Conversation with Andrea Unger

Beginnings

When have you for the first time considered trading as something worth trying?

I have started being interested in the stock market in ’97, more or less. I was still working for a multinational company back then. With a friend of mine we were discussing the possibility of making money by investing in stocks. We bought some stocks relying on tips, as usual. And we made money. So, we thought that everything is really easy. We discovered it was only part of the truth when we started losing money.

The loses gave me an incentive to study and a rival, let’s say, helped me to do some research over the Internet. I have discovered funny things – there were people making lots of money, in Italy especially, using instruments which are called covered warrants. They are very similar to call and put options. Everything looked very easy. So I also started studying those instruments.

With the friend of mine we also bought covered warrants. We had opened positions with a lot of money in gain. We felt rich, wealthy. And again, after a bad day we suddenly woke up and saw that we lost about 80% of our profits. We believed that those profits could come back to our pockets someday. That never happened and we lost about 60% of our initial capital.

I felt stupid because I didn’t believe it was possible that someone was making money and I was not. So I kept on studying and continued over several years. Then, on 25^th February 2001 – I was at home that day, I kept one day free from work – I discovered the truth.

The truth was that the market makers – banks selling those instruments had bad software and the quotes were delayed. Depending on the software of the given market maker, they were delayed by 5-8 seconds to even 40 seconds.

You may imagine that if you were good at maths, you could play some arbitrage because you could look at the underlying moves and calculate what the right value of the covered warrant should be. You knew you could buy what was quoted at that moment and maybe sell it 30 seconds later with profit. It was sort of a video game. I played that video game and it was very easy. I was actually very good at playing video games.

So, this was the way I started and I was also at a point in my life when I was dissatisfied with the environment at the multinational company. People were nice, absolutely. My boss was nice, my colleagues were nice but the general environment was not something I liked because you weren’t noticed. People in the company were just numbers. Everything was measured in terms of profit which is fine, I don’t blame them. But it was not something for me. I didn’t like it.

I saw the possibility of making money in the markets, sort of an escape from that world into the world where you were praised for your skills. I made the big decision in 2001, went on my own and started trading. Well, it was not trading. It was playing video games, like I mentioned. The point was that I made money. I was lucky because I could take advantage of a clear inefficiency that was there. While I was playing those video games, let’s call them that, I also learned something about the market, market moves and so on. I realized in that first period that this could not last forever. The banks are not stupid and obviously they had their own advantage in getting volumes into the instruments. But they would, sooner or later, change their software to a more efficient one or change some other particularities of the instruments.

For example, the spread. If you have a very tight spread, you can take advantage of that arbitrage. If not, bid would never reach ask or the other way. So you would not be able to take advantage of that any longer.

So I started studying. Being a mechanical engineer, my mind is easy to shape on the mathematical background, I found a way to face the markets by building automated trading systems. I’m not talking about black boxes which are some complicated algorithms. I’m just talking about a set of rules put together and giving you information about what to do on the market. That was my path.

I cooperated with some friends: Domenico Foti is a very good friend of mine and he taught me a lot. He taught me everything I needed to know at that period of my life. Once it was obvious the covered warrants were broken, I started actively trading on the futures market. Futures and forex are the instruments I am trading today. I have been a trader for a pretty long time so far, as I officially started in 2001. And I am still here which may be a bit of an exception <laugh>.  

Could you describe your first system?

I started building systems based on trend following. I mean the classical trend following with breakout entries from important levels, such as previous high and previous low of the day. I normally built trading systems based on intraday data. I plotted it on 5-minute charts. This may be confusing because I don’t mean that I used 5-minute charts to get the main execution of trades. The charts were used to get higher definition of the moves during the day. But my classical trades were breakout entries somewhere during the day and possibly close to the end of the day. Unless I was stopped out, of course.

Generally, the studies I conducted concerned what time of the day it was better to trade. Maybe not in the first hour or two. Maybe not during the lunch pause. All these studies were made with software that was available out there. I also studied what conditions were the best to actually study a breakout or not. Because not all the breakouts are effective, this is something we all know. So, where there setups or conditions which helped the breakout to become a trend or not? These were most of the studies I have been performing and are still performing today. My bread and butter is trend following systems. On some of the instruments I did not stick with intraday because the moves were not sufficient to assure a decent profit, to cover all of the costs of trading – commissions and slippage. Positions were kept overnight.

Classical examples were on the currency futures where intraday opportunities were harder to find. So I kept positions for three, four or five days. Also the Bund which is a pretty cheap market if you can say that. I mean what the tick costs in terms of euro. Obviously, to cover all the commissions, we had to stay in the market a bit longer.

Studies were made to find the ideal length of the trade. We then had a revolution – the markets got more efficient which means the classical breakout pattern may suffer. In any case I noticed that diversification was not the key in the terms of markets but also in terms of approaches. So, I also started studying counter-trend systems. I tried to find out the best setups to understand when it was a good choice to enter selling the resistance or buying a support which is opposite of trend following. And in that case – how long should I stay in the trade, how I should close the trade and so on.

So I built some counter-trend systems. Obviously, just to give you an example, I told you I was buying the breakouts only in some periods of the day. Clearly, the remaining periods of the day could be good for the counter-trend trades. I understood that in some periods of the day the breakout was not effective, because for example the market was chopping then. Also, a counter-move did not start. But that was a starting point to study how to deal with the markets. Also the setups and patterns for volatility comparison are normally good for a starting trend.

The opposite is true for a counter-trend. These are all things that experience tells you when you have software with which you can make all the tests you can imagine. Important in these tests is also to stick to common sense.

So if you find a fancy pattern that allows you to trade well, you should understand what the pattern means. Not just say “Ok, let’s do this because it makes money”. The point is that when it stops making money, you may not be able to understand why it’s a moment to stop using it. Also, later on I started studying the bias of the market which means what the market does when it moves, time of the day it normally goes up, time it goes down, which days of the week it goes in each direction etc. All this information put together allowed me to develop some systems based only on standard and repetitive tendency of the market. I put together plenty of systems with completely different characteristics, for different markets, different timeframes.

The classical indicators approach is not something I used but I started considering that as well. I noticed for example that indicators might be used on higher timeframes, starting from 60-minute bars. On lower timeframes they don’t work very effectively. On higher timeframes you can find solutions, build systems to efficiently work on the markets. The studies that we carried out in the last ten years are ongoing. I am studying every day. When I see something, I try to test it to see if that’s something that potentially gives me an edge in trading the markets.

As I understand, you are doing all this by yourself? Did you attend any trading seminar or training sessions?

Yes, I did. First of all, I mentioned a friend of mine, Domenico Foti,  who taught me a lot about his approach. But I also went to a seminar conducted by Larry Williams in 2004.

I flew over to the United States and I attended “The Million Dollar Challenge”. I have never used Larry Williams’ material but what I got from that seminar – Larry is a really nice guy, very clever – was a conviction that it could be done, the right mindset. It was in 2004, I was trading for only three years. I have spent most of that time trading covered warrants, playing. I was not sure that there could be a way to consistently and repeatedly beat the markets. When I was there I saw that it was actually possible.

After the three days of seminar I saw how he worked. His stuff was not for me, everyone has his own approach. It was not something I could easily work with. But I came back with a strong feeling that I could do it. Larry was always helpful, he’s a very nice guy, we’re still in touch and we are friends. Sometimes we exchange some considerations about the markets. He was the first one to congratulate over one of my victories in the championships. I mean, we know what we are talking about because we’re both involved in trying to figure out the markets. 

Did you keep any trading journals? Were they really helpful?

No, not really. I only kept record of my daily equity on the main account. Obviously when I go into a drawdown, that’s a kind of an alarm. It’s a sign that something is going wrong. I get a bad feeling and with that bad feeling I try to have a deeper look into the systems, the market situation and so on. In terms of a real diary about were my feelings, my activities – I have never done that. I’m not that disciplined. I am disciplined in my trading but not to that level, generally in life I might say.

What was the most memorable experience from your beginnings?

There are so many! I’m not the kind of guy who jumps for joy or the kind of guy who gets desperate. I’m rather a quiet guy, so I never got really strong emotions from trading.

The nicest experience was the activity that developed besides trading – I’ve been a speaker around the world, I travelled, I met people from all parts of world – from France, China, USA, all over Europe. That is a great experience. That’s also the most valuable experience – meeting people, exchanging opinions with people from completely different cultures about trading but also about life.

Sometimes you become friends which is a great added value to what I’ve done. I must thank trading because it helped me to achieve that. I was successful, so I got invited to be a speaker somewhere. That was the added value to the activity and the thing that I probably like the most.

What books had the biggest influence on you?

The biggest influence was caused probably by “The Trading Game” by Ryan Jones which allowed me to discover money management. Ryan Jones in this book described his fixed ratio model for position sizing. Apart from the model – which I don’t use personally (I used it but prefer other models now) – it opened my eyes about the world of position sizing and money management. I got so keen on that, that I wrote my own book on this subject in 2006 <laugh>. It’s only available in Italian, so I’m not advertising it right now. We’re translating it to Chinese but I don’t know when it will be ready. Anyway, I wrote that book because I discovered that when I was looking for books in Italian on money management, I discovered that there was nothing about that. So I started surfing the Internet, collecting information and documents about position sizing. Once I got all the knowledge together, I wrote the book that I wanted to exist when I was looking for it. All the income from the book is given to charity. So writing the book was something it did just for the pleasure of having that material out there. I must say I’m very satisfied because now they’ve just printed the second edition. What you normally see on the Italian forums are people blaming the trading stars, for example person X, that they are not traders, they are just selling stuff and so on. But I have always found positive comments about my book. Everywhere, on every forum. That was a great pleasure because in the environment where you mostly get bad publicity, I’ve always found people saying good words about my book which is a great achievement in my opinion.   

Could you please give us a synopsis of your book?

My book looks through the reasons why we should use money management. I describe the classical coin toss principles, martingale and anti-martingale, why I choose anti-martingale, why martingale probably kills traders, I really go through the classical methods. I also describe the Ryan Jones method. I obviously referred to him because it’s his method. I describe Ralph Vince’s stuff – optimal f, fixed f. I also go through Monte Carlo analysis. I added an Excel spreadsheet which I personally use for running Monte Carlo simulations for trading results. It goes through a path – starting from easy things and going to more complicated ones with a possibility for the trader to build a plan for a period of time. That plan should help him in his trading activity.

And what is your position sizing system today? Have you developed your own method?

I am trading a portfolio of systems, many systems together. So the hard part is finding the way to put all of this stuff together. Normally in literature you read that diversification smoothens the equity curve, that it’s good against risk. Which is true on one side because if you make a simple consideration that you’re risking 2% per trade in each system and you have 10 systems, you theoretically have a risk of 20%. On one side that’s good – one system will do well, the other will do poorly, so your equity should smoothen. But the worst-case scenario is a 20% loss in that case. So I tried to figure out what was the best way to work on this and my current solution is the mix of worst day percentage system combined with a percentage of winning days system and the percentage of my equity to be risked each day. I am still working on that system because as a human being, when there’s a bad period I doubt my method, I have a deeper look at it and I try to find some better solutions for the future.

So you’re using a mixture of systems and thinking about the best money management method for this whole mix of systems?

Yes, the whole portfolio. I always consider my trading in terms of portfolio. It’s also funny that when you speak to people, they always ask you about your system. They never speak about SYSTEMS (plural) which is the right way because it is naïve to think that I could trade the markets with one system for every type of the market. Obviously I have many different trading systems working together based – as I mentioned before – on completely different approaches, on different timeframes, duration of the trend and so on. I mix different worlds into my computer (I’m not working from home, everything is done on an external server) but it becomes harder and harder. The complexity obviously becomes bigger with higher number of systems put together. This is because I trade in an automated way. If I traded discretionally, this approach would probably be different. But I had to make a choice and so far I have stuck with the automated trading which allows me for higher control of the outcomes because you can build a better plan. But I can tell you that I believe that if we take the best system trader in the world and the best discretionary trader and we measure their results, I strongly believe that the discretionary trader would make a lot more money than the system trader.

That’s an interesting point. What makes you think that?

I think that the human brain is still something that no computer can emulate. In my opinion there are things that are not a logical consequence of what can be measured in trading. The biggest part of it for sure. But there are still some shapes which are some deviation of the instinct of the people. The best discretionary trader will always find a way to adapt what he’s seeing in that moment while the computer has its rules. You can put as many rules as you want in there but there could still be that one rule missing that makes the difference in favour of the discretionary trader. On the other hand, obviously, the discretionary trader is strongly linked to his emotions – he had a bad day, he had an argument with his wife etc. So he may find it more difficult to concentrate properly. But overall, in the long run, I believe the discretionary trader could make more money. It depends on many factors. Sometimes I consider discretionary trading because of new challenges and to get some amusement out there, stepping into the game in a different way. But I still have my systems running which are completely automated so I have more time for all the other initiatives.

So you have the money and time and the computer earns your money for you – it’s an ideal solution.

It would be ideal if it weren’t an ongoing, never-ending process. The point is that most of the work is in monitoring. Not because I am afraid of computer inefficiencies which is something that might happen and happens from time to time. The reality about trading systems is that you never know how long will they live. So you have to always be aware of what’s going on and when you have it at as complex level as I have – believe me, you spend a lot of time on analysing and reflecting on what is happening. Recently I started doubting the time efficiency of the systems. At least you can tell when to look into the systems. If you’re a discretionary trader, you just have to trade. When the markets open, you have to stay at your computer. While you have to analyse, report on the equity curve or the track record, you can do it on the Sunday afternoon or three o’clock in the morning, whenever you want.

Let’s go back to the money management issue for a while. What would be your hints regarding money management for the beginning traders?

Never risk too much. That’s the only hint. Consider that 2% per cent risk is already something that is pretty tough. Everything which is above that is dangerous. Absolutely dangerous.

Obviously, if you have small capital, you can’t risk that much. The point is: if you have small capital, you can go on market such as forex where you can play as small as you want with mini lots or micro lots. And as small as it is safe I would say. The biggest hint is: don’t risk too much. Look at the trade you’re going to place, look at the distance of your stoploss and then decide how big your exposure should be to limit the impact of the eventual loss on your capital.

Taking into account your actual experience as a trader, do you have any suggestions for beginners?

Beginners should look for the most important answer. The most important answer is the one that answers the question: “Is trading something for me?”. Trading is definitely not for everybody. A sincere answer to this question may save a lot of money. You should really look inside of you, you should obviously analyse how you’d be trading, how will you be facing the markets and so on. After that you should really sit down and meditate if this is something you can do. They should forget about trading as an easy way to make money. It’s not a slot machine.

Trading is a business. Considering it as a business is the only way to do it seriously and being consciously aware that you can lose money. The possibility to lose money is always there and you have to take that under control. If you control your losses and you have a valid approach, winners will come. But you have to be sincere: can I cope with losses? If you can’t – trading is not the only solution for you.

There are many things to do in the world. You don’t have to trade. Unfortunately most people don’t listen to this, they try, they lose money, they lose a lot of money, they are desperate, they spend money on help or mentorship from pseudo-gurus and so on. Everything is leading to disaster. But I still try to convince people that trading is not for everybody and they should probably think about other solution.