Odd Lots - Brent Donnelly on What It Takes To Be a Winning Trader

Episode Date: August 12, 2021

The last 18 months has seen an incredible influx of people getting into trading. Thanks to a combination of Robinhood, a bull market, and perhaps more free time, trading is part of popular culture to a degree we haven't seen in over two decades. But what does it take to really win over time, across multiple cycles? And who should make an attempt at going pro? On this episode, we speak with veteran trader Brent Donnelly, the author of the new book Alpha Trader: The Mindset, Methodology and Mathematics of Professional Trading, on what it takes to consistently win.See omnystudio.com/listener for privacy information.

I'm June Grasso, inviting you to join me for the Bloomberg Law podcast. Every weekday, we help you make sense of the legal stories that shape the nation and the world. Listen for complete analysis of the biggest court cases, the latest actions from Congress and regulators, and the legal moves driving the markets, from corporate law to constitutional law, and from state courts to the Supreme Court. At Bloomberg Law, we go beyond the day's headlines. We speak with top attorneys, judges, scholars and policy experts to break down what the rulings really mean. We do this every weekday,

then bring you the best conversations in our daily podcast. Search for Bloomberg Law on YouTube, Apple, Spotify, or anywhere else you listen. On the East Coast, listen as you start your day, and on the West Coast, catch up in the evening. That's the Bloomberg Law podcast with me, June Grosso. Subscribe today wherever you get your podcast. Hello, and welcome to another episode of the Oddlots podcast. I'm Joe Wisenthall. And I'm Tracy Allaway. You know, we haven't really talked about sort of the pure like markets in a while. We've been talking a little bit about crypto. We've been talking a bit about macro. We've been talking about supply chains a lot, obviously. But the other big sort of story for the last year and a half

has just been in this incredible boom in trading. I'm going to ignore the subtle dig at crypto there, this idea. We haven't been talking about markets except for crypto. But yeah, no, you're right. So it feels like so long ago, but really it was only six or seven months when we had the game stock phenomenon, the big boom in retail trading and Wall Street bets, and this idea that everyone was suddenly pouring into meme stocks. It feels so, so long ago.

It's weird. Yeah. And of course, you know, like, so I personally first started getting interested in markets just as a thing I was interested in, like in the late 90s and high school and there was the dot-com bubble going on. And at that time, it was just trading, retail trading was really taking off, but also just really became like part of the culture. People were talking about the stocks they were trading and what they were bullish on and so forth. And then it went, felt like that basically went into like a 20-year hibernation. And then when everyone was locked in their homes with the coronavirus crisis for the first time, it really came back. Yeah. So I remember writing about this earlier in the year. And I think the way I framed it was flows before pros.

So this idea that if like if you have this immense buying momentum from retail traders or retail investors, then maybe like if you're a retail person, you're in a better position. to judge that momentum than someone with a professional background, you know, say a self-side analyst at a large bank, someone like that who's looking at fundamentals. And I think that was kind of borne out, at least temporarily, by some of the meme stock price action. But it does beg the question of what exactly is the difference between a retail trader versus a professional trader? Absolutely. And there's also the question, and of course, you know, we've had all these people come into the market, probably a lot of them have done really well. Like probably people have made a ton of money and made multiples of what they make of their daily salaries. And because it's been this

market, which means some are going to be tempted to like go pro on some level, not necessarily go work for a bank or a fund, but it's like, oh, like, I made a ton of money. I could do this? Why would I go back to my job? And so some people will be thinking about do they want to make trading their full-time vocation? Yeah. And again, the question is, is whether or not the past six or seven months have been extraordinary in one way or another. I think we all agree that the experience of COVID and the markets during that time have been somewhat unusual and whether or not their success over that short timeframe can carry on longer term. Right. So people are going to be asking themselves, A, do they have what it takes to be a

trader and B, if they do how to win? So today, we're going to be speaking to a guest who knows a lot about trading a long-time veteran, and he will tell us whether you have the stuff, whether we have the stuff, whether the listener has the stuff to make it as a pro-trader. And if they do go into it, how to win at it. All right, let's do it. I'm excited. All right. I'm very excited. We're going to be speaking with Brent Donnelly. He is the author of a new book, Alpha Trader, The Mindset, Methodology, and Mathematics of Professional Trading. He's a long time veteran for over 25 years. He's worked at HSBC, Numura, City.

Very excited to learn from Brent. Brent, thank you so much for joining us. Hey, guys. Great, great to be here. I'm a huge fan. So thanks a lot for having me on. So I guess the first question I have is, what is a trader? How do you define a trader?

Because some people invest, some people sometimes reallocate. Some people are moving in and out. I guess day trading. But when you talk about a trader, what does that mean? Well, so that's a great question. So in the course of writing the book, one great thing about writing a book is you get to talk to a lot of random people because people DM me a lot on Twitter and LinkedIn. And your question is a really good one because a lot of people I can tell by their questions to me don't really know themselves whether they're an investor or a trader. And to me, I'm unbiased because my whole experience has been trading.

But my belief in efficient markets is that on short time frames, markets can be kind of inefficient. And on long time frames, they're pretty damn efficient. And there's a lot of research that supports that, as you guys know, passive versus active. I mean, Charles Ellis was writing about that in the 70s with data showing that passive beats active. So then I think you really have to know what you're doing and know that what you're doing is trading. And then you might have a specific edge. And I think really the difference is, I mean, the obvious difference is time frame. You know, to me, trading is something probably less than one or two months.

And then you can call it kind of call like two months to one year swing trading, but that's getting closer to investing and much more fundamentals. but I would say the definition of real trading is something that you're doing that's short-term where you have a solid risk management process and you have an edge that you can identify and you can explain to somebody who's not an expert in the business. I definitely want to ask you about the risk management aspect and also the idea of an edge in trading. But before we do, just because I think this will help maybe conceptualize the idea of a trader, But over the past 10 or 12 years, basically since the 2008 financial crisis, would you say

that's been a good time to be a trader or a poor time? Because we've sort of heard it both ways. So there are people who argue that valuations are completely based on momentum and inflows. And the more money that's flowing into something, the more valuable it gets. And it doesn't really matter about, you know, things like price to book ratios. and traditional measures of fundamentals. On the other hand, there are plenty of people who say that markets have been skewed by central banks, and you don't really know where anything is going anymore, and nothing makes sense.

So I'm just curious, like, if you could characterize the past decade or so for a trader. Sure. So I would say anything related to valuation doesn't matter for traders. That would be my opinion. So I mostly trade currencies, but I have a lot of experience. trading equities in that. If you're trading, if you're a trader in my, in my definition, you don't really care about valuation. And so one concept that I get into a lot in the book is the idea of adaptation. So anyone that's saying like, this is a bad market, this market is a

joke, this is manipulated. That person's not adapting and they're not playing the current game. So my question is always like, do you want to live in a world of, you know, the current reality and play the current game, or do you want to play a game that you wish existed? And then the subsequent question is, do you want to make money or not? And if you want to make money, I think the key really is to, first of all, understand what game you're playing, and then number two, adapt to that game. So I feel like just the idea of saying, like, this was a good period to trade, this was a bad period to trade isn't a great mentality for traders

because what you really should be doing as a good trader is adapting to the current environment. Now, obviously, that's not like as easy as just saying, okay, today I'm going to do this because it's obvious what the environment is. Regimes change in a subtle way. But then sometimes it's pretty obvious that the regime's changing. Like, for example, when the algos started, 2004, 2005 is the first period when I really remember the algos, the algorithmic trading, really becoming a forced in currency markets. And I remember there was a really sharp split on the desk.

So at that time, I worked at Lehman Brothers and talking to people in the market, not just the traders at Lehman, but just in general, there was a split between people saying, this is BS. These algos are, it's not a real market. Every time I put a bid in, it comes in one point higher. And then there was another group of people that were like, hmm, this is weird. Like the market, the texture is different. I wonder how can we beat the algos? What are the algos doing? Can we mimic them but do it smarter?

You know, can we figure out what they're doing and reverse engineer it and then make money off of that? And so I feel like that was a real eye-opener for me because that was whatever, 15, 16 years ago. So I was still kind of like transitioning between junior and senior trader. And it was really obvious that some people were adapting and some people were complaining. And so that has been consistent throughout my career is you see that people that adapt, tend to do well in the long run and people that don't tend to maybe have periods of success and then fail. So going back to your original thing about, you know, a lot of new traders have come in 2020. Another thing that I've witnessed from conversations with a lot of retail

traders is that a lot of people did really well in 2020 and are struggling now. And so an obvious explanation for that would be if you're if you were buying calls around earnings, let's say that was a really good strategy in 2020. However, that hasn't been a good strategy, especially recently. So what I tell people who are new is that you need to become an expert in one market, which could be a security or for me it's G10FX, but really it could be any kind of narrow part of capital markets. And then become an expert in that, but don't become an expert in a particular strategy like I'm a breakout trader or like I buy options before Zoom's earnings or whatever. Like the more narrow your strategy is, the less chance that you're going to make money

in the long run because it's all about adapting to the new regimes. Not that there's a new regime every single day, but certainly new regimes come. They're cyclical ones and their structural ones. So the structural ones being like retail kind of, you know, was huge in nine, from 99 to or 98 to 02 and it's getting huge again. Algorithms came in. And then there's cyclical ones that are more about volatility, like is the VIX at 10 or is a VIX at 40? Your trading strategy has to be different in those two regimes.

And generally, I would say a lot of people are good at specific strategies, but in order to be good to have a, you know, multi, year or multi-decade career, you need to be able to identify regimes and then adapt and trade the regime and trade what works. And that's kind of the philosophy of like do what's working and stop doing what's not working. That reminds me always, of course, of, you know, poker advice, of knowing the table that you're at and all the good ones talk about the ability to shift gears. If you're going to make it as a professional trader, you have to have an identifiable edge, something that you can articulate.

All right. So you've been a trader for over 25 years. What's your articulate to us, non-professionals, what your edges that allowed you to have such a rare and durable career? My edge in a nutshell, just try and keep it relatively short, is that I look at the macro world. So I'm my, if any of your listeners have read my stuff, I tend to talk like fairly macro in terms of macroeconomics,

Fed policy, you know, Australian CPI, all that kind of stuff. And so what I'm trying to do is understand the current equilibrium where price is the sum of all the information that's in the world. And then as new information comes in, I think my edge is understanding what that information means in the context of the current or slightly in the past equilibrium and entering trades into currencies before they move in order to capture the momentary disequilibrium from the new information. So that doesn't necessarily always mean like an event comes out and then Euro goes up and I buy it after the event and sell it after the event.

It can also mean something a lot more subtle, which is that as a narrative starts to get really, really fully subscribed, you start to see positioning by metrics, but then also by because I have a pretty good network of people. I get a sense of not just what positioning is, but also like there's like an emotional edge to positioning sometimes. Like if I send out a bearish Aussie piece and I get like 17 angry emails all like with pretty weak rebuttals, then I'm like, oh, okay, I'm definitely on to something. So there's like a more subtle aspect to positioning that I sometimes can tease out as well.

But then also on the other side, it can be something like say news comes out and say New Zealand housing number comes out. And so in that example, I know the market's really. really interested and really cares about Kiwi housing, but then say another number comes out, and I'm like, I know the market isn't really that fixated on that, but, you know, a currency moves 25 pips on it. Then I'll take, like I'll fade and I'll take the other side. So I think my edge is understanding what matters and what doesn't because that's one thing that's really frustrating for a lot of people is, and actually for financial journalists as well, is trying to understand sometimes

why things move when it doesn't always totally make sense. So if you, for example, like the classic example is current account deficits. So generally currency markets don't care about them, but every five or 10 years, we'll trade off of them for like a year and then we stop trading off of them. But the current account deficits themselves are pretty sticky. They don't change that much. Kind of knowing what matters as well is an important part of that. So for example, like if you trade a lot of correlation, which I do, knowing which,

which assets people care about and which ones they don't. So like if oil's been in a 40, 45 range for eight weeks, the correlation to dollar CAD probably isn't that significant. But if oil is like on the front page of Bloomberg every day and it's breaking to new, you know, new three year highs, then the correlation to CAD is probably going to pick up. And so I have a good sense of like, okay, I got to have oil on my radar because we're, you know, it's all over Bloomberg or or not. So then sometimes, like, if you don't know what you're doing, you might see, like, oil's been in a range for six weeks, and the range is 40, 45, and it goes from 41 to 44, and people are like, how come dog cat's not moving? And it's like, well, because oil's not

front of mind right now. So my age is understanding the current narrative and then surfing the move to the new narrative. The news doesn't stop on the weekends. Context changes constantly. And now Bloomberg is the place to stay on top of it all. Hi, I'm David Gura. Join us every Saturday and Sunday for the new Bloomberg this weekend. I'm Christina Rafini. We'll bring you the latest headlines, in-depth analysis, and big interviews. All the stories that hit home on your days off.

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Listen on Bloomberg Radio, stream the show live on the Bloomberg business app, or listen to the podcast. That's Bloomberg this weekend. Saturdays and Sundays starting at 7 a.m. Eastern. Make us part of your weekend routine on Bloomberg Television, radio, and wherever you get your podcasts. What does an edge look like for retail traders? Because you're talking about, you know, professional experience, maybe some insight into flows and positioning which your average retail investor is not going to have. Sure. So I don't want to overstate positioning just to be clear because actually, oddly enough, I think that's one of the most overrated variables. My view on positioning

is that it kind of matters at the super extremes. And it can be like the only thing that matters at the super extremes, but most of the time it just doesn't matter. Like macro and stuff, tense and flows and all that tend to override positioning. But as a retail person, I can answer that easily because that's what I did from 1998 to 2003. That's what I did. I was trading my own account during the NASDAQ bubble. And at that time, my edge was, first of all, I didn't have very much money.

So I would risk management. My risk management was really good. I worked at a place called Swift Trade, which was like a place where you go in and sit down. And it's a trading floor, legit trading floor. And you pay commission. I think it still exists, actually. Like people kind of call them bucket shops, but this was like a professional place. It wasn't a bucket shop.

And whenever people walk by my screen, people used to always say, how come your P&L is always green? And essentially, the reason was so that obviously if you're up, it was green. And if you were down, it was red, was that I just cut my losing. in positions really, really fast. So everything I did was momentum based, essentially looking at futures. And I had the future squawk on. And then when futures started to, you could get a sense of there was some electricity in the futures, then you would get on the bid in six stocks that trade super wide and then

try and get given by other retail or by whoever and then ride it up a little bit. But I always cut my losses really fast. So one edge can be really good risk management. And the other one was I was really fast on the keys, which sounds stupid. But in those days, there were so many ridiculous things happening. Like somebody would go on CNBC and say, hey, my stock of the week coming up after these commercial messages, it's an optical network maker in Texas or whatever. So you just frantically Google like optical maker, you know, and find the three biggest ones. Or in that case, there's probably only one.

You buy it and go up 4%. And you sell it. So there were so many trades like that that essentially almost felt like zero risk. But then I can give you the rest of that story, which could because that again relates to my adaptation thing is that. So what I was doing relied on pretty wide bid offer and then just catching brief momentum and kind of catching the wide bit offer on a lot of these stocks. So every morning in 1999, I printed out a sheet or a list of all the stocks over $100. And it was around four pages long. And those are the ones I focused on because you need like

high nominal value to have wide bid offer. And in 2002, when I printed out that thing, there were four stocks on it. So it went from four pages to four stocks. And then in the meantime, in April 2001, it was either April 1 or 02, I can't remember, but stocks went to decimalization. And so when the nominal value of stocks was way lower and then there was decimization, the bid offers size collapsed. So instead of some stuff was trading like 50 cents wide, tons of,

stocks at that time were trading like one one cent wine so what i was doing stopped working but i just kept on doing it so my account went from like 25 000 to 350 000 back down to like 70 000 by 0203 and it was because i i never adapted i just kept on doing the same thing and so one thing i say in the book is one of the reasons that you really have to have an edge that i don't think people fully understand and I try to lay it out with some graphs of gross and net, is that you can be gross positive and net negative, and that's not going to pay the bills. So generally what happened to me was throughout my whole time when I was day trading,

I was always gross positive. So I always made money. I had some kind of edge. But there's commission, right? So as I was trading more and more shares because the value of the stocks went down, my commission was slowly rising, rising, rising, rising, until the point where a lot of days I was net negative, even though I was still mostly gross positive most days. And so people have to understand that like people think,

oh, it's a zero sum game. I'm a smart person. I can outsmart, you know, I'm smarter than average, which is the classic bias. But anyways, but the thing is, it's actually a negative sum game. So you have to be able to, whether you're paying, you know, visible commission or not, you are paying a tax every time you trade, even as an institutional trader. there's still brokerage and prime brofies and bid offer and all that. So you have people have to understand. It's a negative sum game. And so that's why it's so difficult.

So anytime people bring up dot com era stories, I get excited because I was a small retail trader around then too. And, you know, I definitely saw exactly what you described, especially with friends who like made a ton of money in 98, 99, early 2000. And it didn't, they didn't realize that the market. had shifted for like two years. And so they just kept doing the same thing. And so that really resonated.

But actually, so I graduated from college in 2002. And I got a job offer. It was kind of a job offer at one of these like trading shops. And like 200 people applied and they gave four people offers. And it was like one of these places where they would like start you with X amount. And if you did well and it was, you know, I actually got one of the offers. And I didn't take it for whatever reason because I was young. I wanted to party and I didn't, I just, I didn't feel ready.

And I ended up not doing it. And I, you know, 20 years later, almost 20 years later, I sometimes think back. And I like, did I make a wrong choice? Like, could I be a billionaire? You know, could I be like a huge hedge fund mogul now if I had taken that job and really gotten into trading? So, which raises the question, I'm guessing the answer is no. I don't think I would have been good. What does someone have to know about themselves?

How can I, like, if I think back to that moment, is like, did I make the right choice in 2002 to either, to not take this offer. What should I know about myself to determine whether that was the right call or not? Sure. So I think the first thing that successful traders, who, I mean, what you're describing is someone that kind of comes in

and pretty much does well right away. And generally, most people don't do that because there's a lot of painful lessons, which is kind of what my book is about. Like, I'm not saying, I'm the holder of absolute truth on trading. It's more like here I made all these mistakes. and saw other people make mistakes and then train people who made mistakes.

So a lot of success in trading sometimes comes more from like having adequate runway. And that's why like going to a bank or whatever, you have more runway. Whereas coming into a day trading shop, the problem, the biggest issue really is that you just don't have a ton of runway usually because you have a finite amount of capital or you have like a pretty tight stops and all that. So the point that you have to get to is you pretty much have to start from

the point that a lot of people get to eventually, which is being rational is the number one thing. So what tends to happen is people can be rational when they're analyzing the market. But then what happens is as soon as you put on a position, you're like just like this steaming hot pile of bias because you have emotional attachment to the position itself. And then new information, you're kind of generally a bit more white knuckling. So new information, you tend to overreact to the new information. The Conman and Tversky stuff kind of goes into this. But a lot of that is in an experimental setting. So what I try to do in the book is also relate a lot of the Conman and Tversky stuff to

trading because all that stuff that happens in an experimental setting obviously happens in real life. And then I think you also have to be really conscientious. So it's funny, he said, you wanted to party and all that. And that's one thing that kind of hurt me in the 9902 era was that, you know, I was 22, 23. I had a lot of other things that I wanted to do besides I wanted to go and trade for a couple hours and make my money and then go have fun. And that's just not how the world works. So I think conscientiousness again. And so I did a little bit of research for the book.

Most of it is my experience watching people and watching myself. But I did some research as well on what are the. the fundamental underpinnings of success in the world in general. And conscientiousness is the one that generally in athletics, academics, business in almost all domains, the research shows that conscientiousness is the number one driver. And interestingly, conscientiousness is the one trait in the big five that goes up over time throughout your life. So again, I think that makes it really hard because you have to do the work. Like there's so many people out there trying to compete.

It's very similar to, like you mentioned, poker, professional sports, trying to be a professional fiction author, is that the barriers to entry are so low and the rewards are so massive that it just attracts a lot of people. And obviously that means there's a lot of competition, plus there's transaction costs. So the negative sum game with a ton of skilled individuals, you have to do the work.

And so if you are trying to like make, make your money in three hours trading the open and then, you know, go back to bed so that you can go club until 3 a.m. or whatever, that's, that's not going to work. And I think, you know, fundamentally a lot of people, including myself, didn't really, I never was very conscientious as a, as a young person. I was the opposite, whatever the opposite is. So unless you have that really strong mentality of, of coming in and doing the work and grinding every single day, And actually, it's the same with poker, right? The people that really find success at a young age are the people that can grind and grind and grind. And then the last thing I would say is the right level of confidence. So I call it calibrated confidence.

So generally, you know the poll or the survey or the research that says 86% of people think they're better than average drivers. That sounds like a joke, but it's true. And the research shows that in every area. out. The problem with trading, if you're overconfident, you tend to blow up. And if you're not the right amount of confident, then you just tend to not be able to pull the trigger. Or the other side of that is every time you get into a trade, you just see danger everywhere and you just want to get out. To come in at 22, 23 years old and be rational, conscientious and have calibrated confidence, man, that's a huge ask. Like, yeah, there's a few people that are like that, but that's a huge

ask. And then the other thing that that we kind of talked about is adaptation. So doing something and making money, that doesn't mean that that thing is going to work next year. So having one eye on the horizon and saying, okay, and I mean, that takes a lot of humility too, to say, okay, I'm not a god. Because you feel like a god when you're 22 and you quadruple your account. You know, So to be able to say, okay, and to be able admit, admit, okay, I was in the right place at the right time here. But next year might be different. So I'm going to be, have one on the horizon and get ready to adapt. So just on that note, you know, you talked about identifying regime changes earlier.

How do you actually go about doing that? Because, you know, it's one thing to say, like, well, obviously you have to adapt. But in order to adapt, you have to actually spot that something is changing. So how does one do that as a trader? Sure. So that's one thing that it's also really hard to, you can see something changing. So for example, I trade a lot of correlation. So I see like gold rallying. That's generally bad for the dollar. So if you're on a super short term trader and you see yields lower gold up and dollar hasn't moved, then you know, you might think that that gives me a clue that the next 20 pips in the dollar is probably down. That's kind of like a basic framework of how correlation works. pre 2008 that was a huge edge because a lot of people didn't even have live feeds to stuff like even working at an investment bank there were traders that sat too over for me that didn't have live feeds to gold and oil and stuff like that which is mind-blowing now so then 08 brought all that

into focus because correlations went to one between every single asset class so a lot of algorithms obviously plugged into that but then every human being as well did oh and the other thing is too is that the blogosphere exploded at that time. So the overlays, so when I sent out an overlay of, you know, KiwiN against S&Ps in 2006, that was kind of a novel thing. And people would be, oh, that's cool. Yeah, risk appetite kind of drives both of those things. They should go up and down together. And now, I mean, those things, those overlays are are so common that there's just not a lot of edge left with that. But because I started trading that way and it was a huge edge for me, And including 08, it was a huge edge as correlations went to one.

It's really hard to give up on that because you kind of have some ownership in it. And that thing kind of paid your bills for a long time or did well by you. And so to throw it in the garbage feels bad. So there is a challenge to saying, okay, first of all, identifying that things have changed, which I think I was doing at the time. But then I stuck with it way too long just because it was such a good strategy. I was kind of, I think subconsciously to go. Maybe it'll come back.

one really obvious way, sorry to answer your question more directly, Tracy, to identify regime is using a vol filter. So if VIX is below 15, that's one regime. 15 to 25 is another one, 25 to 40 and then above 40. That's one really simple way. And I think if you have any experience trading, you do that a little bit by intuition or, you You do it just because you feel it. But doing it more systematically and adjusting your position size based on current volatility

is something that people generally don't do very well. So you'll see in a bank, you'll see a trader that just always is long or short, 20 euros, 20 million euros. And that makes no sense if volgos from six, one month euroval goes from six to 12. You shouldn't just always have the same position. Like that's pretty much trading 101 is adjusting your position to volatility. Yet a lot of people don't do it. So that's one way you can identify regimes.

There's a lot of quantitative ways looking at, you know, rolling 20-day correlation of assets against each other and things like that. But then also I think part of it is just paying attention and listening to what people are saying and being thoughtful about it. So I think if you're not in that mindset of adaptation, then when new things come along, you're just more fighting it. So, you know, the classic example of that is, I remember in 2010, I might have the year wrong, but around there.

David Tepper went on CNBC and he's like, there's a lot of liquidity. You got to own stocks. And a lot of people were like, that's so simplistic. Like, it's just not that easy, dude. And it was that easy. So, you know, he was, he had an open mind to, like, I don't care what I wish Fed policy was or I don't care what I wish how stock markets work. This is how they are currently working, and he was correct.

And I know one anecdote of sort of friend of a friend of mine who opened a hedge fund in 2012. And the first trade he did was sell S&P futures. And they closed in 2016 because performance wasn't very good. And the last trade they did was covering an S&P short. So not to say they were short the whole time, but you get the idea that not looking at what regime you're in, can kill you. You know, I remember that, that Tepper call. And, you know,

what struck me about Tepper at the time was, and, you know, not overthinking it. And I feel like, again, I'm like thinking about my own temperament in life and why I don't think I would have been a good traitor. I feel like the people who go into journalism, it's like, well, you know, technically speaking, when the Fed expands

the balance sheet, and that's not really added liquidity and it's an asset swap. And we like to think like that and we like to explain why some, why people are wrong or we explain why some popular conception doesn't actually, the mechanics of something that everyone's talking about doesn't actually work that way. And I feel like there are times, and maybe there are times when that's called for, but I feel like there are times in post-2009 was one probably, you know, last April 2020 was one where overthinking, and it can really be a dead right. Isn't that just following momentum though?

Sorry. No, that's all right. I mean, I think it's, I don't think it is because I think it's more understanding what matters and what doesn't. So looking at your framework, if you're more of a, so like I'm a combination of fundamentals, technicals, and positioning, but when I say fundamentals, it's more about narrative in the kind of, I don't know if you guys read Ben Hunt's stuff, but, um, in that kind of vein of not necessarily the fundamentals as a weighing machine, but more as a voting machine. So like, what are people voting for? And I think, so I think if you have the right

framework, then that's what, what it is. So it doesn't necessarily mean always being long stocks. In fact, right now you might start to think, okay, now we're in the transition period between additional liquidity and reduction of liquidity. So maybe now for stocks, if you were using that framework, that temper framework, and I don't know if this is the case because I haven't heard from him in a while, but in that framework, you might be now thinking about selling calls or something like that because we might be more in a chop period now where it's not clear, I don't think, which way liquidity is going. It's certainly not as clear as it was in 2010 or 2011. So to me, no, I don't think it's a momentum strategy. It's having the correct framework

and then using that framework to trade. And the way that I kind of describe it is you want to be more concerned about what's happening and less concerned about why. Because the why is important. But like you said, Joe, you can kind of get bogged down in the why. And the thing is, it matters. And you have to have a framework that makes sense. But in the end, the what is what matters.

And I think that's the useful part about technical analysis. is that it's been shown in a lot of research that technical analysis is not a good forecasting tool. It doesn't backtest very well. If you back test head and shoulders or any kind of patterns, generally, systematically they don't backtest very well. And yet there's also research that shows that people that use technical analysis outperform those that don't. And that sounds like a disconnect. But I think the reason that it's not is that technical analysis is a great risk management tool. So it tells you, you know, if you breach a certain level, then you're going to admit that you're wrong.

And it forces you to admit that you're wrong. And I think that's the real value of technical analysis as opposed to using it as a forecasting tool. So I think a good framework is to have your fundamental view, but then or your narrative view or whatever you want to call it. But then you overlay technical parameters around it so that you have reassessment triggers or exit or action triggers. based on technical analysis. I'm Francine Lacqua, an award-winning journalist, and I've got a new podcast, leaders with Francine Lacqua from Bloomberg Podcasts.

I've interviewed everyone from heads of state to fashion icons about the news of the moment. But I've always been curious, who are these people as leaders? I don't think there's one right way to be a leader. Make decisions. A poor decision is always better than no decision. Listen to new episodes every other Monday.

Follow leaders with, Francine Lacois, wherever you get your podcasts. So a slightly random question here, but you bringing up technical analysis reminded me of this. With your background in currency trading, what do you think about Bitcoin? Because to me, like, trading Bitcoin is sort of, it's sort of like the ultimate expression of this, of the idea that, you know, it doesn't so much matter why stuff is happening. The focus should be on the what. And I have to say as financial journalists, you know, every time there's a big, surge or fall in the price of Bitcoin, we're all sort of scrambling to try to figure out a reason. And often, for most of the time, it doesn't even really matter, right?

The only thing that matters is the price move. So I'm just curious whether or not that's something you're looking at and how it kind of relates to your overall trading strategy. Sure. So I watch it closely. I actually think that Bitcoin is slowly becoming a pretty good proxy for the whole dollar debasement and fed liquidity trade. So when, for example, Bitcoin peaked the night Elon went on SNL,

and that was actually a decent indicator for the currency markets. So if you look at what Ozzy did or the more reflation oriented currencies, that peak in Bitcoin was a pretty good signal to get short those currencies. Dollar Canada made a low at that time as well. So I think it's becoming an important proxy. And the other thing that I think is interesting is it does. it does look to me like there's a pretty clear substitution effect between gold and Bitcoin, where the gold, there's a lot of on Twitter, hey, why is gold underperforming?

And to me, it seems like Bitcoin is becoming a competitor to gold, right? And some people might believe that or some might not. But it doesn't really matter if you don't believe it, because 38% of people do believe it and they're buying Bitcoin instead of gold to hedge the dollar debasement story. So to me, I think it's, it's, It's becoming, I don't really have a view on price at current levels, but as an asset class, I think it's just becoming a new asset class, kind of the way commodities really weren't that much of an asset class at one point historically. They were, they were good that got transacted and hedged.

And then they're a financial asset class. And that can happen once in a while. And that's what I think crypto, specifically Bitcoin is becoming. And more narrowly, it's becoming a meaningful competitive. to gold because you get a yield on Bitcoin and you don't get one on gold. And then depending on your age and and you're kind of not political orientation, but you're like money, monetary systems orientation. Again, it doesn't matter if I believe or not.

If a lot of people believe, then that's where the price is going to be influenced. So that's again, yeah, that's a good example of the what, not the why. And it is definitely interesting trying to find a framework for Bitcoin, I think, one of the great challenges right now. Obviously, a lot of people use technical analysis, but I think there's a really interesting behavioral aspect as well. The SNL, Elon stuff being one of the most intriguing ones where it was the biggest by the rumor sell the fact.

And just to be clear, I was writing about this like a week before it happened. And I'm wrong all the time. I'm just saying in this case, I was right. And it was really obvious. It was like the greatest buy the rumor sell the fact trade in history. was to be long doge or long Bitcoin into S&L and sell at 1130. And it was like tippy top was 1130 or 1145. It's amazing.

So there are some behavioral things. I think that you can kind of unpack in the crypto space. But yeah, mostly it's technicals and flow. That seems to be what dominates. And then there's this whole ecosystem of fundamental analysis going on in the alt coins, which is interesting. but that's an area that you really have to spend so much time to become expert. You know, you said something interesting earlier on,

and you're talking about sentiment or positioning, and how positioning is not always the best indicator, but sometimes if you overlay it with sentiment, and you mentioned if you, say, put out a note about the Aussie that was bearish and you got a bunch of bad, angry responses that might tell you something. Do you use, can you use social media that, way, can you like put out a tweet with some idea, some trade idea, some theme with the express purpose of trying to gauge the sentiment of the reactions? Well, you know what? I have thought about

that, but generally I would say no. And I've tried to get my feed to be as balanced as possible, but the problem is that there's so much bias I find on Twitter, like just in general, Twitter tends to lean very bare stocks, for example. It's more like going to TripAdvisor to check out the hotel, and you're going to see a lot of pissed off people in there. So generally, I don't find it to be that great. Maybe it's just like the mix isn't good enough or that there's too much bias. But I just find you just generally tend to either tweak a specific topic

that gets people kind of angry or annoyed. or you don't and you just get a couple of like weak replies that that are supporting you. So it's more like is your view a trigger? Yes or no? If yes, then you get a ton of responses. And if not a trigger, it doesn't go viral enough. And then it just, you know how the Twitter Algo just kind of drops it and and nothing. No, you don't get any really meaningful reaction.

So so I guess my answer would be no. Maybe it's more because of macro. Like maybe if you're in single names, there might be more balanced. and more people interacting with your tweets. But I would say on macro, you either trigger people or you don't. So I guess I'm wondering, you know, for all the people that sort of got into retail trading over the past year or so, what would be your advice to them going forward? Like your one big piece of advice?

Sure. So definitely my number one piece of advice would be be humble. it's easy to make money in a raging bull market and there are specific things that happened in 2020 that may or may not ever happen again in our lifetimes. So I would say be humble. And then just behind that like we were talking about is be sure to adapt as things change. Don't just get stuck in your one strategy that worked last year because it's probably not going to necessarily work this year or next year. So if you want to trade for the rest of your life, be humble. And adapt. I'll ask one last question. You know, again, you have this new book out, Alpha Trader.

Obviously, if someone has been a professional trader for 25 years, it's presumably extremely rare, especially if you sort of start from the universe of everyone who thinks about getting into trading. But what do you just tell us a little bit more about your background and for someone considering the book? Like, why should they listen to you? I guess the main thing that I have, as you mentioned, is experience, but then my experience is pretty broad. So I tried to write the book, not just for new retail traders, but also so that one of my peers who's been trading for 20 years at a major hedge fund would also get value from the book. That's the way that I tried to write it. So the three stages of my career were, or my real career in trading, were trading professionally as a

currency trader for a bank, was the majority of it. But then I also spent about four. four or five years trading my own money on the NASDAQ, as we mentioned, on NASDAQ bubble. And then I was also at a hedge fund for three years. So I have one thing that that taught me was varying your risk size and really having proper risk management because a lot of people read a lot of trade selection books. Like those books are more fun to read Market Wizards and the John Murphy books or whatever books you're reading. Most books are about trade selection and there's not that many books about.

risk management. So I try to cover that in a pretty easy to understand way, but I have a few chapters about risk management because I think that's a really important thing that gets left out of a lot of books and especially young traders. But even you would be surprised because at a bank, there's so many other things that you're doing like market making and all that that risk management isn't always taught either. So you tend to learn it more by osmosis. So I think my range of experience. And then also the way in the book, I try to go through everything from understanding the metagame, which we kind of touched on to specific, here's how I make my choices of what to trade. Correlation. I cover a lot of topics. So I think people that whether they have experience or not,

the whole idea of the book was to try and add value to people across the spectrum right from somebody who's never traded before, right to someone who has a lot of. lot of experience. And the one cool thing that I found cool or validating was Ben Hunt wrote the forward to the book and his takeaway at the end of the forward. And the interesting thing was a couple other people that like were early readers before the book was published said the same thing was that it's kind of a book about understanding the game that you're playing and and it can relate to the areas outside of trading as well. So there's a lot of stuff in the book about self-awareness and adaptation obviously and discipline, conscientiousness, doing the work, how success transpires

in the world in general. So there's a lot of subjects that aren't super specific to trading. And so Ben says in the end, this is the kind of book he would buy for his uncle or for his niece or whatever who aren't even in trading because hopefully it can teach you some of the things that I've learned about playing the bigger game or other games like poker and things like that. So I think it has some application outside of trading. From the feedback I got, that's what people said. And that's kind of what I hope that people also get out of it is some application outside of trading. Brent Donnelly, thank you so much for coming on Odd Lots.

And congrats on the book. Thank you. That was awesome. Thanks very much. Thanks so much, Brent. Take care, Brent. Obviously, I always really like those episodes. I mean, I really do.

I always go back in time to like 2002 and whether I could have been a trader. And I actually think not. I really think I made the right decision to not pursue that. I'm sure, like I think, you know, oh, could have made a bunch of money. But I just have a feeling I wouldn't have been a win. Why don't you set up one of those like fantasy football type portfolios and see how you do? Although actually, that's a terrible idea because if you lose loads of money, you just feel bad. And if you make loads of money, you feel bad because you haven't actually made loads of money.

Yeah. Well, I thought it was interesting his point about. like sort of runway and risk management. And if you like enter the game at like some like day trading shop where you're on like really, a really sort of tight stops and so forth versus say coming up through a bank where you're a market maker and you have like a lot of time to learn and you have like a lot of liquidity behind you, like I just feel like that's such an important lesson. And it just seems so easy to get chopped.

If you don't have like a, you know, really good risk management. management framework and you don't have a lot of cash behind you, it's just got to be so easy to get chopped out of the beginning and be out of the game day one before it even get started. Totally. The other thing that struck me was this idea of not worrying about the why and focusing on the what. And to me, that just kind of characterizes the past, you know, certainly the past 10 or 12 years since the 2008 financial crisis where we had so many people who were talking about markets It's being artificially inflated by central banks. Nothing makes sense anymore.

Everything is distorted. But in the end, it might not actually matter. Like, the thing that matters is what people believe in, the actual flows and the story that's behind those flows. And so had you bet on, you know, stocks in 2008 or 2009, you'd be doing phenomenally well. Yeah, I think that's really hard. And again, I really do think that, like, my mind is not. And I really believe, I don't know about you, but I really believe a lot of journalists would not make for good traders.

Because I truly believe that, like, well, they tend to overthink things. Oh, totally. It's two different skill sets. Yeah. Yeah. And it's more important to be right. You know, it's like the classic thing. It's like, do you want to be right or do you want to make money?

Journalists like want to be right. And we don't want to make money. Well, I mean, with good reason, right? Like the whole point is you're trying to build up credibility so that people believe in your journalism. you're not trying to make money. Obviously, as a journalist, you're not trying to make money. No one goes into journalism to become rich and famous. Okay, shall we leave it there?

Let's leave it there. All right. This has been another episode of the Odd Thoughts podcast. I'm Tracy Alloway. You can follow me on Twitter at Tracy Alloway. And I'm Joe Wisenthall. You can follow me on Twitter at The Stallwart. Follow our guest on Twitter, Brent Donnelly.

He's at Donnelly Brent, and he's the author of the new book, Alpha Trader, The Mindset Methodology and Mathematics of Professional Trading. And be sure to follow our producer, Laura Carlson. She's at Laura M. Carlson. Follow the Bloomberg head of podcast, Francesca Levy, at Francesca Today. And check out all of our podcast at Bloomberg under the handle at podcasts. Thanks for listening. You can get the news whenever you want it with Bloomberg News Now.

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