The Derivative - Stories for Traders: A Trend followers’ journey through it all with Andrew Strasman of Totem Asset Group

Episode Date: April 13, 2023

Have you ever wondered how successful traders make their fortunes in the markets? In this episode of The Derivative Podcast, we explore the world of trend following with a master in the field, Andrew Strasman. Here first-hand about his journey as a trend follower, from his early days in the trading pit to his experience in the real estate market and the birth of high-frequency trading. Throughout the discussion, Jeff and Andrew talk about the importance of risk management, position sizing, and having a stop order in place. We'll also dive into the problem of shorting cryptocurrencies and trying to predict market winners. Uncover the significance of monitoring trades from inception to conclusion and implementing stop orders, and delve into the no-nonsense approach towards the financial crisis of 2008, the global impact of central bank digital currency, the utilization of CTA indices, the methods by which conventional trend followers generated alpha, and a plethora of other captivating topics — SEND IT! Chapters: 00:00-01:29=Intro 01:30-12:52= The turtle Quiz & Skiing creekside 12.53-36:47= First taste of Trend Following, Board of Trade shenanigans, early days of high-frequency trading 36.48-54:00= A French Trading company, DRW days & You vs. Yourself 54:01-01:19:53= Earning your stripes, 40in20out: importance of stop-orders & your pure dollar at risk 01:19:54-01:30:58= Totem: the spark between boldness & humility / Central Bank high jinx 01:30:59-01:46:26= Vol targeting: Last year’s darling is this year’s heel & Side-stepping Trend Following Check out Andrew's websites for more information at totemasset.com & 40in20out.com & follow along with Andrew on LinkedIn for all the latest news. Don't forget to subscribe to ⁠⁠⁠The Derivative⁠⁠⁠, follow us on Twitter at ⁠⁠⁠@rcmAlts⁠⁠⁠ and our host Jeff at ⁠⁠⁠@AttainCap2⁠⁠⁠, or ⁠⁠⁠LinkedIn⁠⁠⁠ , and ⁠⁠⁠Facebook⁠⁠⁠, and ⁠⁠⁠sign-up for our blog digest⁠⁠⁠. Disclaimer: This podcast is provided for informational purposes only and should not be relied upon as legal, business, or tax advice. All opinions expressed by podcast participants are solely their own opinions and do not necessarily reflect the opinions of RCM Alternatives, their affiliates, or companies featured. Due to industry regulations, participants on this podcast are instructed not to make specific trade recommendations, nor reference past or potential profits. And listeners are reminded that managed futures, commodity trading, and other alternative investments are complex and carry a risk of substantial losses. As such, they are not suitable for all investors. For more information, visit ⁠⁠⁠www.rcmalternatives.com/disclaimer

Welcome to The Derivative by RCM Alternatives, where we dive into what makes alternative investments go, analyze the strategies of unique hedge fund managers, and chat with interesting guests from across the investment world. Hello there. Got an interesting guest coming to you next week, chatting with Sarah Schroeder, who's with One Rivers Digital Fund Trading Group, which was recently purchased by Coinbase. So lots to talk about there. On to this episode, we've got one of the true characters in our business and fellow Chicagoan,

Totem Assets, Andrew Strassman. We dive into his background at Fame Chicago Trading Firm DRW, some of the cool trend focus indicators and tools he offers up to investors. And of course, all the nitty gritty on trend models, the trend fund industry, and even trend investors. It's only Andrew can tell it. Send it. This episode is brought to you once again by RCM's newly released Managed Futures Rankings.

Want to see who the best trend followers are, the best programs you can access with under 250k, the best overall, et the best programs you can access with under 250k the best overall etc etc go to rcm alts.com slash rankings and download it today now back to the show hey everybody here with andrew strassman do I ever pronounce that right? I don't think I just say hey you when I see you at conferences and stuff. Hey, pal. Hey, buddy. You know, that's good. That's good. Strassman. Yeah. So let's start with for you listeners, head over to YouTube because Andrew's got a heck codes, some boarded up, nice distressed logo look. So give us the breakdown of what's going on with the virtual background. Oh, that's okay.

So I've got a link in there for my LinkedIn. I mean, it's pretty standard. Just my URL. Always be branding, right? Right. Always be branding. And then there's ar code for the famous turtle quiz i'm sure you're familiar yeah 66 questions um and it was the original true false

entrance exam by richard dennis and bill eckhart for the original turtle trading program so i included that in there what i did did was I took the original turtle exam and I want to just like put it online because you can find it, but you know, there's no answer key or anything like that. So I put it online and I filled it in with my answers and I sent it to Jerry Parker, who's of course one of the original and most famous turtles. So he comes back with WTF. I only got like 93%. And so he got like five questions wrong. And I'm like, Jerry, relax.

Okay, here's the deal. I was the answer key. So there's no answer key that I know that exists. I go, you were comparing to my answers i go so we disagree i guess on five of the 66 questions and i said let's like go through them one by one well he went my way on a couple of them after we talked about it um i went his way on a couple of them and then there's one or two that were just kind of really ambiguous and like he's like i had no idea what rich was thinking here. I mean, I don't know what the heck he was thinking here. Only Rich knows, right? So I kind of left it at that. I used that as the answer key.

And I put it out there attached to our academic project called 40 In, 20 which um which publishes transparent cta trend every minute of every trading day and i can tell you a little bit yeah later about that yeah so what was what were those some of those five questions that were on either side that had jerry parker confused oh shoot i don't you on the spot yeah i can't remember um i'd have to look back at the notes um sorry i i don't recall but um they did a subsequent um on the top traders unplug top traders unplugged uh podcast which is yeah complimentary to yours um they went through he's neil sprung it on jerry one day he said we're gonna do something different today and they went through, Neil sprung it on Jerry one day. He said, we're going to do something different today. And they went through every question live. So that was pretty cool.

But side note, what we're thinking about, what we've been working on, and I want to tap you on this, we need to modernize that. There's a lot of questions on there. They're just antiquated. Yeah. All right. Well, we'll go through in another day yeah the um but what go back to that origin story so the the idea there

was hey we put the ad in the paper people came in we gave them this quiz based on how they did on the quiz we said you get into the program we think we can teach you how to trade yeah i mean that was a genesis they were looking for people that thought a certain way um now i think they should have taken someone with a very low score and said can we turn this guy around i mean that would have been really interesting because you know they already had they already had people they're kind of moving or in the right direction they said like let's take these people and see if we can teach them to trade, right? And there was 13 people in the first tranche of the turtles and then another 10 later. And they taught them the rules and they gave them a little bit of seed capital.

Some guys bounced out and couldn't do it. But the guys that were able to follow the rules, they subsequently funded with millions of dollars in trading and eventually gave rise to what we now know as the cta or managed futures industry that we know and love right yeah and chesapeake jerry parker uh liz chabal emc still we have allocated both those um those are great guys so brian's done it too he was another another guy. He got 95, 96%. We talked about the one or two or three questions that we disagreed on. I told him the whole story. These are Jerry's answers. He's right down the street from me. I'm in Highland Park and they're just down the street from me. I see Brian now and again. Brian Proctor. Yeah. So, and we'll talk real quick

skiing just because I love to talk about that and people complain in the comments that we talk too much skiing, not enough quants. So give it to me. You were just out in Whistler. Yeah, we took the kids 7-11. I grew up in Vancouver. So we used to ski up there all the time. When I was there, Blackcomb wasn't online

yet, really. And I moved out here to work on the floor at the Board of Trade in 1991. So we used to get up at five in the morning, you know, grab an egg McMuffin on the way, ski all day, and then till close. And then it was the co-pilot's job to make sure that the driver didn't fall asleep on that treacherous sea to sky road. Which in those days was that pre Olympics? So it was worse.

Yeah, it was treacherous. They, I mean, it's great now they've, they've like, some parts are still a little windy and they couldn't do too much, but they really straightened out and made it a lot safer than it used to be. But amazing. The peak to peak transfer wow that's an engineering marvel um because it used to be in the morning you'd be like you want to ski whistler blackcomb and you know right down in whistler village you can go up the excalibur lift into blackcomb or you can go up the whistler gondola and like you'd spend your whole day up

there now you can go scooting back and forth because it goes right to mid station to mid station it's really phenomenal that's a great crosses the valley you're saying yeah oh yeah it's and it's it's it's an impressive engineering these guys are clever there's only four towers it's wow it's crazy it's something it was always on my punch list so i'm glad we got to do that on a beautiful day recently yeah have they gotten hammered like the rest of the world country not world yeah and not even really the rest of the rockies yeah oh with snow yeah um there's a huge base um and we they had like four inches of fresh right before we got up there and

right as we left they got like six eight inches which right before we got up there. And right as we left, they got like six, eight inches, which would have been real nice when we were there. Do you know about the Peak to Creek? I believe so, but tell me about it. It's an 11-kilometer run. Yeah, yeah. It's the largest contiguous run in North America. It goes from the peak of whistler all the way down

to the the creek side gondola um unfortunately there's chunks that were not available to us on this trip so that was too bad i wanted to take the kids down that yeah when we when i stayed there we stayed at that creek side so i think we did that daily to get back sure yeah yeah the lower creek side yeah yeah what a great hill though i forgot how much fun it is and beautiful and then even within vancouver proper there were three really good local mountains and you know we could be from house to skiing in like 20 minutes and now from vancouver quickly before we dive into some real stuff, what's your take on Vancouver real estate and Canadian real estate bubble? Yeah, bonkers.

Bonkers. It's bonkers. So, you know, the crazy thing now, I know they've gotten away from this. It used to be you couldn't get more than a five year term. You could get a 30 year mortgage, but the term would reset every five years so i always thought like ultra low rates you're like there's gonna be some people they're gonna wake up to a surprise one day when things reset so um i don't know maybe i don't know how people like can afford in general there there's like the shacks are 1.8 million canadian yeah um yeah it's it's they've actually much like our

529 savings plan they've started to talk about introducing a similar plan so that young people can get enough for a down payment which i think is you know bold right however doesn't this kind of put an underlying bid to the whole prices you know better than not i suppose but i don't know that that bubble um just refuses the problem is chinese money still of yeah it goes back to 86 everyone was worried about the hong kong handover and it was a million dollars for you know a 20 square meter apartment in Hong Kong. Or you could buy this stately mansion right by UBC. And people quickly did the math and go, well, that's an easy swap. And Canada said, bring me your tired, your hungry, your moneyed masses.

And through the... I was actually a dual citizen. was born in san diego and i became a canadian citizen when i moved to chicago to make five bucks an hour on the florids runner in 1991 and i said what if things don't work out i better can i go home so i applied for my canadian citizenship and got it around then they were doing entire citizenship swearing-in ceremonies in Cantonese and Mandarin. A room full of people. It was nuts.

For their citizenship. That's great. Yeah. They just churned them out. They call it Hong Coover. There's a lot of that money is over there it's it's impressive and that's the depressing part right of like all these young people how are they ever gonna afford buy a home yeah exactly and then you've

got these some young wealthy chinese that have a lamborghini and can't get it out of put the car into reverse you know you might want to start with a jetta or something to you know get get you down with the whole driving you might want to learn how to drive before jumping into the lamborghini just a thought just a thought so you mentioned being a runner at the board of trade uh i was a clerk board of trade bond pit what pit were you in again so i my first gig was uh assistant controller in vancouver and i quickly kind of revamped all of their back office things and was doing some really early stuff that led to Gus and Otis. And anyway, I had pretty good command of the back office and a fella came out to Chicago and he said, anytime you want a job, you got it. It's five bucks an hour, no benefits. And yeah, I'm like, yeah, you drive a hard bargain.

And he explained to me, but what you get is access and a badge and you get down there and he goes, you're going to meet people. And then you can, he goes, you got to bootstrap your way up unless you've got a rich uncle. That's where everybody starts. So I really took that to heart. And I said, yeah, I'll let you know when I'm serious. And I felt like I had to do it because I saw the Vancouver Stock Exchange go fully electronic. And that happened like on my watch. I saw the old board markers. Yeah, I was going to be a board marker and work my way up. And I saw it happen on the VSC when all electronic.

I'm like, well, that's going to happen in the futures markets. So I better get my butt over there. So I had been trading for myself also. That's kind of noteworthy. going to happen in the futures markets um so i better get my butt over there um so my first and so i had been trading for myself also that's kind of noteworthy um before you went to chicago yeah um i was actually i backed into trend following in a weird way um so my i show up and they're like we need you in the grain room. And it was LIT. We used to clear Stotler, then everything transferred to LIT. And I thought to myself, LIT, London Interbank Trust,

I'm going to go to Chicago for a few years. Then I'll go to Europe for a few years because I'll clearly work my way up the chain. And then I'll come back to the West Coast where your day starts at five in the morning, but you're basically done at one in the afternoon you've got your whole day ahead of you so that was kind of the loose 20-year plan and um i started in the grain pit in the grain room my first day was the russian coup and yeah well and like so i you know i already had a sense for markets and trading. And I mean, it's obviously very overwhelming.

And I was looking around and going, I got to get this piece of paper to the person in the middle of that pit. Like, this is bonkers. There's got to be a better way. And I pretty much my first day, I became a sub deck holder in the in the bean pit, because by the time you beat your way into the middle, I mean, people are sopping with sweat and everything.

And you got people with these running these orders and it's a cancel replace. That's like out of range. You know, it's a straight cancel that's out of range in the wrong direction. And they're running it in like it's a 500 lot market order and shoving it in people's face. I'm like, you have no idea what's happening here, do you? Right, right.

You need to put that in your pocket. That doesn't... Yeah, I mean, no one's going to get upset if you take your time with that one because it's out of range in the wrong direction. So I quickly took it under myself to like just grab all the paper sort it and like give it to our filling broker and you need this you know like sort sort sort um and like then take the fills coming on the other way out and handing it to the people

to the runners like hey take this back to the desk. Give this to Joe. I try and explain to people the amount of paper that was on the trading phone. I don't think anyone realizes literally how much paper there was. My favorite is Jay Homan. I don't know Jay Homan. Oats. Okay. Oh, yeah, yeah.

There's four guys standing around in the oats, and you could bring a piece of paper to him with a market order right and he'd like bang it out he'd see that he'd endorse it you're standing right there and he just drop it right in front of your face are you serious sir okay i got it okay yeah the paper was ridiculous isn't it which you're like why yeah of course it went electronic like to manage all that and like what you were doing intuitively but that's now what electronic of like okay this order isn't important kick it back out yeah yeah exactly there's some fuzzy logic right i mean mean, the other thing I remember was being in the wheat pit and I got to be good friends

with some, yeah, well, Cavi, he's my Cavi. So Cavi was kind of part of this circle and we had a really great execution team and a good filling broker. And I remember being in the pit and, you know, it's like, I can, whatever the handle, it doesn't matter. It was like 523 or whatever. I'm a cellular twenties, cellular nine, cellular eight, cellular 17, cellular six, cellular fives.

It still says 23 on the board. And I, I'm thinking, you know, the fast moniker goes up and then you see a 20 and then you see these scattered prints. And I just remember thinking to myself, and I kind of knew this intuitively when I was in Vancouver. the fast moniker goes up and then you see a 20 and then you see these scattered prints and i just remember thinking to myself and i kind of knew this intuitively when i was in vancouver i was like i'm so far away from the action that by the time these things are occurring like that ship has sailed sir like way long time yeah and like you know eight cent move and we it's like huge and i'm just thinking to myself if i was in my my office in Vancouver, I'm picturing these guys sitting around with a cup of coffee and like getting on the phone and going, you're screwing me, Chicago.

And like thinking just a lag time with them getting their information. And I remember watching this and like we go from 23 down to 15 in like just the blink of an eye right pause people are getting totals they start endorsing checking orders three two one the phone bank starts lighting up right now all come all these these panic orders come flying in. And anyway, it was just, that was pretty cool to see that stuff happening in real time. And it kind of affirmed what I already kind of knew or suspected.

And like back in the office in Vancouver, it was like, wow, these things are, I don't think they're out to screw us like single-handedly. It's just, we're very far from where the price discovery is happening. We used to take people who wanted to trade online, if they ever came to Chicago, and we'd be like, hey, we'll take you on a tour of the floor. And we'd walk over, and there was like the dot matrix, and that's where the online orders

were printing onto a thing. And then some clerk would rip them off and take them where the online orders were printing yeah onto a thing and then some clerk would rip them off and take them into the pit and i'm like and there was a pile we came down there one day there's a pile of them stacked like this like it hadn't been ripped off the printer yeah i'm like that's at least 10 minutes old your market order that's at the bottom of this stack of paper so go ahead online trade your life away okay so with one day we had a bunch of this really good wheat desk these guys are great um really strong execution team um so like a five for your listeners a 500 you know 500 bushel order in the wheat is a pretty big order and um we had a contract yeah or if you know a 500 lot right which is not contract it'd be 100 contracts now because it was you know the stupid

5 000 oh got it yeah yeah anyway so they so all right so um the we've got the customer says we've got like a lot to do today like five million of the stuff so he's coming in in 500 lot increments and um so he would to get our broker's attention there'd be a clap great hey greg he'd like poke his head out 500 market okay he'd go he'd bang it out and do whatever well one of the locals was on to us and so you he kind of after three three times he greg comes over he goes boys listen up numb nuts over there is picking us off all right so what i want you to, and this is at your discretion, you, you know,

do the regular thing. Call me over. I'll poke my head up. You give me the old bunt signal like the, like this. Yeah. Yeah. I will disregard the next and only the next one order.

And that's it. And so, okay. Okay. So we kind of sit around i i'm i'm watching this all go down i'm like this is hysterical so grab me grab me yeah what up buddy yeah bun signal okay toss him over sell 500 market really slow slow action right okay i'll sell 500 turns around and the other guys cleaned out everything he goes great quarter bid for 500 because he just cleaned out everything he's sitting there make. Make it easy for you, pal. Quarter 500. Oh, I got nothing. What do you mean you got nothing?

What do you mean you got nothing? I just saw your clerk. Oh, you were watching my clerk? Hey, guys, this guy's watching my clerk. Anyway, they ramp it up on this guy a few cents just on principle to teach him a lesson. And they're like, okay, I guess that pretty much covers the picking off and watching my desk okay right cut that out we'll do baseball signs all day long oh yeah right yeah keep this up this is just our early stuff and and do you feel like that's what scared a lot of people out of futures markets like all that right i don't want to hesitate to call them shenanigans but they were

kind of shenanigans and all this floor trading stuff and like you said you're in an office somewhere in la trading whatever in oklahoma trading oil and you're like they're screwing me in the pit but it was they're providing a service they're filling these orders best they can and then it's like there is gamesmanship it's a live pit they're all competing against each other in the moment so i don't know if there's a question in there but yeah what's your yeah stop no that's not what drove people away i mean of course the great stories from the pork bellies and everything um are you know there's there's been some outrageous things have happened for sure and yeah i'm shocked shocked to find the gambling has been going on um but i don't think

that's the real reason that they got scared and they're still scared there's still this this this ongoing theme in the futures markets that i won't trade that that stuff is scary are you kidding me honestly yeah the only thing they're scared of is like they've got poor risk management and there's a lot of leverage. So they start with 10K. I mean, 95% of the people that start with 10K trading futures are going to, at one point, lose all their money. I mean, the risk of absolute ruin is super high, right? Because they can't manage their risk.

Right, so you're trading at 200K nominal level with 10K or something. David Gardner, M.D.: Right. That's another example of you not being… If you have $5 million and you're trading a 20K account, you could do this all day. You're not ever going to be concerned. They've got problems trading in the futures, but they've got no problem trading equities. And the issue is the equities didn't have the same sort of leverage happening, right? So they, it's, but it's okay. These meme stocks are going that crazy, right? Yeah.

Trade some call options on AMC and YOLO. Yeah. Yeah. And what they do is they're still seeking that leverage because they can't take down 5,000 shares of XYZ. So then they start reaching for these one week options. Like it's bonkers. It's crazy. One day now.

Yeah. Yeah. I mean, it's crazy. And it's so, if they only knew how bad this is for themselves, because what we have on the equities is the front running, right? And if you think it's bad in the outright equities, it's double bad in the options. And you might have a good trade on, good luck getting out, you know, and it's a hot potato. You're not going to get out until they let you out. And they're wider and they're generating long gamma. So they're buying them and they're melting.

And they're buying them into the worst part of the melt when the theta really kicks in. So, I mean, they want leverage, you know, and they're comfortable with stocks. And it's just, if they only knew how bad they're getting ripped off in most cases. My thought is always, at some point that should self-correct, right? There's not an unlimited bucket of retail people who want to blow through their savings, YOLOing these options. At some

point you'd think they'd be like, oh, cool, I made some money, but generally I've been getting hammered on this. And they realize that the spreads are wide and that the market makers are not nefariously, but just like, hey, they're protecting their risks. They're doing what they do. And they have the edge over that retail investor. So I don't know, to me, it's going to self-correct and they're going to be like, all this option volume is going to turn over a little bit as they'd be like, okay, this isn't a quick way to wealth. They're just going to ultimately throw it all into view and call it a day right right so um it's talking about equities um i got a fun story for you talking about like equities and structural edge because now all the structural edge like

most people don't even understand like ken griffin's the other side of most of their trades right um and all the dark pools and this sub pennying um is legalized front running is what it is right and every time you get a better fill just know you were used um as leverage against someone else right yeah so uh i mean the whole thing kind of makes me vomit in my mouth but um back in the 2000s uh where do they bring payment for order flow to futures oh great we'll get into that in a minute sorry go ahead with your story yeah so um i for a nanosecond there i was doing you remember the Soz Bandits? Oh, yeah. Some of my good buddies were neck deep in that,

telling me to get in, sending me statements like, we made 600K yesterday. It was just who could hit the button fast enough to jump in front of an institutional order. Right. Well, it was, you know, Picos would be half bid and it'd be offered at even on the Amex. And you could, if you were fast, you couldn't give you, you know, click, click, you know,

you'd lift the evens and sell the halves and you'd make a free half point. And it's always, it was pure price inversion arbitrage. And some people came out with some software and opportunities would pop up and you would click, click. And if you were fast, which I was, it was, it was kind of a good deal. And then what started happening, they would start it to DK or bust orders and say, no, that never happened. You're like, that was four hours ago, bro. What do you mean? It didn't happen. It most certainly did happen. No, we're busting it. Oh. and the reason code would be like inverted price of market you're like that's not my problem that's like not a thing and um let me talk to the the pit committee

i am the pit committee it was when they started busting trades that game was over because you couldn't really rely on everything on on your fills that you were getting but this one fella who had funded a group that i was part of um he says you gotta talk to the guy that's backing all this he he needs a programmer i'm like all right i mean this thing's pretty cool but like yeah i'll talk to him so i go i meet with this guy he's got a small enclosed office um embedded within first options before they were bought by goldman and he smokes he's the chain smoker and it's him and this other guy and he's i need some help with something i'm like all right i'm all ears well what he was doing was basically a toby crable-esque opening range breakout type system where as soon as the

opening print would come out, he put in a buy stop above the market self stop below the market to initiate a new trade. And once he got in and trade, he'd be, he'd be doing some add ons and he'd use a trailing stop and he was doing all this by hand. Yeah.

And I'm like, Oh bro, by hand. That's kind of tough. um i mean but it was working and he was making some money he wanted to ramp up operations and he was there's this crazy thing though whenever remember with the uptick rule a sell short a good till cancel sell short stop order must be filled on an uptick. Well, they weren't being filled in a timely fashion,

or if at all. So he'd be getting short, short, short. And this is all kind of under the radar stuff, like nothing more than 600 shares of the clip. So it's all kind of like penny ante for the most part. But you got four add-ons, you're looking at at 3 000 shares that's not a bad line and um the crazy thing is he he would get all these these trades were elected they were due but he wasn't getting filled and he'd be trading as if he was filled because he knew they'd come in eventually

and he would either lock in a small loss or lock in a profit or whatever the case may be but he let's say he got short 3 000 shares he'd be covered all and it shows he's long 3 000 but he knows he's flat but he doesn't have the fills yet well an hour would go by or something or two now he's getting triggered on the upside he's getting long long. So now he's long like 3,500 shares and now he's long 4,000 shares, but he knows he's really only long a thousand. Well, I don't want that stuff now. So like 3,000 shares, three bucks ago. No, thank you. I don't want that cancel right you are out like you kidding me yeah it just gave me nine thousand dollars like thanks for shopping at Walmart so he's like I don't understand why this is happening um but it is happening and we're kind of exploiting it and I called it oh it's like a free call option

either with them not filling this order in a timely fashion so we had fella came in from new york and we went out for a drink and i said so what is happening he explains to me those orders were kicking out on little ticket printers in at the specialist post and while the specialist he's got a five thousand dollar armani suit while he's moving blocks yeah it's like he's got minions below him that are dealing with all this other penny ante stuff because he's moving blocks yeah it's like he's got minions below him that are dealing with all this other penny ante stuff because he's got a five thousand dollar armani suit yeah don't bother me with the little yeah yeah right and it would be like the the the kid the jamoke kid of the nephew of the guy he didn't really like that he knew from grade school that was like filling this and um doing not a

particularly good job of it so um we said we'll we'll do that for you like we'll monitor these trades and and in if they did fill us poorly like on the low of the day we'd be at 942 we're due this price at 10 10 we're due this price and we call them into dot services and we get all the fills per exchange rules because we were watching every tick and um this thing we went out we did have a losing day for years it's almost like the early days of high frequency kind of a little bit of right of like hey knowing the order types knowing how the orders route knowing where you have to get filled um who what can you share the name who was oh it was a small group of us it was emerald trading and um i was promised a piece of the firm we'd start the day flat and end the day flat and i think our biggest one day was up 450k so i he brought me in and i automated this stuff because that's what i do

and boy do we really we ramp things up uh we just ramp them up as then some of the specialists were kind of on to us the 3m guy was notorious and i kept a table because each specialist at each post he'd have like a couple marquee names Then he'd have a bunch of like garbage, like these debentures and just other tertiary stocks in the one traded. And I kind of kept a table of by post of what their stocks were. So a guy would, for example, open down $3, the first print, you know, down to, and we went through decimalization, by the way, down 298, you're filled, you sold 3000 down 298, down one bid, even bid up a dollar bid, right? But boom, like you're filled, you sold 3000 in the, in the hole, have a nice day. Those we got to fill immediately on, right? I'm like, ah, oh, golf clap.

Congratulations, sir. You figured us out. So then I had a subroutine just especially for those guys. I called the tormentor and I would just, I would get the tormentor and I would just go, okay, cancel all orders in this, in this stock, in this this issue but i also know he's got these tertiary stocks and debentures and everything so i just ran a tormentor and it would place a bunch of orders order check cancel replace and every time these activities occurred guess what same ticket printer so i the guy i get a call from dot services. A specialist has asked if you would mind not doing whatever the hell it is you're doing.

Cause I'm picturing him running out of rolls of paper. And I'm like, listen, I propose that the specialist does his job. Yeah. And it becomes more special. Yeah. Right. and instead of like worrying about like yeah anyway um we would put them into the penalty box for like three months and then we would slowly reintegrate and we'd get the money back we just like hey remember me i want that money back um yeah so basically i think what what the by the wholesaling of orders

are doing like they're able to do this sort of thing and people just don't know they're just right you're saying like you like basically citadel's doing that on a massive scale these days basically um thing ish you know by sub pennying instead standing in front they can for sure lock in a 0.1 loss with a good chance of getting a 0.9 gain right and if i could do that all day i would yeah yeah i would too and those crocodile tears drive me crazy you want to take away our single biggest expense go ahead we'll be more profitable oh baloney so let's shift gears so speaking of big chicago prop firms you worked at drw for a bit um design it well tell us what you're doing there and what it was like there. So I had learned trend following in 93 from a firsthand source.

I can't tell you what it is. I can't. I didn't learn the turtle model. I learned like facets of it, like ATR based stop sizing. And, you know, it's significant highs and lows and things like that. So I kind of, I got, it was even better than being taught the turtle program.

I had enough to begin my process of discovery. And when I had my aha moment, I went, holy crap, I've been looking at this wrong. I've been worrying about MACD and RSI and all these other things that just really don't matter. And I figured out like, oh, this is how you do it.

And so I started trading for myself and I had like 10K in my account and then I had to have 60K in my account. And it was like shooting fish in a barrel in the mid nineties. It was a great trading time. So I was at a French company called Fina Corp Vendome. And we had a fantastic execution desk. It was execution only.

We did a little bit of clearing, but it was mostly just execution. And we had the best guys in the world on the bond box. And so they would be telling, you know, they'd be calling out, know 10 11 you know 100 up 10s trading at eight at seven baldwin nicoforo pressing it even to trading like they would be getting that kind of color and it was the best execution team i have ever worked worked with

they were fantastic i used to get calls we'd have the trolley system with the hoot and ho, and I'd have like eight slots for people to listen in and you could talk to them on a microphone. I'd have before the payroll report, I'd always get a few people call me up. Can I listen in? I'm like, you can listen in, but I'm turning you down. If you talk, I'm not going to hear you. And this is privileged information you're hearing right um so um back when stocks and bonds traded together so um i covered one of the clients i covered was drw one of drw's basis traders basis trader and so we had a good rapport and uh we used to shoot them all day you know 50 lots 100 lots and all that sort of thing so drw was a customer and um we would have pre-electronic or in the early days of electronic this is pre-electronic yeah no that that was all a pipe dream at that time we i mean i was excited for it but it was pre-electronic for

sure and um so i was covering a couple of these guys and you know we throw you know parties and have champagne and stuff and i got to meet don and don is a very um you know he was very um people were in awe of him right yeah smart guy really smart guy and gay smart guy yeah and he people were just kind of in awe with him he was a customer so we always got along and i was nice and polite and then um he we started talking sailing and i had sailed in vancouver and um i he was looking for some crew so i started crewing on his boat and of course he could have any boat he wanted but he he chose the Tartan 10 fleet, the T10 fleet in Chicago, because there's about 85 boats in the fleet based out of Chicago Yacht Club. And they had very strict rules about buying new sheets or new sails every year and all that sort of thing.

It's a very well run thing. It really came down to tactics and crew. You know, each race was very competitive and he you know he's not one to shy away from competition right so that was before being a sailor myself that was kind of before the one design movement right and right d35s and all that where people like oh okay it's all the same boat and it's just coming down to your skill versus my father actually in my sailing career was on the other side of that where he was like no we're gonna buy our way to victory we've got the best sales we've got the north sales reps on giving a strategy like he was a good

sailor the kevlar yeah that was the flip side of that was hey hey you can spend as much money as you want to make your boat as fast as possible and you're racing next to the guy who has a year old sales yeah they had a bit of a handicapping system but it wasn't yeah right that and that the mixed class where like you see these two boats and like one clearly beats the other but he loses because of the time yeah you got to give him a minute per mile or whatever yeah and like you know we like the head-to-head competition was great. That's what was nice about the one design. So I was crewing for him. And I was telling him about all this money I was making trading, doing trend following.

And he basically said, well, shit, why don't you come do that for me? I'm like, indeed, why don't I? Yeah. That's great. Yeah. well shit why don't you come do that for me like indeed why don't i yeah so he yeah so he this would have been i i was in paris for a year he was in london um came back it was covering some of his guy we kept in touch all this sort of thing is kind of a long story that's boring but um he said why don't you come do that for me he grub staked me um 300 grand account size to start this would have been 97 into 98 and um my first year trading made a million bucks and i remember being up i remember being up a couple hundred thousand and this is like do you remember 98 there's too much stuff it was a deflationary spiral there was unsold box cars of

apples would stretch from washington state to chicago we overbuilt all this stuff it was a big theme at the time was too much stuff and a deflationary spiral so um yeah i i remember being up a couple of grand he's like that's a lot of money for you you're gonna take it you know there's a split right and i'm like no i don't think we're done yet i think this the positions i have on are gonna be worth a million bucks and then there was like a test and they tried to shake you out of everything right then i have a size up only 50 grand. And he's like, you sad? You didn't take that money? I'm like, it's on. Here's the thing. I still have these trades on.

I'm still in. They didn't get me out of much of anything. I go, I'm now more convinced than ever. This is going to be worth a million bucks. And then, so then, you know, the 98, the Asian crisis happened and everything went like we were warning about. And so that was a pretty good year for me. And yeah, that was a good year. It was a good time.

It was a great. Weren't you rules based anyway? So did it matter? You weren't going to get out the trend you said to get? We're not computerized yet right okay so um the deal is this like and i i mean i would sit there and like i you know used aspen graphics which was like a cqg offshoot remember it yeah and i you know i had excel and i had spreadsheets and i would incorporate into a database and I create all these trades.

And so I was on my way to automation, but I still had to call New York to place these orders. Right. And once you get a human on the line, it was like placing orders. Yeah, we weren't, I couldn't type into computer yet.

Globex is just barely coming online at the time. Project A wasn't quite yet out there. So once you're calling or like, I'll just watch it or I'll put an alert, right? I'll give it a little couple ticks. Now you're introducing something else in there. Yeah, like, oh, I wouldn't do that right now. You have the big whatever. Big reports coming out

in three minutes would you would you an idiot you're gonna put that order goldman just added 20 000 with their role and yeah yeah there's a million shit really it's what you what you what you finally understand and hopefully sooner rather than later, it's always you against yourself, right? And that is the chief theme of all trading is you versus yourself. Markets are going to do whatever the hell they're going to do with or without your participation. And so your five lot, 15 lot, 60 lot, one lot ain't going to change much of anything at all. So really you realize it's just you against yourself. And so the closer, you know, I was able to match what I had on my paper, that was always kind of the goal, match what I have on my paper. Now here's the other rub is

my, I would calculate my margin equity ratio. And I mean, 40 mean 40 45 like these are not levels i could even get to now being like fully automated i couldn't even get anywhere close there there's too many risk overrides and protection in place and my stuff's automated right now and it would never get there so right and just listeners the average across the trend following industry is 10 12 and a half percent something like that yeah i'm closer to six percent and never over 15 now but um at that time it was it was rock and roll baby yeah but do you think that model's dead um just of like hey here's a chicago prop firm that's going to give you money to trade because you have you've been making money or is it way more now

just all computerized what edge can we find and mine until it's dead and then find the new edge i don't know the the guys like you know the euro dollar market makers um you know, the Eurodollar market makers, you know, they were looking to make like four bucks a trade, you know, that's down to like 12 cents in a pick and market. So like, good luck there. And I've been approached or talked to several prop shops and I'm like, look, I'd like to ramp things up. Why don't you, I'll give you guys a very good split you know 25 million let's go and a lot of them that i'm talking to now they're like um yeah well we can ramp things up but we want you to be the first million in loss yeah like i don't need you for that i get 100 like i don't need you i mean i'm offering you the opportunity to get some diversification and make some money it's got positive ev like you want it or not and like they um so they i don't know so

i the prop model um and then like drw i mean they're they're doing fine i'm sure with their market making activities and they don't have any outside money to deal with right and they went heavy into crypto and market making and crypto and mining the crypto yeah what i understand yeah a lot of them have i've got another funny story about don like he used to be the king of the euro dollar options right and or he'd be in like the euros trading strips packs bundles or he'd be in your dollar options and i remember one day he called me up and he's like um we got any sugar on like what what are you talking about you should be talking like volatility cones and you know and smile like what are you going on about sugar because all the guys in here are talking about sugar i'm like oh geez are you kidding me we've been lying for 85 days now like and now they're

talking about sugar uh we we must we must be reaching a terminus here i need to take some off on principle just because these jamokes are talking about it um but but when you're like when you're in one a lot of these uh prop shops you know you're in one sector like i would go nuts i mean i don't like right like sitting there for five years just doing one thing right and hoping it does something at some point you know and they're banging out ticks and they can't you know the forest through the trees they're banging out ticks meanwhile the thing's consolidated in a three-year range and when it pops out they're ill-prepared for like hilarity ensues yeah like the and then we'll get into our we're still haven't got into our real stuff but this has been fun so far but um what are your

thoughts on you starting out like hey just make your name for yourself in the pit and like climb up the ladder like that's gone so what happens to that next layer of people such as yourself such as me like where do those people come from if they don't start on the floor right that seems to be a problem i don't know and like you know this whole work from home business. I mean, it's great for us because we've got kids. I don't know. You've got kids. They're a little older now. Like mine are 7-11.

I mean, it's great for us, but we earned it. Getting on that damn L train at 530 in the morning. Breezing. I mean, fully like ding, ding, ding. Market opens at 7. You're here here you're not here right and um a lot of guys didn't make it hey that's a great point you can't be like i'm sick today like no no that thing's dinging whether you're sick or not that's right and i mean i occasionally stuff happens right but you know repetitive you know, is this the straw that breaks the camel back? You know, you can party with the boys.

You got to get up with the men. You know, like you didn't have to be out till two or if you were and you still showed up like good on you. You're 23 and you should be doing silly stuff like that. Right. But, you know, I don't know how these guys earn their stripes now. And we've talked in the past on this pot i can't remember who with but that was a big difference between chicago and new york right new york it felt like in my mind had to go to the right school and know the right people have that

to get into a goldman get into jp morgan chicago hey you could bust your way in through that door without even going to high school and if you could think on your feet and yell and push people around, you could make a living. So, right. It seems like now it's Chicago's kind of lost that part of it. And now you have to have the same stuff as New York. Oh, and by the way, you know, an impressive pedigree doesn't mean you can trade. Oh, yeah. Yeah. You know, smart people do dumb things all the time. I use an example all the time, a slide, 28 out of 28 primary dealers are looking for this to happen in interest rates. And what actually happens? Not that. That was on our two weeks ago pod of that. We actually pulled that up on the screen, that squiggly line chart where all the right the rates go like this on the video listeners i'm pointing up to the right and the

squiggly lines are always way off way yeah and those are the estimates so the yeah the worst the worst of projections of the federal reserve right yeah right and we've all seen like i hire a quant you get them in there they build this model and it is terrible and they have no idea because they don't have the street smarts to be like, oh, it should work. I don't understand what the problem is. I remember when I was there at DRW in 97, 99, we had a PhD on staff and he was actually a terrific help. He really did help with a lot of things in some of my early research and efforts. But he was all hell-bent on doing this high-frequency stuff. I'm like, Lester, listen, I was just sitting at the Globex machine.

And it doesn't matter what the handle was. 4,003. O3s are trading. It said offered at 95 on the screen. I was selling some O3s. I'm like, 12s are trading. I sold some 12s. The matching server and the quote server weren't really talking

to each other at that time. I'm like, guys, 13s are trading. They're like, no no it's offered in 98. i'm like try to buy them then i gotta go yeah try to buy them go for it go for it yeah go for it i'm telling you 13s are trading i'm telling you they're trying to build a model on the quote server basically well well it was like he's doing this sub second stuff i'm like bro like the thing is so broken right now um you know i wish there was an api at the time but like you're getting a little ahead of yourself bro it's like i maybe we'll be there one day well you know here we are 20 years later and they're there so um you know way

to go lester but at the time i thought it was like Don Quixote chasing a windmill. I'm like, good luck with that. So let's shift gears, talk a little bit about your models, about 4020. Where do you want to start uh well okay roots of the academic project how about that sure um it was actually an idea we had back in 2006 um was to like publish a transparent trend for cta returns what we do know um about see the industry as a whole is a lot of the managers got away from their trend following roots. I mean, that should be clear. They went multi-strat. That should be clear. They started to target vol. That should be clear. And they didn't look a heck of a lot like a a classic trend follower at some point and yet you know it seemed like their goal was to like raise assets and which they did like you

know look at winston has what 32 billion aum and you know i'm sitting there i'm like you could be a trend follower if you tried my joke was always always with Winton, right? And their marketing materials, it was like, we have 86 PhDs. And my joke was always 80 of them are in asset raising. That's right. But like, I mean, you literally, you couldn't because like, you know, the power of trend is in its diversification, right? I need a diverse portfolio. I don't know year on year, which of these three instruments is going to make an ass of themselves, but often they do. Occasionally, a lot of them bump along in rhyme or concert. And that's when you make the bulk of your money in very short

periods of high cross-market correlation. But year on your, you can expect one or two things like, man, I really wish on January 1st, it was going to be here on December 31st, if only. So that's why you got to kind of take every trade and take the small losses. They're all exploratory bets as you try to uncover those outliers, is I guess a really good way of saying that. But these guys aren't doing that, really. They focused on financials because that could take the size. They barely traded. They barely took their foot off first base, which is an approach. But I don't know why people are paying 1.20 or 2.20 for you to not really take your foot off first base. So my argument was pretty simple.

If you were going to do an efficient frontier or Markowitz bullet and use data going back to the last 30, 40 years, you're fooling yourself because the CTA indices are dominated by firms that don't really do that stuff anymore. So you should clearly delineate between the new asset gatherers and multi-strats versus the old school CTAs.

And what we need is a reliable index for the returns. And most of these indices are dominated by these firms that have morphed over the years for whatever reason. And there's no right or wrong there, but they've morphed. But you should be aware of that. The argument on the other side is like, hey, no, this is what the investors want. This is what the institutional investors want. They want lower vol, they want lower activity. That's fine. Then don't use a 40-year efficient frontier. Right. Don't use it. That's fine. That's good. That's great. right don't use it yeah that's fine that's good that's great just don't you dare blend that in right and this is the confusion for investors that get upset of like oh i bought this

managed futures program but i was sold on trend following on crisis period performance on all that and now i'm getting something else correct so it's very important to look under the hood not all all trend followers are man's futures. Not all man futures are trend followers. Correct. And that's fine. And everyone should find and plot their own path in life and, you know, let the market determine what they want. You know, you'll find out. Right. So, um, it still doesn't change the issue at hand is like, I do want to do a 40-year efficient frontier using trend. How am I going to do it?

That's the problem. How am I going to do it? So what I had proposed, and one of my investors, he gave a nice endowment gift to his alma mater, University of Idaho. And what they do there, they have 400 and 500 level courses where they actually trade. Because as you know, you can't tell till you bet. So instead of just pontificating, they actually have funded accounts where the kids trade. And they give them a very short leash. But you could probably remember, it's been so long for me when you pit it out, you get the instant sweat because you realize you just lost a whole month's rent in 10 seconds.

You went, oh, F9 recalc, no, that's not going to help. That doesn't change anything, right? So hopefully, you go through that at some point in your life. You learn what not to do is probably more important than anything else. So if they could help these kids kind of get some actual real live trading experience, they would be more marketable and have a lot more skills. So I was asked to speak with these guys and there's like 30 kids in the class. And I'm talking to the dean of the business school. I'm like, here's what I think you guys should do.

There's a need for an index of just pure trend returns. Just a real baseline model. Nothing, nothing too fancy, you know, single entry, single exit, um,

explainable, defensible, very, very, very vanilla. Yeah. And I go go i think you guys should produce it i think you should publish it every day um i think it could become like a um something like university of michigan something that's a subscription based and you know university michigan didn't happen overnight they've been publishing since the late 40s right but now lots of firms are paying for advanced details and you

know in um advanced information and advanced details and all that sort of thing so i go you guys could be the guys the the standard bearer i go because as a cta i mean i could publish something but who's going to listen to another peer or a colleague right no offense to the vandals right are they the vandals if you dangle out University of Michigan to University of Idaho they're like ooh

that'd be nice to be somewhere in that or yeah so I said and they even had a stipend of you know three or four thousand dollars a month to pay the kids to run this right i don't know what the problem was well the problem was like who's gonna run it during christmas break or summer break like well come on you figure it out bro like come on you guys can you can figure it out you're paying or go over the computer science

department and automate it some more and or do something right anyway i figure it out it's a paid position computer science department and automate it some more and or do something right anyway i thought it would it was a good idea and they dragged their feet dragged their feet and i finally i just said look honestly i'm doing this stuff internally anyway and i i'm sure many of the managers you speak managers you speak to are running like parallel um tracking ideas in real time and seeing i'm sure i hope so i sure hope so but um i'm like i'm kind of doing this anyway it'd be no big deal for me to like put it out there and so i mocked it up in like a weekend i said something like this so i was really hoping they would pick it up and they never did. So, but I just started publishing it. We formed a separate LLC and called it the Transparent

Index Group. And we started publishing this thing every minute of every trading day since 2014, monitoring the trades from cradle to grave. And if you think back, the original Turtle program, there's a 20-day breakout and a 55-day breakout to systems. We picked a 40-day breakout, just one. So it's not too close, not too far. Risking 25 basis points of AUM on any trade, which is pretty close to standard and trading a portfolio of 29 different instruments from eight different market sectors and said, we're going to monitor these things from cradle to grave and see the results. That's it. So that gives- But what's the 20 out? So that's 40 in, but 20 on the way out?

Okay. So the first thing, you need to have an initial protective stop, right? And we use one 20-day ATR as the initial stop. Some people will say that's way too close. They might risk like three to five ATRs. Some others might risk 0.25 of an ATR or half an ATR. We're not here to discuss like what the best answer is as if there is a golden, perfect answer. Cause none exists, but it's a good place to start. So the initial stop would be like one ATR away from entry.

Then as the trade, the losses take care of themselves, right? They get stopped out, lose 25 basis points, have a nice day, move on to the next trade. So the question is about handling the winners. In the case of a winning trade, like for a long, we would use the highest of the initial protective stop because that's your no-go line. But as the trade advances, the lowest low of the last 20 days would become the trailing stop.

So 40 days to get in the trade, 20 days to get out. 40 and 20 out. 40 and 20 out. Yeah. And let's dive into the ATR things just for people who don't understand. And when we ran our trend models,

used the same thing. So if you say, I want to risk 25 bps of my equity per trade. Okay, what does that mean? So if I'm trading cotton, do I say the thing's worth $100,000 worth of cotton and I'm risking 2,500? Divide that by the contract size.

You could do it that way. So explain the ATR method of basically you're using that as a proxy for the risk. Okay. So let's talk about the 25 bips of risk first. So we're resetting, we're calling us a $5 million notionally sized account, and you're risking 25 bips of that. And that resets monthly, so it's always $5 million, that's $12,500. That's how much you're going to risk. That's your max dollar risk is $12.5K on a $5 million account size. Or spoken another way, if you have a $100 bill, you're going to lose 25 cents. Right. bill, you're going to lose 25 cents. Big whoop. I mean, I would be upset about breaking the 100

because it's nice to have a crisp hundo in your pocket at all times. But letting go of that crisp hundo is a little painful, right? Unless you really need it, like a tow truck or something. But this is where people get confused. Like, okay, cool. I put on one contract and get out when it loses $12,500. Well, it's not one contract, right? Right. Yeah. It could be zero contracts in some cases. Exactly.

So your max dollar risk would be $12,500. Now, okay, boom. Max notional dollar risk, 25 basis points, $12,500. Next. That's outside of the trade setup that's basically just like hey on each trade i want to risk this much equity of equity put it at risk correct that's it that's my pure dollar at risk yeah next um we now we need to determine how many contracts and like you know it drives me crazy when i see someone has a backtest model. It's one lot, one lot, one lot, one lot. Okay, I actually now know everything I need to know about you.

I mean, I've done it. Everyone's done it. And it's a real simple way of doing it. But that's not a very real world of you, is it? So let's take that $12,500 of notional risk. Let's figure out how many contracts you're going to trade. So ATR or average true range, I caused poor man's standard deep. So if you take the range from high to low of each trading day, and you stack them side by each and take an average of that,

basically the, the average true, true range, true range takes into account the possibility of, yeah. So, you know, just ignore that for the moment.

It's basically an ATR is what we can expect on any day from high to low, the range of the thing. Basically, what we can expect the thing to move. Now, occasionally, there's a catalyst or something. And we can also, by the way, call that N. N is what the turtles called the ATR. So 1N is what we would expect the thing to trade on any normal day. And of course, let's talk crude oil.

Most people know, right? So last 40 days, it's trading between 60 and $75. Yep. And on average, each day it moves a buck 50 from the high to high to the low. Let's say,

yeah, let's say a buck to keep the math easy. Yes. It moves a buck times $100. So that value of its range is $1,000. Correct. So what we would do is, let's put it this way. If you can't take one days of heat what are you even doing doing right trading this thing right like honestly if you can't take one day heat forget it you you belong elsewhere you should put all your money in voodoo right much less where that's where other guys are like if you can't take five times one day he correct some people risk five n right? So this is where you start thinking about this and like, yeah, this is where we get real with minutiae, right? So in this example where Crude has an N or a 20-day ATR of

$1, you say, when I get in, I'm going to risk $1 away. I'm going to put my stop, right? $12,500 divided by $1,000, which is the notional dollar risk of 1N, would give you 12 and a half contracts. Since you can't trade half contracts, see micro. Just stick with the bigs for now yeah so you would trade 12 contracts yeah or if it's 12.6 trade 13 that's a whole nother discussion but yeah maybe maybe now you're technically risking more than 12 000 exactly so do you write it up also this should be the important disclaimer a stop order doesn't necessarily right it. It could gap down, be limit down four days in a row. But this is important for people to understand about trend. That's not necessarily

a way to control risk, even though it does control risk. To me, the bigger power of it is that's what you do on crude oil. That's what you do on corn. That's what you do on cotton. That's what you do on corn that's what you do on cotton that's what you do on japanese yen so you've now normalized your risk across all those markets and if one right if your natural gas a little tamer these days but back in the day or palladium was always one right like you it'd be hard to get one contract even with five million dollars jgb right on palladium some of these contract sizes are very big and the true range is very big and you can't even get to one contract. You know, it's sometimes, so to speak, in extremes, right? Like if you have 50 nat gas on and one corn,

does it really matter what the grain market did today? Yeah, no. Right. You're just a nat gas trader at that point. You're not a diversified trend follower. That's right. You're turning apples and oranges and all into a common banana, right? Yeah. And it's more than just the risk side, right? So now that I've normalized the risk, I'm putting the same bet essentially. I've volatility, I've average true range adjusted all of these bets to be the same. Now, if there's a, we can talk outlier move, there's a six sigma move in corn. I make the same money if there's a six sigma move in yen, right? That's another side to it that people don't quite understand of like, it's to capture the same outlier profits when the outlier

moves happen in the different markets. You got to make sure every bet is the same bet and then you know there's another dirty little secret um as a pro tip um if it's exciting you're doing it wrong this stuff really life tip is that yeah not in the bedroom that doesn't work so it's um yeah it's boring i mean done correctly this stuff is super super boring and i mean what does it say about me that i have uh this high passion for something that's so boring right but you're not waking up in the middle of the night like holy shit we have so much yen exposure on like no yeah it's boring it's just doing it's doing what it's supposed to do yeah and i and i well as i was explaining before um when i was you know prop trading in you know early times um there would be times i would sleep with the computer on right in the bedroom like because i probably had too much on right yeah you can't that's probably had too much on, right? Yeah. You probably got too much on.

This is why trend followers don't make good podcast usually because they're talking. They can't talk. They don't care. What do you think about the end? I don't know. I don't care. It's all the same bet. That's what people don't understand. Why does this guy have no opinion on any of these markets?

I don't predict. It's all very boring. It doesn't make for a good copy. I'm the first to say that. Yeah. All right. So that's out there, 40-20. So people can go check it out. 40-20.

What is the number? Yeah, the number 40 in the number 20out.com. And we apply this simple, stupid model. I don't trade the 40-day breakout system okay i'll just share that tidbit it's it's perfectly reasonable it's a good place for people to like cut their teeth and begin their research but if you have a command of that you've probably retrained your mindset already because um there's a few things people do that are wrong they always they always want to be right okay that's probably the number one thing they want to be correct um trend following you're right maybe 34 percent of the time is a pretty good number and that's okay because hall of famer baseball that's right yeah you know

it lose one lose one lose one lose one lose one lose one lose one make five make 15 make 30 yeah keep doing that and um the numbers quickly add up so um which is another way of saying positive skew for all you matthews out there yeah correct and then um so that's one thing they always want to be right and you know this helps like after many observations um and you see how these things work probably they get bored and they move on is my guess isn't and we see that we have about 800 subscribers right now following the academic project and you know every day some people new people are coming in some people are exiting um but hopefully they pick something up in the process and like by the way the reason we're doing this is a better

informed investor it is a better investor and if we can help open people's eyes to how transfer only works, that's probably a win for everybody. But that's one thing they do. The other thing they do is they ignore the short side. And you think about water and the phases of water. It can be liquid, it can be a solid, or it can be a gas. When you think about taking a position in the market, it doesn't matter what market, you can be long, flat, or short. So trend following helps you to determine if I'm long, flat, or short. And that part's pretty easy. What's more interesting is the part we were talking about with the risk management and position sizing. And that part is a little more nuanced. But people tend to ignore the short side is another common mistake that

people have. Now, I'll say this. In some cases, I remember I was getting a short signal in ARK. And I use this as my prime broker for my own stuff. I have some accounts at Interactive Brokers and I tried to get short arc at what I would call the right time. Yeah. Hard to borrow, impossible. Couldn't get any. Yeah.

I'm like, you gotta be kidding me. Yeah. And I'm talking certainly less than a thousand shares. Okay. Yeah. Give me a break so um about a week later good news we got some you want it and i'm like not now and i'm like but i'm interested 20 juice get out of here yeah you know get out i eventually did put some on but um you know we the there's this theme of ergodicity where things can be any state at any time and some markets over the years

i've determined you just must treat differently than the futures markets that we know and love because we can freely get short. It's just as easy to get short as to get long. Not true in equities or cryptos. In equities, you need to locate a borrow. There could be a punitive loan attached to it. So I treat equities and cryptos a little bit differently for those reasons. Well, and that's probably why the biggest and the best trend followers in the world don't do single name equities

or crypto. Yeah, and the problem, you can't get freely short the cryptos either. I guess you could do CME's version. But most of these, I trade the cash only in cryptosism a lot of these big moves

are happening on the weekends you know at two in the morning and the cme is not open so i don't like that but um so i don't know where i was going with all that um i don't remember they so the 40 20 40 and 20 out so it's just out there. Like to me, so you have SockGen's trend indicator, similar. It's on a daily basis. That's a 20, 120 day moving average crossover system. Their trend indicator. Yeah, that's out there daily. Yeah.

And then there's another firm, I'm forgetting the name, is doing like 50 different trend models. And kind of doing, okay, here's the average across all these. I'll send you that name when I do. Oh, is that Max Kaiser? Yeah, maybe. In Monaco? No. Or Alex Kaiser?

I can't remember right now. But I've had talks with a beer company in Europe worried about aluminum hedgingging and they always get screwed because these trend followers are on it and they're like can you tell us what those guys are doing I'm like well yes but no like you can just run this simple model yeah oh my god I want to talk to them yeah I'll set up but there's real world applications for this stuff right of course and you know here's the thing like they should they should when it comes to hedging they need to know their hedge ratio and what they're comfortable with yeah of course their point is more and a lot of these are like every time we

go to hedge the floor gets pulled out or like weird stuff happens in the market because of these hedge funds they call oh like yeah yeah that's this guy it's again it's you against yourself yeah it did do some of your orders get you know bastardized and mistreated yeah but you know that's just a cost of doing business in my opinion you should build that into your model yeah what's more important point there if you could identify like hey these guys are all going to get stopped out at or right like 80 of them may get stopped out on a new 20 day low should we go hedge by like two ticks above the 20 day low maybe not right so there's there's some things there of like sure kind of don't place your orders right before a huge trend following industry driven stuff

happens i would agree with that yeah although i think that's overdone a lot of stuff what's the guy uh mcgillicud or something like uh right he's always out there in bloomberg and wall street turn up like ctas have driven the market this way and that way so i think some of that flow stuff is overdone that's just it's horse shit honestly yeah it's it's worry about your own stuff how about that all right so speaking of your own stuff so you said you don't use that what give us what the totem what's different with how you're working in? I mean, I would urge people to look at a longer look back window. And so it's kind of a trade off, right? The longer look back window, the higher the quality of signal and the less frequent of signal.

And I'm a big fan. I'm not over trading. But you also run the risk of leaving a lot on the table. So you've got to kind of try to spark a balance between boldness and humility. And I would, I think 40 days is a little too close. Certainly not something like a 20 day. And you've got to always understand there's going to be a lead lag relationship. So when 40 and 20 out is beating me, yeah, I'm a little pissed. Yeah. But that's just, you know, that's just life. I know why it's beating me.

And then when I'm beating it, I'm like, yeah, take that. Right. But I think, you know, there's no right and wrong answer. And I think if you can find there's no right and wrong answer. And I think if you can find greater diversification by overlaying multiple strategies, that's one of the things I've done. The other thing I've done over the 13 years. And what do you mean different strategies, different timeframes? So, yeah, I've got like a couple of, I've got two systems working in concert with each other and um one is a little bit of a quicker reacting the other one's a little bit slower

i just find like blending them together helps smooth things out for me a little bit i like it i it's it makes for an easier ride for me um then the other thing i've call it what it is okay like 2008 was awesome for trend following what people i think forget about it is like we're not supposed to talk numbers on the on the pod right but the first quarter was really good. If you stopped trading in April, it was a good year. And we were generally long all commodities, short dollar, long commodities, long stocks. It was a great trade in the first part of 2008. Then things went quiet, they went sideways,

and then they reversed. And that was even better. And it made for a fantastic 2008 so people you know we recollect 2008 we think about the crisis but we forget about the first part of the of the trade and when i was crewing for don you'll you'll you'll remember this the roll tack yeah yeah you know you get all the crew weight on one side of the boat. And then when you tack over, it's movable ballast. And the idea is to keep the boat speed up. Because if everyone just sat like a bump on the log, you'd come over, you'd bob there for a minute till the sails filled up,

and then you'd slowly start to regain your momentum. If you can use this movable ballast concept or roll tag then you get inertia working with you to keep the boat speed up and that's the theory so um i'll even go back to 97 on that then the tie bot blew up it got stronger immediately before it got decoupled so um and i i'll never forget that because like as a stupid trend follower i would have been long the bot right and then i would have a good trade there for about a week yeah and then i would have got stopped out of the bot and then i would have gone shit i'm your huckleberry i'll go the other way on the bot right and that turned into the good trade the and 22 is a lot like that in my opinion right like you had commodities drove the first part of the year and then short bonds drove the second part of the year and but the transition

was super smooth like a lot of these other years you're gonna have the gains a quarter where there's big losses as it transitions, and then maybe another quarter or two of gains. 22 seemed to be like this nice, smooth transition of commodities like, hey, we're out of steam. Here you go, bonds. You run with it now without that big, sharp drawdown, which was nice. Yeah. And so, like, trend following makes most of its money in short periods of high cross-market correlation. And we can actually measure this. We're publishing this thing on our site called the Totem Trend Index. And basically, that's my attempt to quantify, standardize, quantify the strength of market trend and i don't care which manager

you throw at me if i take a look at the monthly average of that um i can usually usually my opinion based on observation of running this on multiple managers yeah um i can usually tell you which months or show you the correlation between a high trend index and the months they're making money. And so the question would be, why not filter for that trend index and only put on risk when the trend index is at a certain level? And that's a great idea. And it's a notion that i've kind of implemented and that's one of my differentiators the rub is on jane on april it's too fast well we don't know you know on april uh what are we april 6th today we don't know at the end of the month what the thing's

going to be the average for the month we don't know that at this moment in time but you do it run it daily in theory right oh yeah no i run it every 10 seconds so i i can tell you um exactly where it is um and then you know so it's actually it's not a bad way to be um like we made we had a high trend index value the first quarter of last year. And it's been very quiet ever since. So like people ask me, what do you think? I go, I don't know. I'm very, not very motivated right now for the outlook for trend at this moment in time.

You know, it's obviously subject to change. And I am excited for the fourth quarter of general election years. So, I mean, I think you got a dog paddle for a while until things become more clear but we also know that uh 13 years of money printing is not good for trend it wasn't then and was that march 13th we've got a brand new four-letter acronym to worry about. Yeah. Which I've ignored it. I don't, what is it? BTFP.

Yeah. Which colloquially known as by the FN Ponzi. Yeah. Is how I'm remembering it, but you know, it shows right up in the central bank assets. Yeah. You,

you first showed me that chart long ago. Like track, what was it? Yeah, the growth of the central bank's balance sheet plotted inversely against drawdown in CTA and also the up move in the stock market. And that was Dimitri Alexei from alphabot he he gave a speech uh one time and we were out for lunch he showed me that i'm like dimitri you've got to amend this showing including the ecb because that explains the next tranche of pain like perfectly and it

is perfect and it's it makes perfect sense right They were on a spur people into risk-taking activities and they want to keep a lid on markets being what we would call fun, i.e. moving. that's a little too simplistic probably it made fewer bets right it made everything one big bet instead of a bunch of different separate bets right which we saw in 22 we saw in 08 like which is weird to say because you say when cross correlations rise trend as well but it's also does well when there's a bunch of separate bets paying off at the same time when oil is doing its own thing because russia is acting up when cotton's doing its own thing because there's a drought in the southeast when right like coco's doing something because there's a war in in wherever that is ivory coast so it's like you need all those different things to hit and for whatever reason when the central banks are acting in unison which is probably mainly because it made

the currencies one big trade. That put a lid on trend, not on their performance, let's say, but on their ability to access different bets. Preston Pyshko, Jr.: Yeah. I think that's a fair way of looking at it. And so here we are again with them actively in there. And those swap lines, bailing out Credit Suisse, Swiss National, I always keep a chart of SNB on standby because it's the world's biggest hedge fund. And the 98 crisis was about a hedge fund blowing up. Then 08 was about a money center bank blowing up. And there's a good argument to be had that the next crisis is one when a central bank blows up. And I didn don't even know no one knows

what that looks like but it probably ends with the introduction of a central bank digital currency around the sdr you know which is canes it's on canes's vision board dream board right yeah like this checks all the boxes um okay didn't they just announce yesterday the uh central bank coin or whatever oh yeah the problem is they kind of are really missing the point right like the point of of the bitcoin is a trustless network that's just verified by all willing participants and they want they want basically a secured sql server version right which they can they control but everyone can tap into i mean it's ridiculous they're completely missing the point on well i don't or they're too clever by

half they're not missing the point at all they want full control and they want to be able to see exactly what you spend your money on and be able to withhold taxes directly and things like that. They want their cake and eat it too. And you know, you hear like anecdotal evidence of like, like Walmart sales at midnight and one minute when the, when the benefits cards kick in and there's this big spike in sales and it's, you know,

baby formula and diapers and like if somebody's waiting till midnight and one minute it's because they need this stuff right yeah so um and then they don't pay their employees enough that they actually qualify for those ebts right exactly it's just it's cockamamie and it's frustrating. You mentioned some of these guys going astray and doing vol targeting. So I assume how you said that you think of that as a bad thing. Yeah, go dive into vol targeting for five minutes. I, you know, I personally think the vol of the portfolio, volatility of the portfolio is like a secondary reaction, right? Like, I don't think that's like your prime directive per se.

I think it describes what your portfolio is doing, but I don't think it's like should be your primary directive to target that per se i will say this um you know most trades don't get to like 100 and in profitability there's that end concept again yeah you know we we initially risk 1n or 120 to ATR, for example. So if you are up 1N, you're 1 to 1 reward to risk territory. If you're up 3N on the trade, you're 3.0, your profitability index or your reward to risk is three times. So if you are, say, 3 to five, most trades don't get into like 30 and in profits. Most trades don't get into 50. And so if you told me you took like, say 20% of your profits off the table, converted open trade equity into realized profits, reduced risk, starting at five to one, seven to one,

10 to one. I don't think that's a really, I don't think that's a bad idea. I hope you're getting out too soon because I hope it turns into a massive 120N winner. But face it, most trades don't get there. But you'll have not to put words in his mouth, but I think Jerry Parker would be like, no, that's antithetical to the whole point of trend following. You got to go for those 100 ends. He says that, and then he also doesn't say that. He says, but if you want to take some off, that's not the end of the world.

Piecemeal profit's not a bad thing. I don't know. He's kind of talking about that. But I think that it's weird. Those, I guess they go one in the hand, go together. But you could also have the case if you're just purely vol targeting that things happen outside that profit. And now you're getting out at 1.2N just because the volatility of the whole portfolio expanded and you want it to be in there at that 14 level or whatever you've targeted. Right.

And now you're forced to like, you're picking winners now, right? right right that's where the or locking in losers yeah right and you like you got out of the good thing too far too soon because this other stuff was getting ants in the in the pants i don't think that's a very smart idea i do think so i kind of look um i look at the overall portfolio. So I kind of, over the years, this is what I've come up with, is we need to pay attention to where we are personally in the drawdown cycle is first. And you say like, if we're making new highs, I want stuff, let it rip.

We're doing what we should, let things go. But let's say you're in a 10% drawdown or a 20% drawdown or God forbid, a 30% drawdown. You need to refit in a little bit. And let's say you treat 10 million like it's 8 million or even 5 million and then change nothing else. But you want to refit in by some factor like 0.8 or 0.5 or something like that to say, look, we're recognizing we want to be in business forever. And we're recognizing we're in kind of a bad state right now.

And we want to like refit in to, you know, put in in your main sheet, right? Put in a couple of reefs to weather the storm. So that's one aspect. Then the other aspect is where are we in terms of the trend index? Let's say, is this a good, favorable time for trend or isn't it? If it is, let them rip. If it's not, maybe we should put another reef in and say, let's just bobble along here and wait. When the time's right, let them have it.

That's what I've been doing. It's been working good. The goal has been to truncate left-hand losses at not a big cost to right-hand returns. That's the idea. We've seen that recently with some returns, right? With trends

having such a great last year and then getting gobsmacked recently. Yeah. That was going to be my next thing. So what are your thoughts on that? You just mentioned it, they came up with the new acronym and whether coincidentally or in your case, not like huge losses for trend. Some of the biggest two, three day losses I've was basically everyone was short the entire curve, twos, fives, tens, thirties, and the whole thing rallied. And, you know, they got smoked. It was too fast to get out for a lot of them. So anyway, what's your thoughts on what happened there? Is that a feature, a bug? Yeah. I mean, last year's Darling was, you know was this year's Heal, right? You had to be sure you're not a traitor. Yeah, right.

Okay, and you got to take your lumps and move on or you're not doing it right. Now, I didn't quite see it the same way with the 40 in, 20 out project. So I think many... Let's just go back to the Sock Gen trend indicator, which is a 20, 120 day moving average crossover system. What I like about that style of trade is it trades infrequently. And, you know, I'd rather make me money than my broker money. Sorry.

Yeah. But like, you know, call it what it is like trade less make more is always a good idea um so i do like that feature what i don't like about those systems that are always long or short is it doesn't allow for any periods of consolidation yeah you know and you like forming a basing pattern you know like it doesn't really allow for that. And during those periods, it can get chopped up a little bit or whipsawed. So I think a lot, if they state they're like something like 0.85 correlated to the SOC Gen CTA index, then I guess we can suppose many of the traders that are the constitute to um the constituents of the cta

indices do do a moving average crossover system i think i think the i'm actually surprised by this but i think the preponderance of cta trend is in moving average systems yeah which i'm floored by um yeah so it would be surprising to me as well i i i think um i think that's the case um which fine that's all right but they're also prone to deep drawdowns okay so they had these good trades on for a long time they're not getting out any day soon they have these sharp reversals to it, 8% down in a couple days trading, right? Which is neither,

you know, they had it to give from last year, right? Right. And that's the flip side of all this. If you made 30 and gave back 10, that's kind of

the bed you've slept in. That is trend following. Yeah, right. And that's fine. Now, compared to like the 40 in, 20 out model,

it didn't have, you wouldn't even notice those two days in the return stream. They were just, I mean, did it give back a lot of open trade equity? Yep. Did it get stopped out? Yep. Did it get chopped up? Yep. Yep. And yep. But you couldn't even tell from the return stream that anything was going on there that day. So yeah, I think that's just strategy specific. And I think it comes down to moving average crossover versus breakout trend following. And then our last bit I'll ask you about, there's been a bit of a movement to be like, hey, you know what, all this trend following stuff, cool, 80 markets, all these models. I think we can replicate it with a simplistic model with 10 markets. Drives me nuts. Okay. Drives me absolutely bonkers. I'm not going to use names here.

I think we all know who we're talking about. But I just have two simple observations. The same author, I was um i i remember this pretty clear it was it was must have been 2013 or 14 because it was five years or so after it was five years after 0809 fell off the like five-year return stream yeah Yeah. And we were at a CFA conference here in Chicago. And one of the speakers said that the old school trend followers made all of their alpha. You know, we don't even know what beta is, but go ahead and say they generated alpha because we still don't know what beta is because we don't really have an index right but he said that um all their returns were derived from the yield curve sitting

on like fully funded accounts and getting a five six percent yield and of course that was helpful right like nobody few people notionally funded accounts back then. I guess for your listeners, if you have a $2 million account size, you can either put $2 million in the accounts, which would be the preferred method, or you can do a related a group account and have some master account sitting somewhere that has a pile of money in it. And then you have an account that you're trading 2 million notionally, but it really has $0 in it. And any margin requirement is,

is, is sated by the master account. And so that's what people are doing these days you have a two million dollar account there's like zero dollars in it go get him kid yeah um so that doesn't exist anymore um that getting that extra five percent or three percent or one basis point kicker doesn't really exist anymore so he said that and i'm like you're you're, you're like, you believe this. He believed it. I'm like, show me the math. Cause that's preposterous. He's saying all these trades they're doing in silver and crude and this, you're saying none of that matters, none of it. And that's what he said.

And I'm like, I just, I that's incorrect. That's not right. So I already kind of had a, a beef with this one author. But then you go and you take a look and they've raised like a billion dollars. Yeah. The ETF, which is great. Yeah. It's great.

But on their old website, they replicate, they used to replicate 16 different things. Now you go to the site, they only have but two. So they've actually done trend following of sorts by no longer offering, I imagine, the other 14 things because they found the two things that actually worked. And if anything says trend following,

it's actually that, right? So, I mean, I think it's great. But I think people, you know, trading once a week using linear regression models, like, why don't they just subscribe to 40 and 20 out? I'll tell them exactly how many CTA trends should be positioned, right? Like, I can tell you minute by minute, but I'm not a big fan. I think the problem for managed futures and CTA and trend is, you know, if I need two and a half million minimum for my trading programs, you know, it'd be nice to be able to offer things in 50, a hundred K clips. But as you know, now you're talking about a fun product and those get very expensive

to administer. And if any problem is right now with the trend, it's like, give the investors an investment vehicle that they can use. And so I think they filled that niche. And then you see something like a 0.85 risk expense ratio for those things. But what you don't see are swap fees behind the scenes and all these other additional fees. Everything that is so transparent in the CTA, NFA regulated space. So there's a few things that drive me crazy. Good.

All right. We've got a long time.'ll leave it there any other thoughts um no you done i loved your your show brother and you you do you ask you know great questions you've had a great lineup of people um yeah um all right i'm not gonna tell you ask you to tell everyone where they can find you because it's plastered all over the screen for you listeners go to the youtube subscribe for our channel and you get to see all his stuff here the quiz the linkedin the name totemasset.com uh and we'll put all that in the show notes too all right buddy have a good one. Let's grab a beer here in Chicago sometime soon.

That's it for the pod. Thanks to Andrew. Thanks to RCM for sponsoring. Thanks to Jeff Berger for producing. Go check out Andrew's 4020 site and trend indicator. See it in the show notes. Go check out RCM's ranking paper, rcmalts.com slash rankings, and go subscribe to the pod.

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