institutional trader

	TradersCALM - Institutional Trader © dedicated to trading with good feelings www.traderscalm.com

	This time we are fortunate to have a double interview with one particularly successful institutional trader. First about his lifetimes work and second about his personal investing. His track record running a pension fund is astounding - nearly 30% per annum compound over more than a 30 year period. His three figure annual returns on his personal trading are even more remarkable given that he only began such trading 3 years ago.
	In case you think 30% per annum compound for 30 years is not such a great return on an investment portfolio of millions, just appreciate that compounded it turns 1,000 currency units into over 2,600,000 currency units.
	Following his 'retirement', he agreed to give his first ever interview, to a mutual friend - also an institutional trader. There was much jargon and personal chit-chat to remove before the interviews were suitable for publication, but hopefully some of the emotional cut and thrust has been preserved. Any remaining jargon or lack of clarity in this final version is fully the responsibility of The Calm Trader. While the interview is longer than The Calm Trader normally publishes, this was a once in a lifetime opportunity.
	A little background might help. Before his recent 'retirement' our institutional trader was the investment manager of one pension fund for over 30 years. And the pensioners of the fund have much to thank him for. Our hero is very self-effacing - he has only once attended at a public conference in 30 years - and then against his better judgement as an invited speaker. His reasons for adopting a low profile in his industry are interesting in their own right. While his chosen trading instruments and personal trading style is very different from his professional trading, he insists that the underlying principles are identical and that this is the basis of his success. It was both a privilege and a heavy responsibility to be the editor of these interviews. As an outcrop of the editing process, I feel my whole value system as a trader has been disturbed for the better - and is still re-gelling. And this has led, for me, to unprecedented levels of profitability as a trader in the last few months, and I feel this is just the beginning of a future of steadily improving returns. I will be forever grateful, and I hope you, the reader, can similarly benefit from his wisdom.

	Friend	How did your trading career start?
	Institutional Trader	The pure good fortune of meeting W.
	Friend	Tell me about your mentor.
	IT	In late 1960's, W. was interviewing for a successor to his role as pension fund investment manager - some years prior to his retirement. And characteristically he wanted someone with no prior trading experience. I was one of 420 young hopefuls he interviewed and somehow I made it to the short list of three. Having to do a similar search for a successor recently I think I understand the magnitude of the task.
	Friend	In the short list, yes, but you were the one selected - how so?
	IT	Good fortune again. The three of us were taken on six months probation - within four months, one decided he wanted to be what we would now call a graphic artist and the other tried, unsuccessfully, to fiddle his expenses. I was selected by default.
	Friend	OK, even if I buy that, you had to make the grade. What made W. decide you were up to the job.
	IT	I think it was my calm response to his provocation - I kept gently asking why - and this was just what he was after.
	Friend	Provocation?
	IT	He said that to be an extremely successful investor that continued to be successful as the trading environment inevitably changed there were three main concepts I had to understand, fully grasp, believe and fully live, just as my breathing was automatic for me now. And he kept on at me until both he and I were both confident that I had fully integrated all three ideas into my very being. He would not even discuss what we would now call a trading system or discuss any individual investments or any other matters that I would have considered investment related until the concepts became, for me, as automatic as my breathing.
	Friend	What are these ideas?
	IT	The point W. was making that they were more than ideas - they were concepts that I had integrate into my core, to live by, to make sure I would never lose all or even most of the pension fund moneys with which I might be entrusted. The three core concepts he helped me integrate were: to be successful you need to avoid being in the class of the failures, to be outstandingly successful you need to differ from the merely successful, you need to avoid being unlucky.
	Friend	OK, I understand the first two, but the last is surely just a joke - everyone has good and bad luck.
	IT	I am going to be blunt. One of W.'s sayings was that mere understanding is not enough. I needed experience and W. would say even this is not enough. I need to have woven the basic concepts so deeply into my very fabric, so they are automatic and, like breathing, I do not stop using them when unusual circumstances occur.
	Friend	OK, I am beginning to understand, no integrate the concepts now. It is related to what TradersCALM calls 'effective trader behaviours', but it is placing a very high emphasis on particular types of trader behaviours. But what about being unlucky?
	IT	W. had a simple answer to that. You cannot go back to the pensioners and say, "I have lost most of your money, I was just unlucky". You have to have considered what circumstances might cause difficulty and be prepared enough to use them to the pensioners advantage.
	Friend	Advantage? How?
	IT	There are many ways to be prepared for adversity and to take advantage of all that the market can throw at you.
	Friend	For example?
	IT	Diversification, cash reserve, low 'beta' offsets, exploiting crowd behaviours, gamblers premium ...
	Friend	I haven't forgotten about the first two concepts, but I am intrigued by this 'never unlucky' concept. Tell me more - start with diversification - I know that W. had some unusual wisdom here.
	IT	Yes, W. had made various studies of past traders. One study concentrated on some of the highly successful traders of the late 19th and early 20th centuries who had experienced one or more catastrophic failures. W. discovered that there were many common themes. One common theme was to be over-exposed to one investment. Normally, the catastrophic failure was not because they were poorly diversified initially, but had allowed themselves to become over-concentrated on one or two investments - because of the very success of those investments. So W. never allowed one investment, however attractive, to start at more than 0.5% of the value of the fund, and even when it was spectacularly successful, as it often was, to exceed 10% of the fund. In this way he excluded himself from the category of being 'unlucky' when one successful investment representing a large proportion of the fund rapidly became nearly worthless.
	Friend	OK - and cash reserves?
	IT	W. believed that a 30% plus fall in equity prices was the start of a general buying opportunity, and you had to have the cash to take repeated advantage of such opportunities as they might unfold all the way down to a 99% fall. As he had before me, I have always kept between 5% and 50% of the fund in cash - partly to accommodate the initially rare, but getting more frequent, periods of net excess of pensions in payment over new moneys for investment - I averaged just over 15% cash.
	Friend	So, is your thirty year average of 30% per annum compound on the equity investments and the cash together?
	IT	Unlike W., I never quite got to 30%, but the figures do include the cash.
	Friend	I had not realised the full extent of your achievements - amazing, but what do you mean about low 'beta' offsets.
	IT	W. was one of the first to use, in serious size, what might now be called 'over the counter' trading baskets. As he operated well before equity futures were generally available, he, (and for a couple of decades I also), would sell, via a merchant back or similar, a basket of equities against a small proportion of the portfolio.
	Friend	Why?
	IT	To avoid being in another class of 'unlucky' investors. The kind of stocks W. invested in, and the fund still holds, tend to rise, when the market rises, much faster than the top shares rise. In the jargon, the fund stocks have a high beta. So W. believed it was an insurance policy - making less money when the market rose than the fund otherwise would, but having profits on the hedge to exploit low prices, (particularly for high beta stocks), when the general market fell. In the long run the net profits from investing any hedge profits far exceeded any hedge losses. The real purpose was to avoid the risk of being a forced seller in a market decline and to have extra cash to exploit market declines. W. saw it as insurance with a negative premium and it has been for me too. I also see it as being less greedy in good times to have the cash to benefit from a bear market - a more balanced investment approach perhaps - and the technique, in the long term, has contributed about an eighth of my long term returns.
	Friend	Yes, I understand, you are much less likely to have assets worth less than your liabilities in a market crash. I am beginning to understand now, as often is the case, a less greedy approach ends up making more money as you are prepared for what others might call bad luck and use it to advantage as good luck - good approach. And how are crowd behaviours used to avoid being unlucky?
	IT	Now you understand that good luck can be engineered out of what others call bad luck - it is a matter of being prepared. The first two of the concepts of W. are really about avoiding being part of the crowd. But crowd behaviours can be actively exploited too. For example, when everyone else is in a panic of selling, close out some of the hedge. When the panic selling continues, use the profits generated by closing out some of the hedge, and at even greater extremes use some of the cash reserve, to buy more stocks at very cheap prices. Similar but inverse concepts apply in buying sprees.
	Friend	In other words a contrary trading style.
	IT	You said that you wanted to go back to the first two of the three concepts: to be successful you need to avoid being in the class of the failures, to be outstandingly successful you need to differ from the merely successful. Not acting like the crowd is what the first two concepts are all about.
	Friend	Yes, thanks for the reminder. I am still thinking about the good out of bad luck idea - I think I can use some of that in my own trading. Still on that tack, what did you mean about gamblers premium.
	IT	Like W., I selected 3 'students', one of which has successfully taken over the running of the fund and the other two have gone on to other employers. I found the selection process hard work, but my notes from W. were invaluable. The four of us meet every 6 weeks or so and exchange ideas - and maximum exploitation of gamblers premium is something I learnt from one of my 'students' before I retired. For about ten years, rather than hedge using over the counter equity baskets, I was hedging using index futures. Much better than before because the costs were lower. I got the market price and also the normal premium of the future over the cash based on excess of interest rates over dividend yield. Sometimes I got to sell extra premium over this 'fair value' - and I call this the gamblers premium - the premium desperate buyers seem prepared to pay for buying the future when they expect the market to rise heavily. I also often got to buy back at a negative premium when everyone was bearish about the future. The related idea I took on board from one of my 'students' is to take advantage of the occasional disparity between the near future and the next quarter future - 'money for old rope' from my point of view. At appropriate times, I switched from being short the near future into being short the longer future. Often the far future falls more heavily than the near future when the market takes a prolonged dive - this means extra hedge profits for the fund. As you might guess I really enjoyed exploiting gamblers premium - I anticipate it will continue to be worth about an extra 1% per annum to the long term returns.
	Friend	Can you explain in similar practical terms what W.'s first two concepts mean?
	IT	W. decided that he not only wanted to be a successful trader, he wanted to be one of the best of the best and to keep being the best. You can see how the 'keep being the best' led to what you call "good out of bad luck" ideas. W.'s studies identified, using several measures, that most of the successful traders he looked at did not trade with the crowd to one degree or another. He also found that the degree to which they differed from the crowd seemed to be positively correlated with their success. He suddenly realised the obvious, that if doing the things the majority did made you successful, then the majority would be successful. Since the majority were not successful, there must be inverse or alternate approaches ignored by the majority that could separate you from the unsuccessful to make you successful. Also since his definition of success was relative, then it was logically impossible to be successful by following the tactics of the majority. W. further concluded that to some degree or another, you have to do some thing or things many of the other successful traders are not doing, to be outstandingly successful. This meant being a contrary investor, buying what few or preferably no-one else wanted and selling it back to them when almost everyone wanted a piece of the action. When he integrated these concepts, and acted on these concepts, he found he was very successful as an investor. Using patience rather than effort, he realised that he was so different from the majority of pension fund or other fund managers, they would reject his concepts in the same way we know say that our immune systems react to an infection - they would have to lose face to accept his concepts and so he kept quiet.
	Friend	So that is why he and then you did not and do not attend conferences and the like.
	IT	Yes. But we first met at the only conference I ever attended.
	Friend	As you know my company had paid for me to attend - partly to hear you speak! But I never got to fully hear your speech because I was too busy helping with the catering - my sister-in-law was doing the catering and 75% of her staff were ill - so I was drafted in.
	IT	Yes, I remember you as being one of the few asking sensible questions. I also recall asking you what you were doing on that side of the drinks table! My ego had been sufficiently inflated by being invited to speak, I momentarily forgot W.'s advice. He would have turned in his grave, worrying about my sanity, if he had known. My presentation did not go down well, judging by the nature and tone of most of the questions.
	Friend	It wasn't what they wanted to hear.
	IT	You are right. But then I asked for it. I went back to my old notes from W. - he had predicted the reaction fairly accurately.
	Friend	OK. What did he teach you when you both felt you had the three concepts in place?
	IT	Simple stuff really. If you buy a depressed share, out of fashion with the crowd, say having fallen over 90% from its peak, there was a high probability of it going bankrupt. So you had to buy a well diversified portfolio of at least 100 such stocks to avoid too many going bust at the same time; never to buy more than 30% in the same stock market cycle; never more than 10% in the same industry sector. If any one share became worthless you lost 100% of your investment, but under new management, with a new product, or a fortunate change in fashion it could reach or exceed its former glory, maybe 100 or 300 times or more than the current price. So the expected return could be highly positive - you just needed the occasional winner to pay for many losers.
	Friend	A bit like a venture capitalist approach.
	IT	I had never thought of the analogy, but yes there is some similarity.
	Friend	What else?
	IT	Start selling the stock when it starts to be in fashion, never letting it be too high a proportion of the funds value.
	Friend	And ...
	IT	When it becomes difficult to find new opportunities, this is a good sign of a market near its temporary top. This is the time to begin to increase the hedge levels and steadily sell some of the stocks that had started to reach their former glory or better - to generate cash. And of course use that cash to start buying when opportunities, according to the buying criteria, start appearing again.
	Friend	I will not be rude and ask what your buying criteria are.
	IT	There are no secrets, just look at price for the first criteria. One example says it all for price - GEC in the UK, now called Marconi, is a mere shadow of its former glory. Some traders might see the price of the stock as mere option premium. I see it as an opportunity, a stock few would consider buying - at the moment in single figure pennies a share, and the equivalent of over $15 at its recent peak.
	Friend	And another criteria?
	IT	Avoiding corruption, but accepting management failure, or a single product company, or an out of fashion business ... - anything that might be readily reversed by new people, new products, exploitation of brands, change in market cycles or fashion, ...
	Friend	And this can give you 30% per annum compound returns?
	IT	But there are also selling criteria - some of which I have referred to - just as important. W. achieved 30%, I never did. Would a crude illustration help, based on a simplistic basis of just two possible scenarios, going bust or return to former glory?
	Friend	Of course, an illustration would be most interesting.
	IT	Well imagine the probabilities, based on your research, of the stock losing all its value is 35% and the chance of return to former glory is 65% - in this simple illustration these are the only two possibilities. If the current price is $0.05 and the peak price is $10, on our simplistic assumptions then the expected value is: 0.35 x (- $0.05) + 0.65 x (+ $10) which is equal to $6.4825.
	Friend	Not a bad return on 5 cents!
	IT	Yes, but remember this is a simplistic view and the return might take place over say 5 or even 15 years. This corresponds to an annualised compound return of between 45% down to 13%.
	Friend	As I said not a bad return, but obviously you have to be patient, and be well-diversified etcetera. Are the probabilities of going bust etcetera 35% and 65%?
	IT	No, there is a distribution of probabilities and they are for you to discover and have sufficient confidence in to enable you to trade them. Patience is definitely required - I have often almost forgotten I purchased a stock that starts to come good. And yes you need be well diversified to ensure that the odds work for you, and you need to have the confidence that comes from integrating the three concepts of W. - I re-emphasise not one of the concepts, but all three concepts.
	Friend	Before we move on to talk about your personal investing style, I liked the story you told me about the happy pensioner last year.
	IT	OK - because both pensioners are deceased, I have obtained special permission to publish an edited extract of a letter from the widow: "I am just so proud, happy and joyful and so full of appreciation, I had to write to you. Please send this to whoever is responsible for our generous discretionary pension increases. Over the years, this has made all the difference between existing and living. Thank you. When Joe, my husband retired, we lived in one room of our house as that is all we could afford to heat on his pension. Joe always handled the money, and somehow he always found enough to give some pocket money to the grandkids at Christmas, on their birthdays, and later to occasionally help out one of our grown daughters. Each year we seemed to be a little better off, and when I asked Joe how come, he would always say "with discretion". Just before he died we were able to go on a three day visit to the seaside - it had to be by taxi because of my legs. Something we had both dreamed of - but had not been able to find the money for fifteen years. It is now some two years since Joe died and I have been living on the widows pension you send me each month. It has taken me until now to get up the courage to go through all his papers. I now see that 'with discretion' meant thanks to the generous discretionary pension rises every year. My eldest daughter and I were amazed that the discretionary rises were often twice or more than the inflation rises and I now understand that many pensioners do not even get inflation rises. Thanks to last years 'with discretion' I have finally got my second hip replaced. This has ended ten years of being house-bound and I can now get out and about and grow and display my beloved flowers at the local flower shows. What can I say, you made our lives better, and gave us hope for the future. Please make sure all the people who made this possible know how grateful Joe was, and I and my family continue to be."
	Friend	I had not heard all of that before - it must make you feel very proud.
	IT	It is all thanks to W. and his three concepts.
	Friend	I guess W. was one of a kind.
	IT	He certainly inspired me and from what my 'students' say, his inspiration continues.
	Friend	Does W.'s inspiration stretch to your personal trading?
	IT	Yes, using the same three concepts but implemented in very different procedures.
	Friend	How so?
	IT	I trade in different instruments, using shorter periods, using differing techniques - but the three underlying concepts are the same.
	Friend	What do you trade and why?
	IT	Because of the built-in diversification, I trade index futures.
	Friend	How do you trade the index futures, and over what time frame?
	IT	Actually, I do not trade a particular time-frame in the way I think you mean - but I do trade two price-frames which often is related to two time-frames I suppose. But the time-frames are determined by market action, not by the turning of the hands on a clock. I trade what I call volatility spreads. That is I use variable ratio spreads to take out as much of any directional bias as can be practically done using simple ratios, relying on differential volatility to move the spreads one way and then the other. I keep on accumulating into a fall in the spread value and keep on distributing into the rise of the spread value.
	Friend	I think I understand the accumulation and distribution concept - a bit like TradersCALM market path concept. If I understand this correctly, you need a 30% retracement to break-even and the rest is profit. But I am not with the volatility ideas or the variable ratios for that matter.
	IT	The retracement idea is about right, I find about 25% is typically required for break-even, but volatility profits on the way reduces the retracement required for break-even even further. Regarding ratios, perhaps we will take the viewpoint of European time zone and use the DAX and the DOW. (Ed.: A US time zone might take the Nikkei Dow and the S & P 500, an Asian time zone might use the DAX and the Nikkei DOW). Ignoring contract sizing at your preferred dealing agency, I have taken these two because they have roughly a ratio of about 2 to 1, the DOW INDUSTRIALS being about twice the DEUTSCHER AKTIENINDEX. Let us, for simplicity, assume that the two indices have a long term correlation approaching 1 (that is they tend to move together by roughly the same percentages over the long term), and their relative value is such that long 2 DAX::short 1 DOW or long 1 DOW::short 2 DAX tends to have a zero expected movement as the two indices move over a wide range. Are you with me on this?
	Friend	Yes, I think so. They tend move together over the long haul and a spread with a 2 to 1 ratio removes any directional bias in the medium term. You have explained the volatility somewhat, but I have two more questions: Why make life complex by trading spreads? And if there is no directional bias what is the point in trading the spread?
	IT	The whole point is that there is to be as little directional bias as possible. I will explain rather than answer, and in stages. I polled, about their reward to risk ratios, as many of the most successful short term traders I knew of and my contacts directed me to. I typically got two differing sets of answers. Those that traded the direction of one or more markets, typically seemed to have a 4 to 1 or 5 to 1 ratio of expected profits to expected losses. Those that traded volatility all seemed to have a reward to risk ratios in low or high double figures - and this translated into higher average profits - these profits were often more regular - and of particular importance to me, the volatility players experienced lower drawdown percentages and where they had done the calculations, a significantly lower risk of ruin.
	Friend	Really?
	IT	With one exception, the reward to risk ratio was more than 20 to 1 for these volatility guys - they made much more money, more regularly and often with much less risk and as I said, most significantly lower drawdowns and lower risk of ruin. Yes the more regular and higher annual profits were a bonus, but it was the lower risk profile that caught my eye. As W. would say, if you avoid losing money, making money is easier. So the explanation why I trade spreads has many aspects. Firstly, I chose to trade volatility not direction because that is where I believe losses are best avoided. Secondly, trading spreads further reduces the risk in trading volatility - you get to enjoy more profit potential for even less risk. In the words of my mentor: to be successful you need to avoid being in the class of the failures, to be outstandingly successful you need to differ from the merely successful. you need to avoid being unlucky. A third explanation is in the short term the two sides of the spread diverge temporarily because the (intra-day) volatility of the DAX is often about twice that of the DOW. A fourth explanation is the ability to exploit the time zone based trading of two related markets. A fifth explanation is that retracement probabilities can be much higher for spreads than individual markets. A sixth explanation is I wanted regular profits. If the two markets are correlated, then the two sides of the spread are negatively correlated - so both sides are profitable, but at differing times and the overall profits are more even - or in other words the drawdowns are lower. Using the simple position sizing of a ratio spread, I find the risk of ruin can be reduced more than a 100 fold. A seventh explanation is I did not want to be tied to a screen - trading was to be fun not a job. In summary, my trading system selection criteria were all met - I wanted to achieve, compared to the majority, lower losses, lower risk of ruin, more even profits and limited need to frequently monitor my open trade positions. Trading volatility using fading techniques and exploiting the attributes of spreads appeared to best fit my trading system selection criteria.
	Friend	Wow, that is too much for me to take in one go. I will, for the moment reluctantly take your word about the relative reward to risk ratios of trading direction and volatility. I definitely take your point about applying the three concepts. But please explain more about the relative volatility and this time zone business. I will ask more about the retracement probabilities, regular profits and fun later.
	IT	OK. The DAX often has a very high intra-day volatility - sometimes about twice that of the DOW - but they roughly move together over a weekly, monthly, quarterly and yearly time frame. If you trade the ratio spread, you can take out this extra short term volatility with limited directional risk - especially if you are prepared to adjust the ratio from time to time to reflect reality. Also the DAX and DOW trade in a different time zones. With modern electronic facilities, both markets can be traded for periods outside their standard opening hours. Trading in both is often possible for at least 14 hours each weekday - so that my trading can fit in with my hours, not the markets hours. To this new facility must be added the characteristic of these markets to make most of their moves in the hours of operation of their respective home exchange. This means that each plays catch-up with the other - leaving exploitable periods when the other market is officially closed, and is more sluggish in its movements, by trading the spread - and without much directional risk.
	Friend	What about your claim that retracement probabilities are higher?
	IT	Wow, your feelings are sure showing in your choice of words. I can feel that you are a little hurt. In terms of someone such as yourself with a directional view of trading - I found that continuation probabilities for an individual equity index usually started at about 55% and fell away to less than 40%. And for spreads of highly correlated markets the continuation percentages typically started at about 65% and fell away to less than about 10%. Put in terms of a fader, the reversal probabilities ranged up to at least 60% and 90% respectively. So spreads of highly correlated instruments make particular sense for those traders taking out volatility - giving a gain in odds of a retracement. Another way of making a comparison is to look at risks - big moves are risk to a fader. Over about 40 years the DAX moved in a near 4,000 point range, while the DOW to DAX spread (slowly adjusting the ratio as the two markets diverged) moved in a roughly 1,000 point range - so spreads offer faders many times the reward with less directional risk. Based on my poll of successful short-term traders and corroborated by my independent research, there is more potential profit in being a fader than there is in being a directional trader. And using spreads of correlated markets improves the reward to risk ratio further. Other benefits such as lower risk of ruin and smoother profit generation are also useful side-benefits.
	Friend	How regular are your profits, and how much time do you sit in front of a trading screen? And what about trading is the most fun for you?
	IT	It is a rare week where partial profits can not be closed out. Also, as a fader, all you usually miss when away from the screen are some opportunities and these are frequently fully compensated by having nice price gaps from the price at which you last traded - and as a fader, moderate gaps (real or apparent) in either direction are good news. I do not seem to experience the emotional highs and lows that many traders report - trading is boring for me - I get great joy from the process and outputs of research. Research that unearths potential improvements in profits, greater regularity of the profits, or reduced risk of ruin.
	Friend	So you trade using volatility spreads?
	IT	Yes, but I have simplified it for the sake of the example. I actually accumulate/distribute based on a variable ratio - varying the ratio used as the actual ratio changes. Adjusting the ratio for open positions is another source of profits as it normally requires you to purchase a falling index or sell a rising index to adjust the ratio. This is an example of my mentors third concept - that of not being in the class of the unlucky trader. I also trade in multiple price frames on one pair of markets but a single frame on other spreads.
	Friend	This has been a lot for me to digest.
	IT	Perhaps because it is a lot for you to unlearn - or is that too unkind?
	Friend	No - a good summary of my feelings - I have a lot to chew over - you have got me realising that maybe directional trading is not the only way to play the game - it sure is assumed to be by many writers and traders. And I must investigate the use of position sizing, but mostly I feel I must incorporate some of the ideas about avoiding being unlucky. What sort of returns do you get with your approach?
	IT	I regularly take over 1,000 points of volatility profit a week - but based as you might guess for a fader using a relatively small position - and typically make 8% return on account value each month. My system calls for a capitulation if running losses exceed 10% of end of last month account value and I withdraw 5% of prior end of month account value every month and give half to various charities.
	Friend	Amazing. How frequently have you had to capitulate?
	IT	I have only been doing this for just over two years and have not had to capitulate so far, but I budget for having to capitulate about once every three or four years.
	Friend	How much time do you allocate to trading?
	IT	It varies enormously. I typically spend 5 to 10 minutes each time I poll the prices/trade - I might do this 1 or 2 times a day or as many as 20 times a day some days. Other times I might get lost in my research and forget to look at any prices. At least two full weekdays a week I am busy with other hobbies and various commitments and do not get to see the prices. Now I am mostly retired, I can devote more time to research - sometimes I spend a whole day each week doing research into improved position sizing - I find this fun.
	Friend	What exactly do you mean by position sizing?
	IT	I vary the size of each trade according to the reward to risk ratio I perceive at each point - so sometimes, for example, I might trade in twice my normal position size - if the situation is twice better than normal. Position sizing for me means the relative size of trade size chosen at differing situations.
	Friend	How do you determine the situation?
	IT	Poorly. I think I have been very na�ve in my use of position sizing - and that is what I am trying to address with most of my current research. I have been basing my position sizing on retracement percentages - the higher the odds of retracement, as a fader the higher my trade size has been. This is not wrong, but is, I feel, sub-optimal. I feel better bases are my edge and the expected returns on each trade.
	Friend	What do you mean by edge?
	IT	Well if the odds of a retracement are 60%, my simple edge is 20% calculated as (60%-(100%-60%)). And if the retracement probability is 80%, then my edge is (80% - (100% - 80%)) or 60%. I have been basing my relative position sizing on relative retracement percentages rather than relative edges let alone using relative expected profits. Also, for one particular spread, I trade using two differing price step-sizes - I am working on using position sizing to simplify things and just trade one system with combined position sizes - but it is not quite that easy - I have to consider, for example, what this means to my capitulation approach.
	Friend	So you hope to simplify and improve profits further?
	IT	Yes, I am not convinced simplification is practical, but I am taking it slowly and steadily - there is no hurry. My first priority has been simplifying into one system using changed position sizes before I look to improve returns but talking it over with you, I am coming around to the opinion that my priorities have not been sensible.
	Friend	What improvements in return are you expecting?
	IT	Maybe to 12% or 16% per month. But my experience is that much research comes to nothing - but it is fun - in this case I know that at least 10% a month is readily achievable. I will probably re-prioritise and make small changes to position sizes rather than all at once - that way I will learn more and get more new ideas.
	Friend	And this is all with changes in position sizing?
	IT	That is the main focus of my research - getting a better basis for position sizing - employing more of my actual trade results rather than historic data for determining improved position sizing, or just improving the basis of position sizing I utilise now.
	Friend	I have never really considered this position sizing idea - can you give me a simple example of where it has improved your profits?
	IT	Sure. Up until a year ago, I used the same position sizing approach to closing positions as I used for opening positions. I realised that this did not make sense even on the crude basis I use now - so I modified the position sizing and my returns improved from 6% a month on average to well over 8% a month on average - and I got additional unexpected benefits.
	Friend	Unexpected benefits?
	IT	Yes - my profits are now more even - I have had only half the variation at the weekly level.
	Friend	How does this all relate to the three concepts of your mentor?
	IT	The choice of trading using fading techniques and playing volatility rather following the trend is pure W. I feel. The use of spreads to avoid being unlucky is also pure W. Also his 'rules' for percentage investment in one stock and for offsets etcetera can be considered, in the current jargon, to be position sizing considerations.
	Friend	Yes, I see what you mean about position sizing - I must make more effort to exploit the concepts in my trading.
	IT	Thanks for an enjoyable interview - you and the TradersCALM editor have forced me to articulate aspects of my written trading system that I needed to clarify for myself. And this has opened up many new avenues for future research.
	Friend	No thanks are due to you, particularly for suffering my emotional reactions. I will see you next week at the barbeque. TradersCALM home page