Drawdowns, overtrading & learning from losses

Transcript

Andrew Swanscott 0:01: That's good timing, isn't it? Welcome to the trading panel. We were just laughing because Tom's gonna have some wood chipping happening in the background at some stage So let's hope we can get through the panel without that interfering too much. But welcome to the trading panel, the show where we get traders of all different backgrounds, experiences, and we join together, and we talk about trading in the market. So welcome, Jason.

It feels like we only just finished the last show, and we're here already.

Jason Kurz 0:28: Yeah. You know, like, it's it's honestly, it's great. This is one of the highlights of my week. I'm just excited to chat with all you guys again. You know, Andrew and I came up with this idea a while ago, and the idea was to bring on actual traders, people who really know the markets and talk to people who really, like, have money working in these markets, not just people speculating and talking about ideas of and stock picks.

So perfect person to have on for this show, which is Tom Vasso. You guys might know him from the Market Wizards books. I know Tom. He's been on my show many times. We've had lots of great conversations. I'm a futures trader as well. So we have lots of great conversations about the markets on there. If you guys check those out, please do. Just so glad to have Tom on here today. Tom, how are you? I'm doing great.

Tom Basso 1:15: Apologize for the wood chipping in the behind this wall here. But, once a year, get my trees pruned around the yard and I tried I'm very into landscaping and I'm enjoying what they're doing. I'm not gonna enjoy the noise behind me, but I hope I hope everybody can hear what I'm saying. I can hear you guys just fine.

Jason Kurz 1:36: Oh, we can hear you, Tom. You're you're you sound great. Pavel's back with us. Glad to see you again, Pavel. We missed you the last couple weeks.

Pavel Kýček 1:45: Glad glad to meet you. It's always pleasure to be here. Good to meet you, Pavel. Nice to meet you, Tom.

Jason Kurz 1:53: So, Tom, that we were talking the other day and the one thing you mentioned, which is something we should talk about, which is risk management. You know? As you mentioned before, it's one of the most important things in trading. You know, how are you looking at the markets right now? You know, I know you you're you're a systematic trader. So how many I also like the way the inter the information you put out.

So how many ETFs are long right now in your portfolio? How many are going to the short side? Could you give us a little glint glimpse into your portfolio?

Tom Basso 2:23: Yeah, as of this morning, I track 30 different sectors of ETFs. And those are running 29 out of 30 long right now. But let's let's be clear that my indicator to kick out of those instruments is based on a fifty day period. So, there's quite a bit of room still for a little pullback, know, an 810% pullback, and then it keeps going. I don't really bent out of shape on those positions. So it's clearly a bull market. I mean, everybody knows that.

Everybody talks about it on Twitter. It's clearly been strong. Momentum plays keep coming up and everybody's, Nvidia and everything else making lots of money. I'm in retirement. I am trying to be very consistent. The All Weather Trader book that I wrote, the blue thing over my head there. I'm trying to be very diversified.

I'm trying to look at different time periods, different markets and make sure that I have a chance at many, many return streams. Well, when you do that, what you find happening is you stabilize returns. And so even when the market starts caving in like it is, last two days, it had some weak spots there. I guess it was rallying last I looked today. But, that kind of weakness will kick off some shorter term indicators.

So really short term traders could take advantage maybe of a of a free fall for a while. I trade a lot of time periods. So I've got some stuff that just went short, I got stuff that is still long. And so it sort of takes me to a bit more of a neutral position, which maybe is a good place to be given, maybe the market doesn't know which way it wants to go right now.

Maybe it's topping, maybe it isn't, but it could be sideways while it decides and I'm happy to be sort of lightened up on my exposure while it while it makes up its mind. So that's kind of the way I look at it. But you clearly got some big volatility. You got to watch your position sizes. I have been into the rally.

I've been continually getting risk management and volatility management kickoff trades where I take a position and I maybe peel off 2% of the position or 3% or 5% or whatever. And so my position sizes now in a more volatile environment are smaller than they were when we started way back when.

And things like cocoa, which in the future sense of things has just been like an f 35 taking off after a Chinese spy balloon, straight up and ready to go crazy. You know, it's pretty scary trying to move stops up in a market that is like that. But I've been doing it. And just recently, some of the indicators are finally catching up to the market, the markets kind of going sideways. And I just this morning, went slightly short on cocoa.

So we'll see whether that works out or not. But, it could be a whipsaw could make new highs next week or, or even tomorrow. So I don't know. What you try to do is you look at you let the market tell you what you should do. Let the volatility be whatever it is, and let your indicators and your strategy change with that and adjust what you're doing on the fly. Think that's the easiest way to trade.

Jason Kurz 6:16: No. I love that. And I think it's incredibly important, like you said, one thing that I hope people pulled out from that, which is I don't get too bent out of shape about, all these sectors being long and some flipping short. Like, that's that's how you real trading works. Real trading isn't this thing where we're constantly speculating on what could be or what is. It's it's really, hey. Do I have the probabilities on my side? Here we go. Okay.

Great. Oh, that worked out. That didn't work out. Okay. Well, I take my risk management here. Here's where my stop is. Here's the positive expectancy from my systems. So I guess that's another thing to bring up, Tom. You know, if you're looking at these trades and you're looking at all these markets and you've been doing this all these years, how important is risk management to you?

Obviously, we most of us up here know how important it is, but say it like you're saying it to some of the new traders because there's a lot of new traders who listen to this.

Tom Basso 7:12: Okay, well, I've been doing this fifty years now. And part of your problem as a trader in any day, whether you're fifty years in or one day in, is to survive to trade another day. So I think your attitude should always be as a trader to stay in the game. You want to be exposed to risk because positive risk is the risk of return. Negative risk, of course, the risk of losing money.

And to me, it makes sense to manage that negative risk as good as you can figure out how to do it. And then let the returns be what they are. A lot of traders seem to set their objective as I want to make 200% because I want to retire next year. And that's what's required for me to retire or I have to live off the money. And I've only got $30,000 and I need to make $30,000 to live.

So you end up with this quandary of our challenge of making 100% a year just to make your bills be paid. And that's way too much pressure and kind of very flawed thinking, you're going to put yourself in harm's way, you might not make it to your second year.

The the easier way to do it is to say the markets will provide along the way big moves like cocoa or like the stock market has recently, bond market when Fed was raising interest rates to the short side, of course, sometimes some big currency moves. Orange juice earlier in last year had some massive moves.

So just some strange markets that make moves, you want to be positioned for those because you make so much money off of them that they produce your returns for the year. But if the markets don't have a move, then there really isn't a whole lot of profits to be had, is there? It's up to the market to provide those potential profits.

And it's your job as a trader to capture them and go along for the ride while managing that negative risk so that you can keep playing the game for fifty years. And it keep exploiting those things as they come along. And you end up with, decent years year after year. Do you have some missteps along the way or a little drawdowns here and there? Sure.

After as many drawdowns as I've been through in my lifetime, I it's kind of about as easy as breathing, but it's what trading is all about, you got to have the psychology to be able to handle that and realize that the long term is, there's going to be some drawdowns, there's going to be some draw ups, if you want to call them that are surges and you're going to make new equity highs. And that's both part of the game.

It's like breathing in and breathing out. You can't just breathe in, even though that gives you a lot of oxygen, you got to breathe out so you can get your next breath in sort of the same thing with trading.

Andrew Swanscott 10:11: Yeah. Really like how you focus there on your attitude as a trader is to always stay in the game. That last comment you made about drawdown, well, it is a big part of trading. How do you develop the psychology to be able to handle drawdowns, especially if you're kind of a trader more early on in your journey and you've got to develop that skill? How can traders build that skill up?

Yeah, and it's a it's a skill that probably applies to life in general, not reading,

Tom Basso 10:42: but it starts with a certain amount of self confidence or self esteem. If you don't have a good feeling about yourself, and who you are, and your strengths and talents and what you can handle, the markets will find your weakness and point them out to you in vicious fashion sometimes. And so what ends up happening is first thing is to try to be have good constant confidence and self esteem.

Second thing is you need to have an awareness that you're being manipulated by the market. So a lot of people will go through and now they see a big profit coming in. And all of a sudden, they're getting itchy to take the profit because they're looking at their screen and they're saying the market's looking a little toppy and maybe I should sell half my position, even though it has nothing to do with their strategy.

They go ahead and do it anyway.

And they aren't aware that they're deviating from their strategy. So awareness becomes very important in any way that you can get books exercises on awareness and try to be aware of what's going through your body and your mind at all times, so that you can put yourself back on track if you find that you're starting to deviate. You know, you're you're somebody tells you a hot tip on a stock that's going to, go crazy tomorrow.

Okay, is that your strategy? Should you be aware that you're all of a sudden, excited about this stock, and you were just about to buy it? But wait, says, that's not my strategy. And discipline comes in then and says, okay, let's get back on track, do the strategy. That's not my strategy, ignore it, move on. And so that's, that's kind of that.

And then the final piece of advice I'd give you would be one that I it's a trick I use when I'm in a drawdown. And it's probably something you can do better after fifty years than after say six months. But I've been through so many drawdowns, so many equity highs that when I'm in a drawdown, I just remember some of those times when I was hitting new equity highs.

And when I'm in new equity highs, I'm remembering all those times I was in a drawdown. And it sort of just balances you out so that it's just another day of trading and you you kinda get a little bit more mister Serenity trying to even things out.

Pavel Kýček 13:19: But Yeah. I think if I can, because the last advice was very strong in my opinion, but even new traders can stick with it, especially if they are systematic or algorithmic traders. This is what I'm sometimes doing if some strategies, some single strategies on some maximum drawdown on or so. You can always get back to the data.

You can always, like, look in back to your tests, looking at periods when the strategy is having the drawdown compared to the past data, compared to similar periods in the history, and if this drawdown was happening too. So I think analysis helps a lot here, especially for systematic traders.

Andrew Swanscott 14:07: I think as well, excuse me, especially for algorithmic traders that have the ability to test their strategies and spit it out on a nice looking chart. They might look at it over ten years or fifteen years and the draw downs look like the little blips and they're like, this is great, I can handle this.

But when you're actually trading through that period yourself and you're opening up your trading account every day and you're seeing some losses, it's really a very different experience. And I remember I was speaking to, I think it might've been Nick Rudge on one of my podcast episodes years ago. And he said a good trick is to look at the equity curves of some of the great hedge funds or trend followers and take a look at the long term returns,

but then zoom in on the draw downs, like really look at them in like a fine, going over it with a fine tooth. And you can really get a better understanding that, a lot of times or depending on how you trade, most of the time you're gonna be in drawdown. It's like new equity highs don't happen that often. Sorry, I'm losing my voice today, I think.

So you really need to be comfortable with drawdown because a lot of the time you're going to be in drawdown for your trading career. I don't know if anyone's done any studies on how long that is, but I have

Tom Basso 15:30: a story on that topic. Peter Lynch, very famous money manager at Fidelity Magellan way back in my earlier years, maybe before Jason was born, probably. The he had this Magellan and it was over the last ten years at the time of the study, a couple of interesting things came out of it. First, he was number one in his performance. That's why he was so famous.

Number two, he had suffered a 50% drawdown along the way to that number one performance, which I would say that most investors couldn't possibly handle. By the time they're down 50%, they've already bailed and they're on to something else. And the third thing was a study that was done based on the amount of assets under management, tracked each day based on the NAV and dollars in dollars out.

The study showed that the average investor over that same time period that Peter was number one actually lost money investing in Fidelity Magellan. Now you think about that, that's got to be really hard to do. You got to have horrific timing. You got to be buying it when he's making new highs and selling it down at the bottom of the drawdowns.

But that's the reality that we live in as money managers, that I was over, what, twenty eight years of my life. Now, the last twenty, I'm money manager for myself, which is a whole lot more fun. And clients and typical, and I even say some retail traders, do not understand how they fight themselves by putting money in or chasing a great idea or whatever, some kind of trading strategy that appears to be doing just spectacular this last year.

Well, next year might be its Achilles heel. It doesn't mean the strategy is flawed. It means you haven't really thought through all the good and bad of every type of method of trading. And it's one of the reasons why I have some short term indicators and I have some longer term and I have futures and I have ETFs on the equity side. So I'm I'm playing in a lot of games. At any one time, one of those hopefully is pulling the cart. You know?

I got a team of horses. And at any one day, a different horse takes over the workload and tries to pull the cart.

Pavel Kýček 18:10: I've made those tests, like time in drawdown per strategy and per portfolio. Based on the strategy, rent struts can be in drawdown up to 95% of the time. Mean reversion struts slightly slightly lower and well balanced portfolio. For example, our portfolio of 15 strategies and the dozens of trades in one time is in a drawdown of 90%, 88 to 90% of the time.

So and by drawdown, every day when the strategy or the equity, the overall equity is not creating the new all time highs. So, really every trader should expect that at least 90% of the time he will be in some kind of drawdown. So, yeah, being in drawdown is like,

Tom Basso 19:00: it's normal, I would say. It's it's very normal. And I find the same thing. It's a very high percentage of days in some drawdown. But if you can keep the drawdown low, like if you're the only down 10%, you only have to make back 11% from there to get back to breakeven and make new highs. That's a lot easier than going down 50 and then having to make back 100 to get back to new highs. So I'm pretty careful to try to keep those drawdowns minimized.

That that makes my life a little bit more serene in retirement, particularly.

Jason Kurz 19:34: I think that's an incredibly important thing to talk about too is like the stress levels of your trading. Like, if you can't handle and I think you said this on a podcast we were on, Tom, one time where we were talking about trading and people day trading, and it's like, well, you have to match your personality with it.

If you do not have a plan or a strategy to, let's say, pick up your kids from school during your trading day, like, you haven't thought through your trading day enough. And so let's walk through a little bit of that because I love the way you put that. I love the way you talked about it in Market Wizards. You know, when you're talking about walking through these strategies, like walking through the worst case scenarios, how do you do that?

Like, let's talk about it today. Alright. Walking into your tray I mean, it's your personal account these days, so it's not as hard as handling the client money, but it's still stressful. Nobody likes losing money. So how do you mentally prepare these days for Well and, like like you said, expectations?

Tom Basso 20:32: Yeah. Today's just the opposite yesterday. Today, I'm having a really highly profitable day. Yesterday was one of my larger losing days because I was coming off the top on the stock market, coming off the top on cocoa, there was a lot of long term trends that were being reversed, but they hadn't yet got to any kind of stop points. So you take a fairly good chunk of loss in terms of equity going down.

And today it reverses and does some of the positions are actually reversing. So they're picking up profits in those markets that are continuing down, let's say. And then the ones that are reversing and going back to the upside like cryptos earlier I thought, they start moving in the profitable side. So you start building up profits from the new trend starting and a reversal in the back to the normal trend on some of the issues.

And what you find happening is when you, try to manage risk and you try to look at say sixty, sixty five positions on my screens, I'm going to have green and red every day. There's never a day that I come look at my screen and it's all green. That's almost impossible if you think about it. There's just too many markets, too many individual fundamental stories that are gonna, be out of whack with others. That's the point of diversification.

And I think that's the mentality you want to take on is liken it to being a conductor in an orchestra or something. I'm the conductor and there's 60 different people in my orchestra. And right now, the softs in the commodities are going through a struggle. But over here, the currencies are sounding beautiful. I'm just trying to make the whole I'm trying to get through the piece and make sure we get to the end and hopefully the audience is happy.

You know, I think that trying to agonize over anyone and focusing in on that tends to get your mentality in emotions and all that into what am I doing here and what is going to happen. Predictions are the worst. You start predicting and that just gets your ego involved in this. Like, cocoa is going to go down now. I don't know if it's going to go down or not. It's been going up.

I've enjoyed that ride, but if it turns out, it goes down, I'll enjoy that ride too. I don't really care. And I don't have any opinion on cocoa. And I think that keeps me from being in a constant state of angst over whether my prediction on cocoa is good or bad. And I think that's better mentality for trading than to try to be constantly predicting about this stock with that earnings.

And I think they're going to beat expectations and I'm worried about their car production. And gosh, you can go down a rabbit hole with all that stuff and you'll you'll have a very long day. And I don't know that you'll trade any better than keeping it simple.

Jason Kurz 23:48: Love that because I think that's an incredibly important thing that so many people pass up because they think when you think of a trader, you think of a fund. Know, I know my clients give me money and they think I sit in a room and I come up with some huge idea and I put all my money on blank and hope it goes up. And that's the furthest thing from the truth. And so, really what our job is to put the probabilities on our side, manage the risk.

That's really what we do. So I think, the idea that you have of just like managing your expectations, understanding that like, hey, we're not just gonna do look for these huge things to happen or expect this to happen because blank happened because we can't know those things. Because the price could go, like, for example, we could have the fed talk about cutting and the market could go down.

You know, you never know what exactly how the market's gonna react to things. So another thing to get into because of that subject is, you being a trader, what got you interested in instead of going the normal route, especially at that time, the route of fundamentals and valuations and so on, and you go the other route and you go into this trend following thing. How exactly did you become a trend follower and why was that attractive to you?

Tom Basso 25:06: That came down to a very fateful lunch I was having with a bunch of other engineers who were all trying to figure out the stock market at the same time. And I was one of the younger, kids at the table. We had guys that were in their fifties at the table working in my department as a chemical engineer.

And we'd all get together and talk investments during lunch just to kill the time and enjoy ourselves for whatever forty five minutes and then go back to work. And one of the older guys made an observation. He said, Tom, I can't help but think we sit here every day and we talk about all these different stocks and the fundamentals, and we read all these newsletters and reports, and we try to understand what we should be doing.

But we're doing this for like a half an hour a day at lunch. There are Wall Street guys that work twelve hours a day and have access to research departments and all these reports. And what makes us think that we can beat them at that game? And I thought, wow, that is pretty, pretty impressive. And, he's probably right. I don't know that I can beat him at that game. However, smaller traders, retail traders,

and even up to my size and trading millions of my own money, you even at that size, when you compare yourself to BlackRock or something with and hundreds of billions of dollars, I am miniscule in the market. Nobody cares what Tom's doing. They could say they do, but I'm not material to what I'm not going to move any market that I'm involved in.

So when you start taking on that attitude, you actually, as a retail investor or trader, have an advantage over the big guys. A BlackRock or Fidelity or Vanguard, when they're moving money, they gotta move it over days. It's very hard work. They're moving, a 100,000,000 into this position or a billion into that position.

They got to work it and work it and work it and work it and not tip the market off that they're trying to move in or out of the position. It's it's difficult to do. And having been a money manager, not as big as those guys, but I, in some markets, I face the prospects of having a little bit of illiquidity and you have to, work at it. And, at this point I'm thinking to myself, I don't have any of those difficulties. I can use stop orders.

I can dance in and out. I can move a lot quicker than they can. And that's my advantage. So if a retail trader wants to exploit their advantages, it would be to use their small size and their ability to move quickly and just measure the way the market's going. And the markets will tip-off with what the institutions or the big money is doing because they'll start a trend. And that trend sometimes will, continue.

And if you nail it, you can make a lot of money off of those. And your your important your thing to do in that regard is to be quick and decisive and have a strategy and just execute that strategy flawlessly day after day. And you'll be on an every major trend that comes down the pike up or down if you haven't structured that way. And that'll pave the way for profits over the long run.

Jason Kurz 28:40: Yes. Completely agree. I think that's, it's it's the game we're playing. That's the most important part of it.

So getting back to it, Tom, all these all the time of you going through trading, can you talk about a time where you had to basically understand something crazy happened, like, in the world and you come into your office and, the markets let's say, some of the markets you're in are crashing, something's going against you, maybe you're even stuck in something, it's too illiquid to even get out of.

And you've already mentally planned for this and you were able to execute and be okay because of it.

Tom Basso 29:24: I can think of a couple of different things. When some of the agricultural markets or soft markets in futures would go limit down against you and your limit, you're actually long the position. I actually didn't love those days because you can't do anything and your your stuff's not getting hit. So hopefully you've sized your position.

Hopefully you've got profits coming in other markets because you're not just trading that one market, you're trading in my case back in the day, was trading about 75, 80 markets. So in future. So and then I was trading another 30. This is pre euro. I'm that old. So back in, you're back in '97 and all that before the euro even came in being, I'm trading 30 currency pairs. So I've got lots of things going on.

So, when the market going limit down, would try to console myself with the fact mentally that I've got lots of other things that are also probably at the same time making a bunch of money. Because one thing going limit down makes maybe another market skittish the other way. Maybe it goes up. Maybe it's a bond market worried about inflation or deflation or who knows? So you're making money in different places. That's one thing that comes to mind.

The other one was the famous one that I talked about with the oil trade during the first Iraq war. I went, had a computer problem About five o'clock at night, I tell Dave in the computer department, hey, let's knock off and grab a bite to eat. So I went across the street, got some Chinese, and we were sitting there just relaxing because we couldn't figure out the problem.

And then, about 08:00 at night, we finally figure it out and, we get the orders set for the day late, but better late than never. And we call to make sure they've been received. We're all set. We can go home and go to bed. So just on whim on the way out the door, I pull up our screens and see how we're doing and oil were long going into the close and it's now up from $32 to $40 a barrel, which is a huge move back in those days.

And, I'm trading hundreds of millions of dollars of futures portfolios at that point. So this is like multimillion dollar profit I'm looking at. I'm thinking, woah, tomorrow ought to be an interesting day. Little did I know, I wake up in the morning and I go in. The first thing my head trader says to me is, Tom, oil went from 32 to 40 overnight, and it's now trading at 22. Oh my God, that is a bad day.

We're down across all the portfolios somewhere in the neighborhood of, I think it was around 6% in one day due to that one position. So the other positions did not clearly make up for, the amount of movement in oil. And it was basically we started, Bush one, starts invading Iraq because of their incursions on Kuwait. So presumably, we're helping out Kuwait and we we start rolling down the highway towards, is it Baghdad, I guess, or whatever.

You know, the air support and the tanks, they're not meeting any opposition. So basically, the war is over by the time morning rolls around. And, so all of a sudden, oil is just plummeting. Nobody nobody's worried about it anymore. And, we made new equity highs within the next two months. It was no big deal. But that one day, man, you have to just kind of say to yourself, okay, we're now flat oil, in some very, very large accounts.

We actually went short. If they could afford that amount of risk level, the risk level is so humongous. Most accounts couldn't even afford even one contract. So we are essentially flat oil. Let it settle down, let it break out to the upside again, go long, make money back, be in the middle of bond markets and stock markets and other things that were moving. And, you quickly recover and you make new highs.

So no big deal in the end, but, yeah, it's, woah, you got to be in charge of your own mental case to stay cool. And when clients call and are all worried about oil, you just tell them the story and you, you stay with the same story over and over again, repeat it over and over again. They won't listen to what you're saying, but they'll they'll listen to it that moment.

And hopefully you keep them as a client, you move on and, just keep doing what you're doing.

Jason Kurz 34:26: I always love that story. It's, you explain it here. You've explained it in Market Wizard, and know a lot of people haven't heard it before on here. So I'm glad other people have commented and said they really enjoyed that as well, because I think it's important to manage ourselves in our own mental health. So I guess something that's also a great question to ask you for new traders out there, what do you do to kind of, outside of trading?

You know, how do you keep yourselves mister Serenity, for example? You know, how do you keep yourself so serene,

Tom Basso 34:59: so you're not reacting to these things? Well, some of the things behind me are, really stupid trophies of golf. I mean, there are some of them are one of them up here I have is a joke. I showed up to the first tee for a senior club championship, and I wanted to play the, a specific tee set. And my handicap's like fourteen, thirteen these days. So I'm not I'm never gonna threaten the, the club championship, the scratch guy.

And, but there was a flight that was handicapped, it was appropriate for my age. And I thought, I'll go ahead and sign up for that one. I show up on the first tee, and the golf pro is sitting there and said, well, mister Basso, I have good news and bad news. Okay. What's the good news?

Well, the good news is you are going to win the senior club championship in this flight, which is one of those trophies behind me, because nobody else signed up for it. So the bad news is you're not gonna have anybody to play with. So we're putting you in another guy. We got one of the pros from, the club, and they're just going to play with you and you're going to have a good time with them.

But you either choose to play or we could just declare you the winner and you can take the weekend off if you want. But that's the kind of thing I try to get out on the golf course as much as possible and it hasn't been easy with this remodel, trying to build all this stuff behind me and get everything, to the point where I have my own, kind of studio office here.

But it's been a labor of love seeing it come together and it's been very physically and mentally difficult to move in. But, now that I am in and enjoying living here, it's been a blast. I think this great is a great house and I'm looking forward to living here many years. And so I get involved in a lot of projects. I do golf. I love my landscaping.

One of the reasons why I have the tree pruners making noise out here with the chipper, is they just are finishing up the backyard. And My trees even look gorgeous. My landscaping at the new house here, I ripped out 90 plants that were inappropriate.

I custom designed myself after having taken landscape architecture courses on a CADCAM, I put together my own landscaping scheme and installed it last October, 170 new plants, a whole new irrigation system, and a new controller and everything. So I have a state of the art landscaping system and I do all my own pruning. So if I am bored and the markets aren't doing much, I have no interviews to do.

I'll just grab my pruning shears and put on my gloves and, get a good hat, a hat with some sunblock on and I'll go out and play in my garden. You got to do other things. I mean, trading is way too intense. These guys that spend twelve hours a day in front of a screen, I feel sorry for them. That wouldn't seem like fun to me. And, so I, I try to minimize everything I do down to the bare essentials.

I've got it down to about forty minutes right now.

I'd like to get it down to fifteen or less a day that I have to worry about, doing some trading stuff and update my stops. Once I'm done, I'm done. I turn the computer off. If I've got my emails answered, no interviews coming up, I'll go out and go shop for something that we need at the house or I'll, I've got a what we call a junk drawer. When I get done with this interview, I'm going to go into the pantry and install what I call a junk drawer.

And that's that's the drawer that everybody has in their kitchen that collects all the junk that you can't figure out what else to do with it. You stick it in the junk drawer. You got pens in there. You got an odd screwdriver that you might have not put away in your toolbox. You got recipes that you did three months ago are in there. You got rubber bands, paper clips. That's the junk drawer. I'm installing it in about another hour.

So I do stuff like that. It's it's fun.

Jason Kurz 39:37: I love it because, once there might be people listening and being like, oh, well, what's does that have to do with trading? It has everything to do with trading because it's it's honestly the most important thing. I also am in my garden all the time. I hang out with my bees. Don't get me started on the bee thing. But, once again, it's a when you're in that zone, like, you're just looking at your screen, like, you're gonna miss so much.

It's kind of like what people say when you're so focused on something, you miss life. You know, like life can just pass you by. So it's like it's very important to kind of be able to take yourself out of it and then come back to a screen. You know, if you're always staring at the problem head on, you're gonna miss it. I also think a lot of traders

Tom Basso 40:23: literally would put that title. You know, you're at a cocktail party. What do you do? I'm a trader. If you ask me that question, I don't know how I'm going to answer it. What do you do? I'd say I'm retired. I am the busiest retired guy you've ever met. I make wine. I'm out in the yard all the time. I take trips. I do some trading for like forty minutes a day. I love to cook. I we have a brand new beautiful kitchen.

This has got state of the art everything in it. And, I'm still trying to learn some of the equipment, but it's a lot of fun to go into the kitchen and just design a meal from scratch and be able to make it. And I think too many people spend a lot of time going out to fast food restaurants and their health is suffering because of it.

But to me, I can cook healthy stuff and have fun doing it and turn on some tunes and look out my windows and back in the kitchen and enjoy the view of the gardens. You know, what's wrong with that? And it gets me away. And sometimes I'm thinking about an idea that I saw or I heard or a question that somebody like you asked me that's thought provoking and it triggers me in that kind of mental relaxation to say, hey.

You know, I could incorporate that as an eleventh strategy, except I'm gonna do this to it and make it my own and try to figure out how I can get that to work into my suite of, various strategies. And I think if you if you're just sitting there banging it away on the computer, it's it's hard for new ideas to come in because you're just getting overly stimulated with green and red candles going up and down the page and it's overwhelming.

Andrew Swanscott 42:20: Tom, I think you just touched on a really important point there. There's been a lot of studies about how the mind works and how the brain processes information. And you do actually have to step away from these things and let it just absorb into your brain.

And I don't know about you, but I often get a lot of my best ideas when I'm not even thinking about stuff like I'm out riding my bike or walking through the bush and I was just like this is a good idea. It just pops in because your brain needs time to process, synthesize and come up with these new ideas. You almost want to stop writing and go grab a piece of paper or your phone and make a note because you don't want to forget it.

Especially when you're 71 years old, you might forget it. So you, you try to get those things written down as quick as possible. I usually pull out a word document. I just everything

Tom Basso 43:09: that comes into my brain, I'm writing it down, trying to make sure I capture it all so I can go look at it later.

Andrew Swanscott 43:16: Yeah. So I think it's important to reframe that time away from the markets as as development time. It's really you you are becoming better as a trader by not looking at the red and green bars all the time. So if if traders because I know when I was when I started trading all I did was trading like twelve or fourteen hours a day and then I had to work which got in the way and it was it was completely like non stop trading.

And over time you realise that's well it's not sustainable physically but also it's better for you to step away. So I think you touched on a great point, Tom. Thanks. Plus, plus I think that there are two different things. First is

Pavel Kýček 43:55: looking at the charts and another is being skilled in trading. And sometimes this is not connected at all. Sometimes people are just staring at their screens and they're they're thinking that they are learning something which is not not often the case.

So that's why making proper tests, proper research, for example, how I'm thinking about problems, trading problems in general is that I'm heavily in data, I'm making my research and so on and then I'm going out like hiking. This is my most, like the funniest approach how to process these ideas, like many hours in front of data and then going out and that this is how I'm basically approaching it.

But really looking at charts, usually it's not being a better doesn't mean being a better trader, which is often a mistake many beginner traders are are doing. Even myself, I was in it also for quite a few years. So

Jason Kurz 45:02: Great. I love that's this is part of a conversation. I just was talking to a person recently. You know, I was talking about he was asking about systematic trading and all this stuff, and I said, I put up all these videos. And he's like, well, I don't have time to do that. And I was like, okay. Well, here's a website. Well, I don't have time to do that. I was like, well, what are you doing to learn how to trade?

And he said, well, I'm sitting there. I'm staring at the charts every day. I'm understanding price action. I'm like, that's not gonna help you understand price action. And, like, it's it's something that I think people don't understand about our brains, which is our brains are gonna make up what we really want to see. Like, if we think we really believe, like, seasonality wise, let's say April is a great month for stocks usually.

But if you didn't, like, really look at it seasonally speaking, you might not really know that just by looking at the charts every year. You know, like you really need to figure out a way to quantify things and a way to turn it into a systematic strategy that you can do again and again and again, staring at a chart and saying, hey, I see this pattern sometimes and I'm gonna buy it. That doesn't help you do anything.

So I'm glad this was brought up because this has come up so many people are like, would stare at the chart all day. And like, that's, that sounds like I would lose my mind and never want to trade again, really. I've actually done a study with actual traders. It was

Tom Basso 46:22: back in the days of Van Tharpe who's no longer with us, of course. The great trading psychologist that was in the first market wizards. He would have me come as a sort of stereotypical trader or something. Don't know what he called me. Not the ideal trader or something like model trader or something. That was my role. Some days I would sit and ask.

I would do a sort presentation on risk management, on position sizing, and I would answer questions for hours. People would just keep peppering me with questions. And so one of the sessions I did, I actually took charts, and I went back in history and found interesting points that might be a bottoming. It might be a topping. It might be a market that was, going crazy and was about ready to go into a two year sideways.

And I would chop the chart off conveniently right before whatever it was that was going to happen. And then I would, and I had like 10 of these. And I had everybody pull out a sheet of paper and pick up, down, sideways for all of these 10 charts I was going to show them. Then I went back after everybody, got done with the exam, and we went through, and I totaled up on a chalkboard, whiteboard. Okay. Okay.

Example one, what's how many people thought it was gonna go up? You know, and I get the show of hands, count them, and we did votes. It was completely random. People had no idea what was gonna come next. So when you really examine your own ability to look at price action and try to derive something brilliant out of it, hey, maybe you know more than I do, but,

and the simple tests that I've done of actual traders, there's no patterns, no doubles, double tops, head and shoulders, all those things. They're all good and fine. If they work for you, great. But, in reality, somebody spots a head and shoulders and decides it's going to break down and instead it makes new highs. You know, it just didn't pan out when I did the studies of actual traders doing this.

And so I think that if you think instead of charts that you're looking at, when you look at a screen, if you could imagine that instead of that being a chart, it's data. It's nothing more than an open high low close of a period of your designation over a period of time of your designation, but it's really data.

And the price data is created by a seller and a buyer coming together and agreeing to a specific price and a trade gets It's nothing more than that. Don't try to make it profoundly interesting because that's all it is. To buyer and seller come together, you get a trade, you get a piece of volume for the volume chart.

And when you add all this stuff up and do a pictorial representation of it, it becomes a green bar or a candle that's red or whatever. It's still just data. And when you start minimizing what you're looking at down to data, maybe it becomes a little less important in your brain and you start realizing, I just need to filter all this data and try to decide, is it going up or is it going down? How should I react to it and just do it?

And get rid of this this, concept of I'm gonna be so smart and see this, testing of the double. Good example of how we fooled a lot of traders. COVID, what happened? Crash. Stock market hit the skids. It was going down so fast. Everybody's predicting the world's coming to an end. We're all gonna die. It's it's on the evening news. The death certificates are down in the lower, corner being updated live.

So you can see how many people died while you're watching the evening news. You know? And so that's the mentality. So when the stock market's going down, so the thing turns, I start getting some indicators to the upside going over. So I'm buying and I'm watching Twitter and everybody says, no, it's too early to buy. It's got to test the bottom. It's got to test the lows. You got to prove that it can hold and all that stuff.

Well, it never tested the lows. It went straight up. I had a 103% return for the year. My average years, 2030 would be a wonderful year for me. A 100 is completely off my charts. That's the best return I've had in my life in my own portfolio. It's not because I'm any different or I was smarter or I read the charts appropriately or anything. It's that I just followed my dumb strategy. And when the indicators went over, I went along.

Everybody that were waiting for the right chart pattern or whatever, it never showed up. They missed out on the entire rally. They probably pulled the trigger when they got too much heat going into the downslide. They probably a lot of CTAs, professional CTAs. I can't believe they'd still have clients pulled the plug on their program and said, this is too insane. We're not going to trade. They went to cash. I just kept doing what I do.

I did then what I'm doing today. I do have like a couple more strategies today because I've been developing things and continuing to try to improve. But basically I'm doing the same thing I've always done. I'm using the same risk controls. I'm using the same position sizing. Some years, like I think I the other day I looked, I was up about 10% on my all weather portfolio so far this year through about three months. You know, that's a decent year.

It's not the hundred and three percent of COVID and it I would be really surprised if I ever have another hundred and three percent year in my life. But the markets do what the markets do. Your job is to go along. There was a lot of movement in 2000. So a lot of potential profit to exploit. I did my job. The result is good.

I think if people can just take that attitude, I think they'd just be so much better off in their trading and quit trying to force it and quit trying to make I need to make 35% this year. So that means 35 divided by 12, I need to make 3% a month or whatever. So I'm only up two and a half. I've got, we only got three days left to go. I've got a trip. That's ridiculous. The market does what it wants to do.

It's only to give you what it wants to give you. You got your job is to capture it when it's available. And if you take that attitude, your life is so much easier.

Pavel Kýček 53:42: Plus, if I can do charts something, there are a lot of a lot of misconceptions connected to, chart patterns in general. I've made a lot of tests. For example, let's talk about basic pin bar. Everyone knows pin bar. Everyone knows how pin bar should be traded. Like there is some pin and you are basically trading against the pin.

Well make your tests and you will see that this pattern is basically not performing at all, you will be nothing but losing. In fact, if you would be the other side of the market, then you could find some edge and this is very similar with many many patterns and if you just try to trade some chart because of some pattern, most often than not you will be just losing money.

But if I could recommend something to algorithmic traders and thinking about charts, I think that what is really helping is looking at a charts in different periods like short trend, long trend range bound market and connect it with your results of every single strategy. Because then if you really go deeper and you want to understand your strategy, which I think you should especially if you want to survive your drawdowns

then you should know in which basically in which periods your strategy should be performing well and in which it shouldn't be. And once you know that you are running trend strategy to the long side and you are in low volatile sideways environment, well your strategy must be losing money if it wouldn't, or maybe it can be flat if you are having some good regime filter but you definitely cannot make money.

So this is really something that even algorithmic traders could take advantage of really thinking about charts in terms of environment we are in and your strategy or your strategies you are trading. Then surviving drawdowns is much simpler because you know that it's just just market. It's not your strategy, which is always important to differentiate if we are talking about drawdown.

Is the drawdown caused by market environment or is it caused by your strategy

Tom Basso 56:09: losing trading catch for example? Yeah. That's very, very astute, Pavel. They to me, I actually one time shut down or actually modified, I think, a trading strategy because it made twice the return in a period where I looked at the charts and I said, wait a second, the math on this and what I see in the charts, that's I shouldn't have made that much money in this particular period. I must have something a little flawed.

I shut it down and actually did some retooling so that I could understand how this type of market action produces those kind of results. It's very astute that you point that out. When you get done with your development of any kind of strategy, whether you do it on a computer or you do it on a sheet of paper, When you get it done, you should know where you're going to make money, where you're going to lose money,

and where you probably aren't going to do much of anything. Be prepared mentally for that to happen. And so you've got to do is go over to the chart and say, well, I'm in a blazing bull market and I've got a long only portfolio here that should be clocking it. It should be making tons of money. Or I'm in a bear market and it's been down six months straight, 30%. And I'm a ETF timing strategy going to cash.

So I should be mostly in cash and you look over there at your screen and say, yeah, I've got like one position out of 30. That makes sense. I should be making money market rates. Yes, am. I'm not losing money like the buying holders are but okay, that makes sense. The strategy is doing what it's supposed to be doing.

It's making, it may only be making 3% in the money market fund But that is the appropriate return for that strategy the way it's structured in this type of environment that you see on the chart. As soon as you match those up, then all of a sudden you have an understanding of what you're doing and you're not surprised very much by anything that gets thrown at you. And so just cruise right through it and you just keep going.

And, I think that's really helpful advice.

Pavel Kýček 58:22: Yeah. Plus for maybe beginning traders, because it is a little bit more advanced to understand the period or environment we are in, what can help is just using simple moving average and ATR indicator. With just these two indicators, you can basically describe high low volatile environment and trend versus non trending market. It's it's can be that simple.

Tom Basso 58:47: And it can it's not very difficult. Yeah. You learn the math in, what, sixth or seventh grade. Yeah.

Jason Kurz 58:58: Yeah. I love this conversation. It's really good. And the only thing I'd add is, the only pattern that I've ever found now that we're all kinda talking about things that had a statistical edge was, I think Richard Dreiss came up with it, which was, he was trying to and it's funny because he was trying to figure out a way to make Elliott waves work in a systematic way. He found out there was no edge in Elliott waves at all.

And so he basically came in then and he came up with a strategy that basically, if you think of COVID, since we just talked about COVID, you have the crash, the market goes up, it comes back down, it makes that higher low. And then when it makes a new high again, that's when you buy. And that was his strategy that he used for many years. He was very successful doing that.

And it's honestly the only pattern that I found that gives you a really good statistical edge. The most patterns, they don't. Some and like Pavel said earlier, the false breakdown signal sometimes is the best signal. We actually have a system that quantified a way to do that. That actually does make money, but it's backwards from what you would think a normal technical analysis person would do.

Most of the people who are great technicians, the biggest thing they live on is the trend. You know, the trend is up. So we're gonna continue with the trend and they might draw a flag, they might draw a head and shoulders, but we're just kind of going with the trend. So I think that's always gotta be the most important thing in your trading. Do the math in your brain.

If the markets aren't trending and aren't going anywhere, you can't buy low, sell high. You can't sell high, buy low. The markets aren't moving.

Tom Basso 1:00:36: So there's no profits to be had. So you might as well go after the trends because that's where all the money is made.

Pavel Kýček 1:00:43: Plus, I think, Jason, it was a very good point that you cannot connect trend and pattern because there are patterns that are profitable and, which have trading edge for sure. But you have to start with a pattern and not with some trending condition you are putting the pattern into because then you are basically taking some sub pattern into a trend, but this is not the edge of the pattern itself

which is also pretty, pretty important because then you are not trading the pattern itself but you are basically just trading some correction to trend or something like that or breakout into trend but not the statistical edge of the pattern itself.

Jason Kurz 1:01:32: Mhmm.

Tom Basso 1:01:33: And see what I would Jason, what you described with your pattern, I would describe as sort of a really a dungeon channel almost. It's a breakout. Yeah. It's a breakout of a dungeon channel kind of. So I see it as just a trend indicator. I don't see it as a chart pattern. So to me, I take the data, run it through the indicator. I'd get the same breakout that he did, using different math and hopefully a little more flexible math too.

I could probably do more with just a dungeon channel than to try to limit myself to that particular set of patterns and try to assess is that pattern really there or not?

Jason Kurz 1:02:17: How do I just make it systematized so it just spits out of the computer the order? Yeah. Think it would be incredibly hard to do that. You know, I think that's that's part of it. I think what was what was interesting to me was just the fact that he was the only person I've ever seen trade like that and do it in a systematized way that actually was profitable. So it's but once again, it's like you said, like, you would get the same.

It was probably a fifty day high or one hundred day high, like it's a very similar pattern.

Tom Basso 1:02:47: Yeah. Or some kind of flexible way of describing it, whatever. But I yeah, it yeah, it's it's a Donchian like price channel kind of breakout. Yeah. Trend following indicator. So yeah. Good for him. I've I've done a few of those over the years. They've been profitable and I don't know. I don't try to make it too complicated.

I took calculus and differential equations and integral calculus and all that and my engineering program and fluid dynamics and thermodynamics and all that. And nothing I use in today's world is anything remotely close to that kind of math. It's add, subtract, multiply, divide.

Jason Kurz 1:03:31: You know, it's simple stuff. The main thing I was getting is it's just kind of in it's interesting because it's the only one out of all the patterns I've looked at over time and tried to figure out if there was a statistical edge, that was just about it. You know? Like, that's but like you said, it's just a breakout strategy. You basically like, he put all that time and effort into it. It's kind of a breakout strategy.

I'd love to talk to him, mate. You know, I think he's still around somewhere. I'd love to have that conversation with him one point of why didn't you just use a breakout strategy? Cause there had to be a reason. I know he had a bunch of cool indicators he created, the choppiness index and things. So I wonder if like that has something to do with it. Could be interesting. Call him up and see if you can interview him.

Bring him on one of these days.

We could all have a panel with him. Well,

Tom Basso 1:04:22: Pavel said, before you could get a moving average to measure the trend, you get a ATR or something to measure the volatility and you got all the information you need. It's kind of the same type of thing. You cross the moving average, you're breaking out to the upside or downside or whatever. It's just a different way of measuring the same data. It has its flaws and its benefits.

It'll get in a little maybe earlier than your, your other guys indicator there, the breakout strategy. But it could have a little more whipsaw capability, you'd have to take care of that mathematically. But if you just study the math of what you're going to try to do, you should be able to see the benefits of how it'll make its decision to the good side.

And you should be able to try to question the math and logic and say, what would be the Achilles' seal here? What would be the negative of this type of decision making process? And moving averages, of course, can kinda whipsaw sideways and cross the line a million times. So that's one of the negative things. What, is it Wyckoff you said? The the gentleman that did the breakout?

Jason Kurz 1:05:33: No. It was Richard Dreiss.

Tom Basso 1:05:35: He was a trend follower. Richard Dreiss. What he did and what I tend to do is try to put a band on top and bottom. Moving averages have the negative I think of constantly maybe sometimes going over top of each of themselves and giving you a lot of signals. You have to deal with that in your logic and you can. People use it all the time. I just like to say, okay, here's a range. The prices can go in between that range. That's noise.

I'll ignore this. Above here, I want to buy and below there, I want to sell. Inside that those two lines, I'm gonna ignore it. That's for me an easy way to get rid of a lot of the little stupid transactions that happen when you do a moving average.

Jason Kurz 1:06:29: Yes. Agreed.

Tom Basso 1:06:32: All easy. All high school math. Then take a lot of time to use it.

Jason Kurz 1:06:40: Well, this was great. Andrew, do you are you ready to wrap up? I think this was great. I absolutely always love having these conversations with Tom. Hopefully, you can join us again at some point. Tom, this was great.

Tom Basso 1:06:52: Thanks for breaking in the new office.

Jason Kurz 1:06:55: Love it. Love the bookshelf too.

Andrew Swanscott 1:06:58: So Tom, how can people get in touch with you or learn more from you? What's the best The

Tom Basso 1:07:04: largest collection of everything Tom Bossa would be the website that I put together in retirement. Because I got so many questions from people on so many different topics. Decided rather than try to answer emails forever. It seemed like, literally thousands of them that I've answered now. I just decided, okay, I'm gonna put a website together called enjoytheride.world, not.com.world. And people can go there.

I've got my hedging strategy completely outlined. You can get a sense of one of my 10 strategies, and how I actually do it, how I think about it. I've got a seminar that I'm putting on in May with Lawrence Bensdorf out of Portugal. He's a great trader and a good friend at this at this point. And we have a great time in Vegas with 15 traders doing very personalized training. And that's fun.

And I've got a couple of books that I've written, All Weather Trader, which is the blue one over my my my head here. That's been a best seller and it goes into my entire life of trading and how I developed a lot of what I developed and why I developed it. I give you I lay it all out so you can see how I do what I do. As an example, I encourage you to develop your own. It would make more sense.

The only reason I say that is not everybody has my risk tolerance, my capital, my knowledge. Everybody should come to a different conclusion of solving their own personal financial puzzle. So all other traders and other place, probably the largest social media site would be x. I think I've got 52,000 followers there. It's at bosso_tom. Anything other than that is an impostor. And I have a lot of them, and I go after them as hard as I can.

But they're still out there, and I hate to see people get scammed, especially if it's someone who's they think they're talking to me. I don't sell anything on social media. So if somebody's trying to get your money or sell you a crypto scam or whatever, please run the other way, report them, block them. I'm also on Facebook. Enjoy the ride out worlds on there. I've got a LinkedIn account that is somewhat active.

So there's lots of different places. My email is Tom@Trentonstat.com. If somebody has very, very specific questions that don't lend themselves to social media, please send a lot of supporting data with the questions so that I know what you're doing quickly. Don't send me an email that says, I'm a new trader. What would you suggest I do to get started? That's way too general. I don't know how to answer that question.

I'm gonna just point you at the website, so you don't even need to send me an email. Just go to the website right out of the gate. So that's kind of a few places you can get to me.

Andrew Swanscott 1:10:14: Thank you, Tom. Pavel?

Pavel Kýček 1:10:18: Well, you can follow me on my Twitter or go to robuxo.com where you can see how we are trading broad portfolios of algorithmic strategies on crypto for our clients. And if you want to know about our approach in general, then I recommend going to robaxo.com/explainer where you can see more details about how we are doing it.

Andrew Swanscott 1:10:43: Excellent. And, Jason?

Jason Kurz 1:10:45: Oh, yeah. This is great. Tom, thanks again. Andrew, as always, Pavel, great to catch up with all you guys. At AAO Research, that's Against All Odds Research. You could find that on Substack. I website, have I'm on Twitter, YouTube, you name it. We have lots of interviews with Tom on our YouTube channel as well. Please check those out. A lot of those have a lot of views too. So they're really popular videos with Tom.

So as always, as you guys can tell from today as well, Tom is a great person to learn from. And Andrew.

Andrew Swanscott 1:11:21: And me, bettersystemtrader.com or Twitter is Better Assist Trader. I've got a lot of trading interviews on my website on YouTube as well. I don't have Tom though. So I might have to have a chat with you Tom and you can we can do a one on one sometime. I have to it now.

Tom Basso 1:11:37: You can actually interview me in a relatively quiet environment.

Andrew Swanscott 1:11:42: Excellent. That'd be great. So thanks everyone for joining us today. We had a lot of good comments in the chat as well. Not so many questions, but fantastic discussion in the chat. And of course, great guests as well. Thank you so much for joining us, Tom. It was really great to pick your brain for an hour. My pleasure, do it again. And we're here every week Tuesday. Sorry, not Tuesday. What is it? Wednesday?

Jason Kurz 1:12:07: 2PM

Andrew Swanscott 1:12:12: Eastern. Although we may be changing it right, Jason, we gotta have a look at it this week. So yeah, we'll let everybody know. Thanks for joining us and enjoy the rest of your week. Happy trading. Have

Jason Kurz 1:12:23: a good one.