Many traders trade solely on the basis of technical analysis. I want to ask you for a few sentences of introduction of what macro analysis is and what it can give them.

Macroanalysis is the art and the science, is the mix of both of trying to figure out the big puzzle, which is global economics and global markets.

Macroeconomic analysis is focused in trying to understand what are the interconnections between economic cycles, asset market pricing, and potential cross asset opportunities out there.

There will always be discrepancies. There will always be opportunities. There will always be economic cycles moving in different fashions between countries, and macro trading and macro analysis are the ways to exploit these opportunities.

An interesting example to discuss might be the current situation in China, which you have written a lot about recently. Give us some examples what impact can it have in other countries?

Yes, I think that’s a great example, Dariusz. So, let’s reflect on where China is today in their business cycle. They had a demographics boom in the late eighties, late nineties, and early 2000. Chinese population grew aggressively and China joined the WTO as well. The Chinese economy had a strong structural growth push coming from strong demographics and the productivity announcement entry into the WTO, so, all of a sudden China had access to global markets and a younger population. That’s great for growth. At some point, the magic exhausted itself.

This was somewhere after the great financial crisis in the United States, by 2010, 2011, the working age population in China wasn’t growing anymore and China had already become the largest trade partner of many countries out there. The marginal return of this growth enhancement, of WTO entry and strong demographics wasn’t there anymore. What did China do? Well, they levered up.

They did what every other economy had done in the past, like Europe or the US or Japan or the UK. They used leverage to grow. Debt, basically. They indebted their economy, not the public sector but the private sector.

Corporate in China added an enormous amount of leverage and then when they exhausted the leverage push around 2016, it was the time for households in China to lever up. Chinese households brought in quite a lot of debt mortgages in this case, because they were lured by the prospect of higher housing prices in China. China had a property sector boom, somewhere between 2015 and 2020.

What happened there is that this was the only way for the average Chinese worker to participate into the profits, basically, of Chinese economic growth. In China, wage growth is not the thing and consumption is not the thing. The Chinese share of consumption contribution to total GDP is about 35%. In the US, it’s about 75%. In Europe, it’s over 60%. In China, you don’t become rich with wages. The only way to participate into this economic boom was to buy housing and hope that house prices kept going up, up and up and up, and they did but it also created a bubble. Then Xi Jinping, somewhere in 2021, 2022, applied a clampdown of regulation on the most leveraged sectors out there in China, the most bubbly ones, the housing sector and the tech sector.

And now, the problem is that you need to deleverage such a market. You need to count down a roaring bubble and it’s very hard because the Chinese housing market was valued at $50,000,000,000,000 in 2021. It’s bigger than the US stock market capitalization, so you’re trying to bring down or to, let’s say, deflate enthusiasm in an extremely large market. That is propped up by credit, by debt, by mortgages.

The risk is that you don’t control the situation very well and that you generate what is happening now in China, which is that property developers are going bust like Evergrande, which is that households have indebted themselves to buy 2 or 3 apartments, these apartment projects aren’t even finished. They’re stuck with a mortgage but they don’t even have an asset against it because the house is not finished.

What it causes is a bit what happened in Japan in the in the 19-nineties, where you have a real estate deleveraging. You basically burst a housing bubble. Chinese economic growth suffers because the property sector is one of the biggest contributors to GDP growth in China.

Coming back to your original question, what happens then is the Chinese economic growth slows down. It happens that China is the largest trade partners of many countries out there. The trade flows between China and the other countries slow down. Germany, for example, relies a lot on China as a trade partner. You can see that German GDP growth is coming down already as a result also of Chinese weakness.

The second way that Chinese weakness can spread into other countries is through the fact that China was a big investor in other countries for the last 20 years. They accumulated so much surplus by selling cheap manufactured goods around, they accumulated these surpluses, and they reinvested these surpluses in other countries. The biggest recipient of these investments are countries like Australia, Brazil, Canada, Southern Eastern Southern East Asian countries. They will be lacking this investment from China for the next few years and it slows down domestic growth as well in these countries.

This is one example of how macro analysis is important because it helps you understand both the cycle in China and then the interconnections of what happened and what’s happening in China, across other countries as well.

Excellent explanation, thank you. From the trading standpoint, how would you use this situation to trade?

Normally, one of the rules that I use is to not proxy trade. If your view is that Chinese economic cycle is weak, you shouldn’t be trying to trade this theme with other assets that are correlated with China. You should trade it with China. You should be the closest possible to the source of your idea. If your idea is bonds, you trade bonds. You don’t trade equities because bonds are doing that. You trade bonds. If in this case your idea is China, then you should trade China.

I’m going to make an exception here because Chinese markets and the Chinese economy in general is quite centrally planned. That means that the authorities have a big footprint basically in markets and they can direct state owned banks or state owned enterprises to do certain things. And that can basically cause reactions in markets which are not necessarily correlated with your theme.

In this case, one can make a small exception to the rule and say “well, if Chinese economic growth is weak and I cannot express it in China, where can I express it?” Then you look at correlations and you look at assets that are correlated to Chinese economic growth historically and for a macro reason they are correlated. You find commodities, for example, like crude oil or copper are correlated to Chinese economic growth and then you find currencies like the Australian dollar or the New Zealand dollar that tend to be correlated with Chinese economic growth.

One way to approach this is, every time the market gets enthusiastic about a Chinese miracle rebound based on something, you can take the opportunity to lean against it tactically and say “well, I don’t believe in it because I think China is deleveraging and economic growth will be weaker, and therefore, I will be shorting certain currencies that are highly correlated with Chinese economic growth”.

So, there are problems that cannot be covered by, let’s say it politely, public relations strategies.

Yes. One of the things about global macro is that you need to understand the policy maker incentive scheme. The central bankers, the politicians, etc. They are very, very important in driving interest rates and market behavior, and each policymaker, be it a politician or be it a prime minister or be it a central banker in certain countries, they will have a certain agenda and different incentive schemes to switch their reaction function accordingly.

A good portion of macro is being able to understand what different policymakers want and in China, being a highly centrally planned economy, it’s even more important at that point.

In this example, from a trader standpoint, if you would like to trade several markets using this knowledge, where would you expect the strongest move, the most momentous one?

I would say that the normal answer will be in Chinese markets but as we said, it can be a bit backstopped by policy makers. Then I would have to look for proxies, and then I would say, currencies that are highly sensitive to Chinese economic growth. I mentioned a few before. The Australian dollar, the New Zealand dollar, the Korean won, the Thai baht. All these currencies that are highly correlated to Chinese economic growth.

Then generally speaking, cyclical commodities like copper, usually tend to be very correlated with China. It can be that in this case, the market has already learned the trick. So that if China announces something on a headline, they know they’re only trying to prop up their domestic market. They are not going to all of a sudden build bridges in the middle of nowhere and have more demand for copper.

I tend to look at currencies. I think it’s the best way to express it. The Brazilian real, the Australian dollar, the New Zealand dollar, these are the best ways probably to express the theme.

I’m trying to understand the consequences of this this bigger picture. There will be no surge in demand. So, there will be no moving price for example copper?

Yeah.

How can you use macroanalysis to detect strong or preferably strongest movements now?

One way to do this is, for example, to look at economic cycles and then look at the market interpretation of these economic cycles. Sometimes there are divergences between the two, so you study the economic cycle and you can do that by looking at various metrics.

My models generally rely on 3 main metrics: trying to predict where growth is going to go, trying to predict where inflation is going to go, and trying to predict what the Federal Reserve or central banks will be doing. These are the three axis of my macroeconomic analysis.

Then against this, you have market consensus because as a trader, you have to remember that you don’t trade solo, you trade against other market participants.

There is always a set of information which is priced basically into markets and it incorporates a certain expectation about growth and about inflation, how many cuts the Fed will do and so on, and so forth. That is your benchmark. That is your standard point of reference. Your macroeconomic analysis and your models might differ and deviate from that and that can provide with some signals for you to have a certain view against the market or not. Today, for example, we have economic consensus which is perfectly sitting in the soft landing camp.

Actually, in some cases you’re going to have growth around 2% in the United States by the end of the year, and you’re going to have inflation around 2,5. You know, a pretty hot economy by any standard, despite the fact that the Federal Reserve has kept interest rates at 5% or higher for now few quarters in a row. Then the market is priced with a few cuts, like 2 or 3 this year. That’s basically where we are. This is what’s priced in asset classes today, in bonds, in stocks. You have this set of information being priced as we speak.

My models instead are pointing to the fact that there is a chance that growth might end up being lower than this. It’s not gonna be 2%, it might be lower, and that inflation as well might end up being lower and going towards a 2% area. In other words, that nominal growth will be lower than when the market thinks it is.

If you have this deviation in expectations between your model and when the market is pricing, you can generate these deviations to think about trade opportunities.

If nominal growth slows a lot versus what the market expects, what happens? Well, certain stocks that are highly dependent on economic growth to do well. If this economic growth doesn’t materialize, they won’t be doing well.

Then you can short certain sectors of the stock market that are highly cyclical and you can decide instead to go long other sectors of the stock market that are more high quality. They don’t really depend on the cycle. There are more established business models, anti cyclical, like a consumer staple, a good brand of supermarkets. It will always work. It doesn’t really need strong economic growth to do particularly well.

You can do these relative value macro ideas, where you say “I’m gonna prefer a certain sector of the stock market that fits my view of growth and inflation that is divergent from what the market thinks growth and inflation is going to be” and you can short a certain sector of the stock market that needs that growth and inflation.

If you think it’s not gonna materialize for example, you have a deviation that you can try to exploit with the trade idea.

Where did the idea to create such a tool for traders come from?

The idea came as a result of playing poker. At the time, I was trying to build my database. You always know who you’re playing against and you made notes on those players to, try to tackle their personality.

And when I got into trading it was clear to me that I want to have a journal as well because I wouldn’t know what to improve, how to improve, what the hell I’m doing on the charts. I was looking for a solution and back then there was nothing but one journal on the market. That didn’t really suit my needs, so I started building my own journal in Excel and it grew from there.

That time I met my business partner and he had some really cool ideas as well as to what to add to the journal. Eventually we had such a big Excel file with 100 of hours of work put in it. Then we had an idea that maybe we should try to sell this because every professional trader says you need a journal but there is no solution out there. And yes, people bought it.

That’s how we started. From the Excel file that people bought. It’s hilarious.

What is your professional background aside poker?

I studied philosophy and I was a corporate worker in China and Beijing for a German automotive brand. I didn’t really like my job. Some of my friends, that I knew from earlier, went into poker and some of them were making really good bucks, so I became a poker player and from there later graduated to trader. That worked out quite well.

It’s quite an amazing story. Did you took part in any tournaments?

I was mostly a cash game player. Sometimes I would play in tournaments but I really enjoyed cash game the most. If there was a tournament in Macau or in the Philippines or so, I would go there as well just because the games were there and juicy but most of the time I wouldn’t join the tournaments. I would just play cash game with the tournament players because they are so bad at cash games.

So, you actually played poker at the table in the rooms with guys who drink vodka or something, smoke cigars like in the movies?

Pretty much yes, sometimes it was like in the movies.

Amazing. Did you ever witness any violent scenes or something like that?

I was robbed once at gunpoint. That happened after an underground game, which while it’s more than 10 years ago so I can say it was not a legal game, but when you leave those games fishy stuff can happen.

I was in 2010 in Berlin at the European Poker Tour. That was robbed by people with machine guns. That was ridiculous. Suddenly everyone jumped up from the tables and they started jumping and running and I was like “what the hell is going on?” and they were trying to steal the pot of €10,000,000 €11,000,000 or so. It’s crazy.

So, you were a big fish in this in this poker world?

I did quite well. There were many fish that were bigger than me but I did quite well for myself.

What an amazing story, like from the James Bond movie. Okay, let’s go back to traders.
What problems do you solve for traders?

I think a lot of traders have the issue when they start trading that they don’t even know where to start.

Our journey forces you to think about the framework because you need data, you can’t measure apples and bananas and then compare them. It doesn’t make sense. You also need a statistically viable sample size which is at least 30 to 50 trades that you take exactly with the same rules so you can say “okay there is a basic edge here” or not. By using our journal, you are forced to make at least 50-60 trades and then see where that leads you.

We also help people with their trade management because we have found out that it’s a huge problem, especially for beginner traders. I always like to say the last objective moments is before you open a trade and then as soon as you’re in the trade all weird things happen to your brain like the hormones and the dopamine, everything goes nuts. With our journal you can see whether your trade, management actually makes you money or whether you should just trade a set and forget approach, for example.

You can also check, and that is a really big one, what drives the profitability for you individually. I also coach a lot of traders, every time I give them my strategy, the thing that really works is to first understand the principles and then create the system yourself. You can only do that by using a journal, so to speak. You can find out what really drives the profits you make individually because there are as many systems as there are traders. This is what I believe in.

So, it’s a feedback loop. You can study, you can improve your trading, your psychology too. Are there any other serious problems?

Yes. The biggest problems besides trade management system and not knowing what actually makes you profitable and what makes you unprofitable.

Plugging your leaks is a big thing as well. Very small, subtle changes to your strategy can make a huge impact on your bottom line over a year or even over a month.

For example maybe you find out that every Monday you lose money and on the other 4 days you make money or you start giving back all your profits in the afternoon.

You can simply stop trading in the afternoon. You can also try to make the afternoon trade work, but usually losses occur because you are mentally exhausted. Afternoon trading is different.

How can you help traders to increase their profits?

In our trading journal, we track various metrics. My primary focus is on identifying the setups my students use and whether they have specific criteria for these setups. I then analyze the performance of these setups, determining which ones generate the most profit and which ones yield the least.

Sometimes, a trader may have multiple profitable setups, but one of them only produces marginal profits with a high number of trades. In such cases, I advise them to drop it because it consumes their mental capital. Just because a setup generates some profit doesn’t mean it’s worth pursuing if it’s not significantly profitable.

Additionally, I examine factors like the day of the week and the financial instruments traded. Some traders work across different asset classes, such as FX and CFDs, each based on underlying futures.

I’ve noticed that some traders excel in certain asset classes while struggling in others. By identifying these patterns, traders can focus on their strengths and mitigate their weaknesses.

Using tools like Edgework, traders can quickly identify their weaknesses and refine their strategies. This process often involves trading less but achieving higher profitability. Trader development is often about removing ineffective strategies rather than adding new ones.

Part one: the information available on the first day.

In another article “How to catch long trends at the very beginning?” we discussed a situation in which we have an explosion of interest in a company after the announcement of great financial results.

There was an open gap and a very high volume of buying. Everything looked very promising.

But this is only the first day. We don’t know the future and all we can do is evaluate additionally other information about the company and the sector.

We try to pick the best opportunities.
What relevant information on this first day might indicate, increase the likelihood that we will see a longer trend?

Here are some such factors:

Big surprise with results
If a company announces results that differ significantly from analysts’ expectations – either positively or negatively – this can lead to a long-term PEAD. Investors and analysts may then revise their expectations of the company’s future performance, which can affect long-term changes in stock valuations. For example, unexpectedly high earnings may cause investors to revise upward their forecasts for future earnings, which will keep the stock price higher for a longer period of time.

Clarity and quality of the message
Effective communication of financial results and clear presentation of a company’s growth prospects can significantly increase investor confidence. Clear and optimistic messages can strengthen the positive trend of share prices. On the other hand, vagueness or lack of specific forward-looking data can undermine investor expectations and shorten the PEAD.

Industry and market trends
The overall health of the economy and current industry trends have a direct impact on the length and strength of the PEAD. For example, if a company announces strong results at a time when the industry as a whole is experiencing growth, the PEAD effect may be more pronounced and lasting.

Market sentiment, such as general optimism or pessimism, can also modulate the reaction to financial results.

Trading volume
A large trading volume in a company’s shares after the announcement of results is an indication of strong market interest, which may contribute to an extension of the PEAD. Higher trading activity suggests that more investors are reacting to new information, which could lead to more significant and longer price movements.

Revisions and updates from analysts
Analyst reactions, such as changes in recommendations or targeted stock prices, can intensify or prolong the PEAD effect. Positive changes often lead to an increase in share prices, while negative updates can intensify a decline in share values.

Changes in the company’s outlook
Strategic changes in a company’s business, such as new partnerships, acquisitions, investments in innovation or changes in management, can have a major impact on the length and intensity of PEAD. Such announcements are often seen as catalysts for long-term growth, attracting investor interest.

Additional information
If a company announces additional positive information along with its quarterly results, such as an increase in revenue or profit forecasts, this can greatly strengthen and extend the PEAD. Such announcements can further convince investors to make a long-term commitment to the company’s stock, which keeps the share price high.

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.