 It's a confidence that doesn't lead to recklessness because confidence that leads to recklessness Can be a major risk management issue. I think it's been positioned in the market as if you just do these three simple things That's all you're going to need to be successful But that's on top of many many other things that are required of that aren't so simple from same-say markets This is the awful try You have an opportunity to change it. Is it something that was wrong in the process or is it something that we didn't follow that the process told us? Hello and welcome to the artful trader. I'm Michael McCarthy chief market strategist at CMC Markets Asia Pacific In our third season we talked to the experts in their own fields to uncover what gives them the confidence to succeed We uncovered confidence Unlocking the secrets behind resilience, preparation and growth and how it can make you a better trader One of the best and maybe the worst things about talking to traders is that once you get them started Sometimes you just can't get them to stop. Well today. We have an artful trader first We'll be talking to two guests Dave Floyd and returning star John Netto Both are great traders and as it turns out great friends Dave Floyd has over two decades of experience in the markets and founded the Aspen trading group John Netto is the founder of the Netto number He authored the global macro edge which he discussed with some of our clients in a session here in Sydney as a follow-up to the Artful trader season 2 we kick off this episode with each of them separately and then bring Dave and John back into a group discussion To chat through his strategy defining risk and their own experiences of the markets. This is a really unique session And I hope you enjoy it It's my pleasure today to welcome back one of our few returning guests We try to cover a lot of territory in the Artful Trader podcast and for that reason we have a wide variety of guests But we knew John Netto had more to tell and we had more to learn Bit of background first how important is knowing yourself and knowing your style and trading? I think it's essential and knowing yourself and knowing your style it um, you know when I understand my personality having been someone that's taken on risk for pretty much all of my Sentient life, you know as long as I can remember being someone who can think and breathe and eat the idea of risk always had appeal whether it was you know betting on American football or whether it was the market or whether it was You know the outcome of some personal life event Knowing what that risk was and being able to define that brought a sense of comfort And so what I know about myself and why I define things on a return per unit of risk basis It's because I know that the way that I mitigate anxiety the way I mitigate Acting out of impulse or breaking a plan is by Understanding and defining what my risk is into a trade then once I'm comfortable with that risk Now the anxiety can be reduced because now I've made this a numbers game Is if I the same way I would play poker or the same way that you set up a budget? Having a risk budget per trade per portfolio per strategy is both a factor of knowing myself And also frankly a byproduct of a better way to invest John for those who haven't had a chance to go through the global macro edge one of the key Revelations there is that standardization of risk units This is a big step forward for the trading world and it reads as if this is very central to your trading approach It is you know the book is called the global macro edge Maximizing return per unit of risk not maximizing returns not maximizing profits not you know trade from a yacht It's about in advance Defining what it is you're willing to risk on a position having a strategy and risk comes in a couple of ways Risk comes in the size of the you're risking I mean in the position bet whether it's a percent of the portfolio Whether it's a volatility target that you're making but whatever it is It is an amount that you determine in advance and that you adhere to it comes from having a plan And I think again going back to the whole risk budget thing the risk budget is a microcosm of a plan in general What are you going to do when your portfolio hits this threshold? What are you going to do in the if the market reacts in this way now again? It's it's logistically maybe not not feasible that you can plan every single scenario But having multiple scenarios Planned from both a trading perspective and from just a business perspective goes a long way to easing one's uncertainty One's doubt and if you can mitigate that you could trade with a lot more confidence You stress a real difference between risky trades and risk-defined trades. No, that's a great question Michael. Thank you You know People in general you see a lot of disclaimers about trade and the talk about trading can be risky Or you see people speak almost too casually or almost flippantly about oh the market is risky And what they fail to do when they say that is they fail to categorize What risky is whereas Mike you and I and many of the CMC listeners and many people from CMC markets listening to this Are in the business of making risk-defined trades risk-defined trades at a very granular level You know have through research through diligence through a plan through experience through understanding the novel aspects of the market Through understanding the idiosyncrasies of a market look to exploit Edges that exist from these anomalies in the market and they look to exploit those edges by defining the risk in a trade For example, if there's a 35 percent chance that this will happen But you can make four to one on your money Then that's a risk-defined trade that gives you a chance of making money or a chance of Achieving a positive expected return and so the idea that oh you're taking on risk But are you taking on risk for the sake of taking on risk or are you taking on risk based more out of impulse? Are you taking risk based more out of process and risk-defined trades take on trades based out of process? Sticking to your process is one of the key disciplines for you It is and part of my process is being open the process needs to evolve There's a fine line between being stubborn and or being being confident in your system And then just flat out not adapting and it's funny because X post You know after the fact anyone can tell you that if you're in a position and if it you know when it's profitable Then it goes against you, you know You'll hear the the saying oh you can never go broke taking a profit on the other hand If you're in a position and you take profits and it keeps running Then you'll hear the people say oh you got to let your winners run and everyone can say this after the fact Everyone can come up with these I'll keep your losses small or oh don't ever trade with stops or oh Don't you know all these things after the fact what I try and do is look at what I'm doing and start with a big question first How do I make money at this all right because as we talked about last year in the second season Michael Analyzing the market and making money from that is a completely different skill set John You've said in the past that you're genetically predisposed to taking risks Is that true? Were you born to trade? Well, um, I can't speak extensively to my DNA sequencing But I do feel anecdotally That given my behavior of placing my first sports bed at the edge of eight The fact that like I read my first book on derivatives at 12 and ran a bookie operation in high school Or as I say provided liquidity to those wishing to prognostic it on the outcome of sporting events Given that set of anecdotal behavior and I guess in this case empirical when you look at some of my sports betting Performance, it's very likely that I was predisposed or am predisposed to take on risk and given that I guess you can Have found my calling indeed You've always had a lot of confidence in your trading John. Does it come and go? Yeah, I don't know if I've always had a lot of confidence in my trading I'm the confidence waivers with invariably with with some of the highs and lows I mean, I've had a lot of existential questions about my trade I think like everyone else and I can convey one thing to everyone here is that no matter how Great a trader is that at some point time or more likely than not many points in time they've had questions about the the efficacy of their strategy and and More existentially to what degree they would be around in this business And this is not something that I can say that I have so gracefully escaped in the last 20 years and multiple times Even during major win streaks, you know, we're all emotional creatures. Okay, we all have Self-doubt doubt is healthy actually. I think doubt can be the fuel for greater creativity for greater innovation I think what you want to be aware of is that that self-doubt is natural and normal It's overconfidence is probably more problematic So, you know, I definitely have confidence, but the balance between that is like a quiet confidence It's a confidence that doesn't lead to recklessness because confidence that leads to recklessness Can be a major risk management issue. That was John Netto and now it's my pleasure to introduce Dave Floyd Dave thanks very much for joining us for the Artful Trader podcast in trading circles You're very well known and past Artful Trader guests including John Netto and Ralph Powell are very familiar with your work Given your fame, especially with the Aspen trading group. Let's cut to the chase. What does it take to become a successful trader? Well easy questions first I think there's an element that you have to have to be successful that you're probably either born with or just simply not born with And that is the kind of the emotional Or the what they would call the emotional IQ or the EQ and that really boils down to discipline and patience I think that might be able to be learned over time But I think some people just either have that or don't have that I think people can learn the basic rules of trading but In order to be confident and to be successful in the long run It does take the combination of the process part which can be learned for the most part and then integrating that in with your experience feel Patience and discipline and you know for me. I know that's why I'm still in the industry. I'm very very patient I can go a long period of time without making a trade because at the end of the day Our job as traders isn't necessarily to you know use them use the market like an ATM machine It would be nice to do that But markets don't work like that and a lot of people approach them as if well if the markets are open There must be something to do and that might be true for the trader down the street or the trader down it You know at a different bank because their style is conducive to what's happening in the market But you know for me I could go a week two weeks without making a trade and and that's okay A lot of people get really uncomfortable with that. I Would say that the old adage of traders make 80% of their money 20% of the time It's probably a pretty fair pretty fair assessment And if you can get your head around that and be patient and be disciplined You can be successful as a trader for sure But you've got to get over that initial hump and you've got to go through a long period of time Where you kind of perfect your craft and there are a lot of misconceptions that particularly new traders bring to the market Dave you've just highlighted a key one there trading is not a salary-generating business What are some of the other misconceptions you think are popularly held? Well, I think it you know probably cuts across every industry because we're human beings at the end of the day And human beings want the path of least resistance. It's a natural thing. I mean you look at the diet industry You know three simple steps to lose 50 pounds well, yeah, but you've also got to do this and you've got to stick to the plan and Again, everybody wants the quick fix Trading is has been sold that for as long as I've been in the industry I think it's been positioned in the market as if you just do these three simple things That's all you're going to need to be successful There's an element of truth. There are probably three simple things you do need to do as a trader But that's on top of many many other things that Are required that aren't so simple What building blocks can new traders put in place? What do you think they should be focusing on if you can if you've got the wherewithal to kind of define? How you want to trade meaning that do I want to be a intraday trader? Do I want to be a swing trader? Do I want to be an investor if you can identify that? Then you can start to look and say, you know, who could I emulate to kind of get me off the ground? Well, this this person over here seems to trade in a manner that seems consistent with my risk tolerance my time frame Maybe I'll learn a few tricks of the trade and follow along may nothing beats emulating someone else early on But then you eventually kind of develop your own trading style that's conducive to who you are But you do have to get off the ground and when I started day trading I had some ideas of what would make money But my confidence wasn't there because I hadn't didn't have enough You know swings at the bat so to speak to know that if I press the button on the computer and got filled If that would work out, you know, it's the classic fear a lot of people don't make successful trades because they're fearful They don't know enough or they think they don't know enough So how does a new or tried or even an experience try to bounce back from a big loss? Well, it's a great question and we all go through losing periods for me, I Don't have big losing periods and what I mean by that is I'm never position sized So that if everything goes to a correlation of one or if I have four or five losing trades in a row, which is it does happen You know, maybe statistically, it's a little less likely than having two or three losing trades in a row But if that does happen my drawdown from a mathematical perspective is I can recover from it not only financially, but also mentally, I mean we've all seen the drawdown tables and you know Once you start getting to 15-20% drawdown not only mathematically is it very hard to come back But think about where your mental state is at that point in time, you know, you're beaten up and bruised so even if you are Willing to get back on the horse. Trust me, you're gonna be gun shy You're probably not gonna size up your next trade properly It's gonna be lighter and of course that'll be the trade that really works well And you won't be positioned properly to you know regain your capital So I think it's more of a I think the my answer to your question is more of a function of how do you size your trade so that you Don't dig yourself a big hole in the event of one of those losing streaks Because if you can prevent that You can get back to square one and then beyond because you we're all gonna hit those losing streaks We're all gonna have four or five losing trades in a row. It's inevitable. It's a question of Can you get recovered from it and for me personally? I never risked more than 1% of my total capital Well, maybe one one and a half percent if I'm really convinced on the trade and that keeps me from if I'm down You know five or six trades in a row. I'm down five seven percent Maybe ten percent if I had a couple of beefier positions, I can get back from that Mentally and mathematically so your trading plan takes into account that you need to protect your confidence in the market Absolutely, I mean I vary my bet size on every trade I know John will probably talk about this in his portion and we'll probably talk about it when we come back in and talk all at once but Every trade I put on the the bet size is always commensurate with where my stop losses And if you know where your stop losses, you know exactly how many lots you should be trading So that if you do get stepped out or stopped out, you're not surpassing that that that risk level on a per trade basis All right. Well, that sounds like a good place to bring John back into the conversation if that's all right with you Dave Sure, Mike, let me tell you one thing. Okay. It's always a good place to bring John Neto back into the conversation. All right Excellent well, I'd like to go back to something you said earlier John You talked about the development of your trading style and drill parallel with your development as a human being now I was a market maker in options on the old ASX trading floor a couple of decades ago And in one of those quiet periods that hit every trading floor one of the other traders turned to me and said I love trading because it teaches you so much about yourself Dave what's trading taught you about yourself? Oh God lots of things. It's It exposes every, you know weakness and strength that you have It's part of the reason I've been in this industry for so long is It's taught me to be respectful that you can't possibly account for everything that could go wrong Some things will happen. You will have bad trades and you'll have series of bad trades But I think on the positive side is that if you really focus in on Where you're good and are willing to stick with that even during the quiet periods and not jump around and get bored That's when you start to really increase your confidence. What I've learned is that Not every hour watching the market is the same an hour watch in the market where I'm actively thinking actively engaging Could be Exponentially more beneficial than an hour where I'm like reading email. I'm surfing the net. I'm sending I ams to people I'm still pissed about the Dodgers losing last night. You know what I mean or whatever like so that that time is really critical To that to developing Your trading style, you know, I know people that have been trading for 20 years and I'm not sure they're much better In the last 10 years just given kind of some of the things they say, you know Part of working on your craft is what are you doing today to get better? What are you doing today to improve your process or at least in this next quarter in this next six months? what's part of your plan for professional development and And so what I've learned is that when I don't do that when I'm not looking to actively improve and I'm not looking to develop I can stagnate and stagnation leads to complacency and it leads to not asking the right questions and missing opportunities It's like man if I would have just done this and again, we all say that but I try and say it in a self-reflective way in a To get better. Okay. What could I have done today? You know what? Why didn't I do that? Well for the third time now? I said that I should be You know doing a better job of Memorializing the time and frequency of Trump tweets compared to its influence on the US dollar You know what I mean and I should have a better database of this stuff But that's one example right there, you know And I yes, I've kept a database of Trump tweets and I've put a qualitative analysis behind it But there's still further things which I'm gonna keep for myself that I can be doing to make that better And so though that's an example of identifying what regime we're in and then are you making? idiosyncratic adjustments nuance adjustments that acknowledge that to make yourself or give yourself a better chance of success One of the thoughts I was having as John was talking about that We are so inundated with information as traders We have anything we want kind of at our fingertips nowadays So it's very easy to you know try to take in a lot like it's like drinking from a fire hose The fact of the matter is our brains have not evolved to be Engaging in multitasking the way that our society says we should be now The data is pretty clear that if you're multitasking you're not doing you're not being as effective at whatever it is You're doing whether it be trading it could be writing a book It could whatever the craft is you might be sitting there doing some deep analysis on a chart You're really integrating in some quantitative analysis and whatever else and Your email buzzer goes off and you immediately stop and go look at the email and you're like well I only took 30 seconds. So let's go right back to where I was You've lost So much of that mental energy and I can't really describe it the way they did in the in the study Other than to say that if you do that you're really really doing yourself a disservice Maintain that focus and don't multitask. That's the takeaway the again the research is as about as clear as it gets It's not even open for debate Don't multitask. You'll be a far more effective trader Well, it's not a surprise in speaking with highly successful traders that focus discipline Process are words that keep coming up that perhaps a little more surprising though Is that both of you incorporate intuition into your trading style now? That's something that Well metaphorically at least was beaten out of me as a young trader trading on your gut was considered an error And you're certainly not talking about that style of trading where you just think it's going up Let's buy some, you know, clearly you're doing it within a process and within a discipline framework But what tipped you off that your feelings and intuitions were important to your trading success? Too many instances of ignoring it and then seeing what the outcome was either ignoring Getting out of a trade that I was in but I still liked it But my gut was like, you know what I just not feeling comfortable here or getting that that gut feeling and not Executing the trade to get into the trade and then you know a few days later. You're like damn that was the ideal entry So for me, it was really only I only have to touch the hot stove burner So many times before I figure out that I shouldn't do that anymore or in this case I should be doing it sounds really weird, but it's almost like an internal feeling You're just like ha ha time to execute the trade. I mean, I'm already thinking about it anyways It's not like out of the blue. I'm like, I'm gonna get long dollar yen. Well dollar yen wasn't even on my radar It's about something that I'm already hammering away at and looking for that entry point and then suddenly you're like Let's go for it and inevitably they work out really well. It's almost like you nail it to the to the tick You know, I have to echo a lot of what Dave says there. That's okay to echo what I have to say I got a lot of good insights. You've been tremendous inside Almost as good as mine even I'm gonna draw an American sports metaphor to kind of bring this one home and you look at some of the greatest US quarterbacks or if we want to go more on an international scale some of the great, you know Four words or we look at Lionel Messi and Lionel Messi for Barcelona Is a facilitator. He's allowed to use his intuition on the field now Barcelona plays a very specific style They like passing the ball. They have a lot of possession. They have 65 to 75 percent possession And Messi is a you know facilitator on the right wing and he uses his left foot to come back across the field and And set up and facilitate the ball for other players great US quarterbacks have an intricate offense But they do what's called audible when they get to the line of scrimmage they see the defense they see what's happening and they use their years of experience on top of a Foundational approach of play calls to then determine when appropriate It's not every time that you come to the line of scrimmage and American football and you audible or in essence You change the play. All right, but what Dave is talking about is an objective appreciation of Specific market circumstances that are a combination of how he uses his craft how I use my craft as well as an Understanding that this is something unique here. That's not readily quantifiable and so intuition is Yes, the the external manifestation of our internal analysis based on both Fundamental rigor and qualitative interpretation. That's the best way to describe it. Seriously, you're welcome. Yeah No, that was really good. There's really good and I like the quarterback analogy. That's absolutely true They're looking at and going okay. I've seen this before I got to make that adjustment exactly That's the Mike linebacker. They're coming their blitz on the left side running back picking them up 27 Bravo Boom, I have a hot rod. Who's my hot receiver on this blitz? There you go And like these quarterbacks from their years of experience they and not only experience But like finesse in their craft the preparation. I think what Dave and I really you're stressing here is just how much we prepare Okay, knowing our strengths, you know, I know that my strength is I'm very good at taking on outsized risk when the situation calls Not everyone can do that. Okay, Dave has tremendous patience. He's extremely procedural. He's very Process-driven. Okay, but at the same time a lot of intuition So we know our strengths and we build systems around we build our style around we build a risk management methodology around these specific factors and and it's why we've experienced the success that we have I always try to Think of my day-to-day trading as simply another chapter in the book You know, the markets don't change very much on a day-to-day week-to-week basis. I mean they make changes over time But again, if you're sticking with the net for me, at least if you stick with a narrow list of securities that you're trading, you know For me, it's five or six FX pairs the S&P's tenure notes and then You know, occasionally another broad-based ETF Every day is just kind of like a new chapter in the book or a new even a new page in the chapter Not much has changed, but you wake up and you're like, okay It's kind of where we were yesterday. I thought this might happen So you're building that narrative and then when the when you get when you get enough information Just like when you get towards the end of the book You start to maybe figure out who the who done it in terms of the the murder mystery and you've got real Conviction because you've kind of been feeding yourself bits of information along the way, you know, develop that narrative day in and day out Some days it's going to be really really boring But again on that day where it's not boring your conviction level is going to be much higher the intuition is going to come through more and I think that's the more realistic way to approach the market You know a lot of the guys and a few gals that I know that are at the top of their game at really big hedge funds They're not running scans every night to find out what to trade the next day. Their mandate is real simple You trade euro and dollar yen That's all you trade So, you know, if the big hedge funds are telling their individual traders and their analysts to keep a narrow focus Probably not a bad idea to follow the Paul Tudor Jones is in the Citadel and that kind of business model At least in terms of the ethos that they're promoting I'd say you get to be sitting where I am 20 plus years into the game and still saying I've made it I've done well and I'm still continuing to learn because it's an unfolding process It takes time and you're never going to perfect it, but you do get better. I think that's a perfect note first to finish on Thank you Dave. Thank you John. Thank you very much That was Dave Floyd and John Netto if you liked what you heard on this episode next time We're talking to Aussie tennis legend Pat Rafter He opens up about the highs and lows of his career and keeping overconfidence in check complacency Most times sort of will bring you unstuck Make sure you subscribe to the artful trainer podcast to hear Pat Rafter and all of our interviews or listen at the artful trainer podcast.com Join us next time