment? Probably not yet. You know, I'm, I'm still old enough to remember 1999, 2000. I mean, one of the, one of the memes that's going around today is you can only identify a bubble after it's popped, but about, I remember, you know, I was working in 1999 and people were talking about bubbles and ridiculous valuations on the way up, but it just kept on going and, you know, the NASDAQ went, Oh, it just had a parabolic parabolic rise that last 12 months, it had had some big corrections during that time as well. But, you know, it was an incredibly frothy period. I, I don't know that we've quite seen that blow off top yet. That's what I'm expecting,
Same sort of thing. You know, I mean, that's almost the same sort of rhetoric that we saw with, like, for example, the big short movie, you know, the, it was identified beforehand with issues obviously in, before moving into other areas of the market and effectively was getting called out for being wrong, but then turned out he was right. So that's, you know, almost like a repeat occurrence that I'm sure we're going to say the same thing, particularly with things like Bitcoin and stuff, which are in heavy focus right now about whether or not it's a bubble or not. So I suppose that we'll leave that one for, you know, perhaps when we can look at it after it's popped and actually identify it without getting sort of grilled for now, looking at the other side of the psychological element of the last year, I do have to wonder if the increase in population in the amount of people that are interested in trading has been a big part of it.
I've certainly known among, I mean, I'm, I'm I'm, I'm, I suppose I'm a millennial I'm 1990 born kids. So when it comes to, what's gone on with, amongst some of my friends who might not be involved in trading and, and even other university students that I sometimes help out or wherever it may be. I mean, for them, it was, you know, we didn't have the money or the income to get involved, and now we would just want to get in because we're seeing the market tank. And I know that from a lot of the trading volumes that were put out by ACIC, there was like 30 times the amount of average daily trading volume than what we saw in 2019. So I am curious if that actually in its in itself has a little bit of an explanation in what's actually going on in 2020 and helped with that idea of people being very much on the side of buy the dip all the time. So what are your thoughts on that sort of side of things?
Yeah, I think you're right. I mean, you generally see when, when you, when you're late in any cycle, that is when you see the greatest retail participation. I mean, it's, it's just a fact it's happened every other cycle and that's what we're seeing now. So I mean, that, that's another good indication that we're, we're kind of fairly advanced in terms of, you know, what inning Zoe in probably the eighth or ninth tomorrow, you know, the, the baseball analogy w w we're seeing a lot of retail participation that doesn't generally Augur well for the long-term prognosis for the market.
So it certainly alludes to the idea of it now, thinking, I suppose we're getting sort of close to sort of the end where we have been sort of chatting for a while when it comes to your book and the towel of, of trading. I mean, I know that there is some sort of idea of tower having a loosely similar meaning to the journey. Is that the right way to sort of appropriate what we're thinking about your book?
Yes. I mean, I I'm, I'm, I'm a cheap condo instructor. Okay. And G condo is a martial art that was developed by Bruce Lee. And he wrote a book that was very influential on me called the, the tower of cheap condo. And then, so Bruce Lee's book was the inspiration behind the title. But yeah, it, it trading is, is a journey. And I guess what I've tried to do with my book is instead of write just another book with, you know, 15 different trading setups is kind of take people through that journey of, you know, getting your head right. Really be able to read the markets, learning the setups, managing your risk, writing a trading plan, and sort of take you through the w all the steps that I think are necessary to have a really good crack at success in this game. Okay.
And from, I mean, I suppose, you know, I certainly feel from what I have read of your book so far, which, you know, has been circumstantial almost most of it, but not quite everything quite yet, still getting my way through it, but when it comes to, you know, what you've written down in the book, it certainly feels like a lot of it has come from your own personal experiences. So, yeah. Yeah. I noticed, you know, a lot of the things that when you compare it to golf or some other sort of sport, it is making that sort of relation easier for the, I suppose, someone who might be new to trading and all those sorts of things. But what I do find is that that experience and wisdom has been somewhat imbued into your book. So, and, and being used as a bit of a reference point or guiding point for, for others on their own journey. Now, what I do want to ask the question of is, you know, and, and I suppose this really comes from the idea that you can't have wisdom without mistakes. And I'm, I'm curious to know, what do you think is one of your biggest, or your worst sort of mistakes that have actually influenced you in the development of this book?
So, my worst mistake is in my own trading is wanting to be right, and I'll show you, I'll give you an example of, of how that manifests there. There's a fear that I've had that. And I know that hundreds of other traders share this fear through it, through talking to them a trade, isn't going your way, and you don't sell. And why don't you sell? Because you've got this fear that the day you sell is the day it bottoms and starts moving in the direction you picked and, and the, and the anguish of, of getting out at exactly the wrong time is so great. You'll hang on and hang on, hang on until it's almost worthless. And, and that's probably the biggest learning I've had is to just ignore that sort of thinking, because even if I sell and it starts to turn around, I can always get back in.
You know, I might lose a little bit, a little bit on slippage if the stock moves a couple of bucks in brokerage. So what, but, but just, just overcoming that fear of being wrong. And so now I've got to manage my risk because for all I know the stock cadets could actually just keep falling. And in fact, if I, if I look at my trading plan, that probabilities are that it will, will keep falling. The other thing that I've managed to get really, really good at is let lots and lots of great trades go without me experiencing Jomo. The joy of missing out, which is the opposite of fear of missing out. You don't need to place that many trades in a week or a month to make a really good living. All right, you don't have to trade everything. You think, you think about the analogy of somebody who goes surfing, right? But when you, when you watch a surfer on TV, all you see is them catching the waves and they look amazing and they're on the wave and they're doing these tricks. And then that's what you want to do as a surfer. What you don't realize is how much time is spent paddling and spent sitting out the back, waiting for the right wave. And that's what we're doing as traders. We're doing a lot of paddling and a lot of sitting out the back, but it's only occasionally we catch one of those great waves.
It's really about, you know, being an opportunity seeker is more, not so much about trying to get every opportunity available, but actually getting the ones that actually are right to do for the really good ones. Yeah. And then when you do you, I suppose it's almost like testing a hypothesis, you know, if you are taking lots of little trades and they're not quite, you know, they're not working out or they're going the wrong direction, as some of us might say, then, you know, you're killing them until the right one comes along and it's about waiting for the right opportunity. And even though that is, might take some time waiting at the back of the wave, it will eventually come around provided you have enough in the realms of the right, right, right. Gumption or that edge that's actually needed to get it there. Now that's I mean, I, I would love to really thank you for coming on the program with me today and the episode I'd actually really love to have you back at some stage in the future and catch up with, you know, perhaps your ideas.
When we hear the fed taper, everything would be a good point because you'll be able to have a bit of a discussion about what's going to happen from the Fed's point of view. And of course see where you're at with your own trading and a few other things. So I very much thank you for that today. Now, if anyone is now, absolutely, I've looked at your fantastic speaker and it's been a pleasure having you here. So now, if anyone would actually like to get a copy of Simon's book, it is the tower of trading and it is that all good international bookstores and Australian bookstores as well. So please feel free to get in contact with me, if you would like a link to get there. Of course you will also likely be able to find it elsewhere. And I really do appreciate sort of coming on the program.
I'll speak to you soon. Cheers. Bye. Bye.
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