To my dear children,

Jose, Naty, and Sofia

This book would not be possible without my parents. Because you
allowed me to trade your money back in 2000, I acquired the
confidence to step into the trading world, which brought me here.
Now that I’m a parent myself, I know how hard (and rewarding)
parenting can be, and my admiration and gratitude has multiplied.
Thank you for always supporting me. I love you deeply.
 My dear wife, Madelin, understands me better than anyone, and
she has provided me great help and motivation in writing this book.
Your love and inner and outer beauty is a privilege I’m grateful to
enjoy daily. Your compassion and understanding in helping me
achieve my mission in life is endless. I love you.
A special thanks to Tom Basso for taking the time to write the
foreword. Every time we talk, time seems to fly, and I pick up such
wise lessons that I take to heart. His approach to trading combined
with the choice to have the best life possible is what taught me to
design the life and trading style that suits me best. Thank you,
Tom.
To my Elite Mentoring students: You are a wonderful group of
people—teaching you brings me incredible joy. You are the drive
that keeps me working on new strategies and improving myself.
Your bright minds and questions keep me sharp, and you have
taught me more than you will ever know.
It should not be assumed that the methods, techniques, or
indicators presented in these products will be profitable or will not
result in losses. Past results are not necessarily indicative of future
results. Examples presented in this book are for educational
purposes only. These trading setups are not solicitations of any
orders to buy or sell. The author, the publisher, and all affiliates
assume no responsibility for your trading results. There is a high
degree of risk in trading.
 Hypothetical or simulated performance results have certain
inherent limitations. Unlike an actual performance record,
simulated results do not represent actual trading. Also, since the
trades have not actually been executed, the results may have under-
or overcompensated for the impact, if any, of certain market
factors, such as lack of liquidity. Simulated trading programs in
general are also subject to the fact that they are designed with the
benefit of hindsight. No representation is being made that any
account will or is likely to achieve profits or losses similar to those
shown.
Understandably, a lot of people ask: If you’re so good at trading,
why do you teach? Why don’t you just trade your own money? In
this book, I reveal profitable trading strategies. Why would I do
that for less than twenty bucks? It’s a fair question, so I’d like to
give my honest answer.
I started trading back in 2000, and I spent thousands of dollars
and hours searching for the Holy Grail of trading strategies.
Despite devouring all of the information I could get my hands on, I
wound up learning what to do based on trial and error. There just
wasn’t a lot of good information out there. I wished someone cared
enough to show me a strategy with a clear edge, holding my hand
as I learned the ropes. Nobody like that existed.
I know how hard it is to learn how to trade. No matter how smart
you are or how hard you try, it can feel like years of helplessly
swimming in the deep end.
The truth is, successful trading can be simple, but we humans
have a tendency to think we need to complicate things in order to
get outstanding results. As I’ll explain in the book, winning trading
isn’t about finding the perfect strategy—it’s about knowing
yourself so that you can identify the perfect strategy for you.
Everyone is different and must know his or her strengths,
weaknesses, personality, risk tolerance, and personal situation.
Trading is far more boring and process-oriented than people like to
think.
One of the best ways to master a skill is to teach it. This is
common advice, but it’s something I’ve noticed in my own life
many times over. While teaching my Elite Mentoring students, I’m
forced to dig into my strategies deeper and deeper so that I can
explain every part clearly. Teaching keeps me honest and hungry.
Since beginning to teach, my trading knowledge has multiplied
exponentially, and I’ve eliminated many of my strategies’ flaws
and weaknesses. My students are some of the smartest traders I
know, and interacting with them sharpens my mind daily.
It’s the perfect combination: I get enjoyment out of teaching a
group of focused, successful, like-minded people, and we both
improve our trading skills.
My mission in life is to help others transform themselves,
because as I’ll explain in the book, it took a lot of self-work for me
to become the trader and person I am today. Trading is a lonely
profession, and my process-oriented approach can be as boring as it
is successful. Teaching is the opposite—it gives me joy, while
sharpening my skills. I love to help others, and I love to develop
new strategies and ideas and challenge my past beliefs.
When I was younger, I taught white-water rafting guides how to
improve their performance and skills. I quickly found that I was
good at helping others, and that I loved it. I later discovered my
passion and skill for strategic trading. Then it was obvious that my
mission in life was to combine the two. My calling is to help others
make money by creating their own strategic trading approaches.
Every strategy in this book has a clear edge, is simple in nature,
and is easy to follow. They are not the only strategies that work.
They are frameworks—the start of what your eventual strategies
will look like, depending on your beliefs, objectives, personality,
and risk tolerance. The strategies can be tweaked in multiple ways,
to best suit you. Everybody is different and thus should have a
different trading methodology.
As long as you follow the steps outlined in this book, and have
evidence that your personal approach actually works, you will
succeed. Whether you do this on your own, or through my
teaching, I achieve my mission. I want you to succeed. When you
succeed, I’m happy and fulfilled. Good luck, and thank you for
reading.

For more information and exclusive offers, please visit

[Link].

All graphics contained in this book are also available at

[Link]/charts-30-minute-stock-trader.

Kind Regards,
Laurens Bensdorp
I started investing when I had some extra money from delivering
newspapers at twelve years old and bought a mutual fund with that
money. Some fifty-two years later, I’m still investing. It’s been a
long and very rewarding ride through investing in mutual funds,
then stocks, then futures, then starting a Registered Investment
Advisor company, registering as a Commodity Trading Advisor in
the United States, trading FOREX, retiring, and now managing my
retirement portfolios. I still have a love of the process. I enjoy
learning new concepts and inventing different approaches to the
process of good investing.
I first met Laurens a number of years ago after he had made
some contact with Van Tharp, the trading coach, and he had read
The New Market Wizards and a few of my other interviews with
industry-based authors. He knew a lot more about me than I did
about him when he contacted me. That changed when he visited
my summer home in the Arizona mountains, and we had some
lengthy discussions about business, investing, and life. Laurens
impressed me as a “man of the world” due to his speaking several
languages, having business interests and experience in many parts
of the globe, and having a great deal of experience, good and bad,
with the investment process. I have since met him in Hong Kong,
and I periodically have Skype chats with him.
I was very interested in seeing what Laurens pulled together in
this book because he has so many experiences that I never have
had. I dug in and read it in about two days off and on, anytime I
had a moment to continue reading. I could not put it down!
In Part 2, where Laurens discusses automated trading, you get a
great summary of some of the great benefits that can come from
using the computer to shore up some of your potential weaknesses
in execution. The computer becomes a mindless slave. When you
program a logical approach to trading into the machine, it obeys
and executes according to that logic. There will be no exceptions as
long as you keep the program running successfully and feed the
machine electricity.
Part 3 of the book has some excellent points concerning self-
examination and beliefs. I’ve known people that believe “money is
evil,” others that are greedy with no objective goal other than
greed, and others who don’t want to spend even a minute on
managing their net worth. If you are not prepared to examine
yourself and your beliefs, you will surely fail at whatever
investment approach you try. You will find a way to sabotage it
sooner or later. His list of beliefs that all top traders share is an
excellent read and probably a part of the book traders should copy
and put in front of themselves to reread often.
In Part 3, he absolutely nails the concept of investing a great deal
of effort in your own personal investment approach. Because of my
notoriety, I get lots of questions from new traders asking, “What do
you use for your buy/sell approach?” I tell them over and over that
I am not the same person they are. I have different knowledge,
skills, capital to allocate, and experience with trading. It doesn’t
make any sense to me that anyone would want to trade exactly as I
trade. I try to help them understand that they need to develop a
trading strategy that will work for them and not try to copy me.
The next idea that Laurens talks about in Part 3 is the
systematizing of the investment strategy. I remember one year
when I sorted all the trades I made in a calendar year from highest
profit to largest loss and noticed that one trade in Japanese Yen that
I had held all year long was the difference between making a large
single-digit gain that year and breaking even. In other words, had I
overridden or missed that single Yen trade, all the other good work
I did all year long would have been worth nothing. The next year I
performed the same exercise and found that two trades were the
difference between a double-digit gain and breaking even. That
surely emphasized to me the need to execute my strategies as close
to perfection as is humanly possible.
This example shows how important it is to follow your rules in a
trend-following trading strategy. However, that is not the only way
to trade. Some might opt for a mean-reversion strategy such as
those outlined in Laurens’s book. You will still need to execute
your trades as perfectly as possible, but there will be less
dependence on one to two trades per year. It all comes down to
what fits you the best.
Being human means having flaws, making mistakes from time to
time, and possibly not being able to execute a trading strategy
flawlessly. Enter the computer. Since I am a chemical engineer by
degree, I found it straightforward to program the various steps I
was taking into a series of programs that essentially did my trading
strategy for me. I spent years working hard to put myself out of
work. No longer did I have to concern myself with being on a
vacation or being sick. My automated trading strategies executed
the orders that should be executed without flaw.
I didn’t have to concern myself with what was happening in the
world, either. When George Soros had his famous billion-dollar
short profit on the British Pound, I was short the Pound as well. My
profits were not at all due to my investment brilliance or thinking.
They were simply because the British Pound had gone into a down
trend, my computerized strategy yielded a sell signal and went
short, and I profited from that action. It was the same exact
decision-making that would lead to the next one thousand trades
that my strategy would execute. Guessing what someone like Soros
or any other “famous” money manager is going to do or agonizing
over volumes of fundamental data to make a decision will just
make you exhausted, confused, and unable to pull the trigger on
many trades. That would definitely not help your cause much.
Laurens points this out in his book multiple times, and he’s dead on
with that advice, in my opinion. To Laurens and me, trading is a
numbers game. The larger the amount of sample size in number of
trades, the more we hope to create probable success. In some of the
strategies I traded, I knew that over two-thirds of my trades would
be losses, but I also knew that when I was with the market, I would
have trades that had sizable profits to make up for the smaller
losing trades. Replicating that process over and over in a tireless
fashion got me to where I wanted to be, instead of just being lucky
every now and then with one spectacular winning trade.
Laurens captures perfectly in Part 4 the importance of
understanding who you are and designing your approach to the
markets in a way that will make you successful in trading. This
single concept is probably the most frequent reason that traders
fail. They may have a decent strategy and decent risk control, but
they interject their own fears and emotions into the trading, causing
the strategy not to be executed correctly, resulting in the strategy’s
downfall. At that point, they’re off to the next great idea, and the
process is repeated to major frustration. With some easy-to-
understand examples, he shows how various personalities match up
to very different approaches to trading and how all of them can
work going forward. I’m more of a trend follower at heart, but that
is not how all traders should trade. There are a lot of pathways to
success in trading, and you have to find yours.
Another aspect that Laurens gets right in Part 5 is the concept
that if you can automate your decision-making process to a large
extent, you are not limited to one fixed strategy. When I ran
Trendstat Capital Management with $600 million under
management back in the day, we were trading stocks, 20+ mutual
funds, 70+ futures markets, 30+ foreign exchange pairs, and 10
commodity options using multiple strategies within each
investment area. Daily execution was handled by only two traders
with a team of four computer experts, including myself, and three
people in administration backing them up. And talk about scalable
—we could have handled twice as much with the same people
simply by adding a few inexpensive computer servers! Laurens
shows some simple examples of how combining together strategies
logically should increase the robustness of your overall trading,
increase reliability, increase return to risk measures, and help you
achieve more long-term success in trading. I have not used some of
the specific software that Laurens talks about in the book, but I
have little doubt that Laurens and his programmer have done their
finest in marrying the concepts outlined in the book to the software
and getting it to function smoothly. The investing process at that
point becomes routine, almost boring. We all unemotionally brush
our teeth daily and think nothing of it even though it leads to good
dental health in the long term. Running your investment strategy
can be just as routine and unemotional, leading you to long-term
financial health.
Chapter 14 in Part 6 covers some important forward-looking
advice to would-be traders. Your strategy, no matter how well
suited for you and well researched it is, will still have to react to
new things that the market will throw at you. How well the strategy
adapts to changing conditions will dictate some of your future
success. He correctly implores the reader to “treat it like a
business.” That is all it is. As Laurens points out, if you want
excitement, thrills, and adrenaline fixes, find them elsewhere. If
you trade to satisfy those needs, the markets will shred you.
That doesn’t mean you don’t have other challenges as a trader.
Even with systemized strategies, you will have issues with
executing brokers, financial crises that create aberrant trading
challenges, power and internet outages that can be trying, and
countless times when you don’t feel like doing anything with your
trading. But I promise you, if you can take the business approach to
the process of investing that Laurens’s book maps out, you have a
shot at getting out of your own way, and you, too, can “enjoy the
ride” of successful investing.
– Tom Basso
Featured in The New Market Wizards as “Mr. Serenity” by Jack Schwager
Author of Panic-Proof Investing: Lessons in Profitable Investing from a Market Wizard
Former CEO of Trendstat Capital Management, Inc.
Former director of the National Futures Association, one of the US regulatory
organizations
Former arbitrator for the National Futures Association
Former director of the Society of Asset Allocators and Fund Timers, Inc. (SAAFTI), now
known as the National Association of Active Investment Managers (NAAIM)
Bachelor of Science in Chemical Engineering from Clarkson University, Potsdam, NY
Master in Business Administration from Southern Illinois University at Edwardsville
Now happily retired and enjoying the ride!
You pop your head outside the window of your office, and you can
hear the ocean. You’re doing your thirty minutes of daily “work,”
entering your orders into the broker platform. You could have done
it first thing in the morning, but you decided to go for a swim in the
ocean instead. Afterward, you’ll go cycling in the mountains, and
spend uninterrupted time at night with your wife and children.
Tomorrow, you’ll swim for as long as you want to, again. You
don’t have a boss, so nobody is nagging you to get back to work.
 Then, tomorrow you’ll put in your thirty minutes of work and
won’t feel like doing anything else that day. You’ll call your wife.
“Want to drive two hundred miles to Seville?” You go and explore
an exotic city with the love of your life on a Tuesday afternoon.
You’re living a life of financial freedom, and three hundred days
of sun, in southern Spain. Next week, you’re off to the Caribbean
coast in South America, with your family, to visit your wife’s
hometown. You’ll take your “work” with you: your thirty minutes a
day of pressing a few buttons to maintain the financial freedom
your automated trading strategy has granted you.
During the same trip, you’ll visit Costa Rica, in which you have
various business interests unrelated to trading, giving you
additional passive income.
You do whatever you want, whenever you want. You only work
when you’re in the mood.
The strategy fits your lifestyle. You can live by the ocean in
Europe and swim every day, or you can live in the American
suburbs and take your kids to soccer practice. You can live life on
your own terms, because you’ll be making passive income while
you sleep.
No more reporting to bosses, no schedule that tells you where
you need to be or what you should be doing. Instead of other
people deciding how you should live, your life is up to you.
If you don’t want to work one day, you won’t work, because you
have enough passive income coming in to cover your expenses,
and then some. If you want a longer conversation with your wife or
kids, you’ll have it. You have the maximum amount of joy and
freedom possible, because every day, you create the most perfect
day you can imagine.
You had to work hard, up front, of course, to build your
automated trading strategy. But it has granted you lifelong financial
independence, allowing you to live wherever you want and do
whatever you want. You can work on passion projects, stay active,
travel whenever you want, and spend uninterrupted quality time
with family and friends.
That’s my life right now.
I’m really not trying to brag. The truth is, my editor had to wring
that description out of me, because after having freedom for so
long, it seems normal to me. It’s how life should be, for anyone
who wants it. And there’s zero reason you can’t have it, too.
You’ll have to want it badly enough to work hard at first.
Fortunately for you, I’ll lay out each step in this book, and once
you’re done, it will only require thirty minutes of daily
maintenance.
I have students who are successful, highly paid executives, but
they still have to deal with nagging bosses, annoying bureaucracy,
and management telling them what to do. They have pressure,
deadlines, and targets to meet. It causes a lot of stress, and they’re
uncomfortable.
For all of them, there comes a time when they say it’s not worth
the money.
Are you in the same boat?
It’s your turn to create financial freedom without the obligations
of a stressful job. Here are the basics.
Trade once a day—no intraday market monitoring required. You
enter your trades and download the new updated historical data
from your data provider, because that data will tell you what to do
tomorrow. Then you open your trading software (your scanning
and back-testing software), and you scan the previous day’s data.
Your software tells you which new positions to enter, based on the
proven rules you programmed into it long ago.
In five minutes, your computer will calculate what you should
do. Do you need to adjust existing orders? Close out current
positions? This would take you days to calculate—scanning the
complete universe of approximately seven thousand US-listed
stocks, and generating perfect trading decisions on when to buy
and sell. The computer does that in minutes, emotion-, stress-, and
error-free.
You will never have to monitor your positions during the day.
The only thing that monitoring can do is provoke you to override
your proven strategy. The same goes for TV and news. The Fed is
making an announcement? Ignore it. Ignore it all, and live your
life, while the strategy makes you money.
Most traders let their lives be guided by the news—by the latest
profit warning, corporate action, or Fed announcement. It causes
useless stress, and it’s nothing more than guessing.
 Let’s say I’m trading for an investor, and something like Brexit
happens. Of course, it was all over the news. Everyone said it was
a disaster. I read the news after coming home from dinner at 1:00
a.m. one night, and I shrugged. It was interesting, but I wasn’t at all
worried about my portfolio. In fact, I was excited to see what the
day would bring, because my strategy was prepared.
I went into the office early to look at my positions, and I was
market-neutral invested, meaning that I had both long and short
positions, and was completely hedged.
For half of the day, I had to ease the concerns of unnecessarily
anxious investors. I understood why they were worried, but they
didn’t need to be. Our automated strategies were prepared for all
market conditions, even extreme ones like Brexit. They couldn’t
avoid the constant news message shouting fear and doom—
analysts telling you exactly what would happen, based on nothing.
I had people calling me expressing concern, even though they
knew nothing about my positions. Most people can’t ignore the
fear and noise in media.
The markets went way down for a few days, then reacted sharply
the other way, and nobody talks about it anymore. It was just noise.
Whenever there is news, I get calls. It’s amazing. Mostly when
that happens, my mean-reversion strategies, which buy fear, work
well. It doesn’t matter, though, because statistical strategies and
automation mean that news is irrelevant. I don’t need to have any
anxiety, and neither do the people you trade for.
You have clear rules on when to buy or sell, and your software
tells you exactly what to do. You follow its instructions, because
you put in the hard work beforehand to ensure you are following a
proven formula to make money, long term. The agenda of the news
and the whims of your emotions are completely absent.
I’ll take you through, step by step, but it’s simple. Trading
doesn’t have to be hard—as long as you follow the rules, and as
long as you create a strategy that suits your personality, your
lifestyle, and your risk tolerance. The first step is rigorous self-
analysis, which I’ll walk you through in the book. What are your
beliefs of the markets? Do you like trend following? Mean
reversion? Why? Do you want to trade both long and short, or just
long? Do you want to enter orders daily, weekly, or monthly? Are
you patient or impatient, and what does that mean for your
potential strategy?
The clearer your objectives, the easier it is to define your exact
strategy, as we’ll discuss in part 3.
There are many strategies that work, but only the one you pick
has to fit your unique situation. The strategies use the same
fundamental principles, but their execution is different, and if they
don’t fit your personality, you will fail. It’s not that hard to
consistently beat the markets, year after year, once you’ve
determined your ideal strategy. But if you don’t take the time to
analyze yourself, you’ll override your strategy.
Our emotions often unconsciously get the best of us, which is
why I automate everything. Automation takes emotion completely
out of the equation. It’s just a computer crunching numbers, and
you blindly obey.
I advocate strategic trading, as opposed to discretionary trading.
Discretionary traders are trying to anticipate what the market
will do, by perfectly analyzing information. The information is
imperfect, though, and analyzing it perfectly takes Buffett-esque
skill. It’s subjective. Discretionary traders follow loose rules, which
make them vulnerable to emotional swings. They need to be
“right” in picking stocks, so they often take losses personally.
When they’re wrong, their ego is hurt. They’re very “flavor of the
month,” using a variety of indicators based on the times. Some use
macroeconomic indicators, chart patterns, or even news. It’s
nonquantitative, and they generally have a tiny watch list of stocks
and markets to trade, because they can’t possibly track the whole
trading universe like computers.
Strategic traders are virtually the opposite. They aren’t
anticipating what the market is doing; they’re participating in what
the market is actually, currently doing. It’s a humble, realistic
approach that takes ego out of the equation. They follow prices,
rather than information. They have a few rules that are strict and
well defined, to govern their entries, exits, risk management, and
position sizing. Because their ego is absent, they’re unemotional
when they underperform. All that means is the market wasn’t
conducive to their strategy at that time, but they will win long term.
They always use the same, technical indicators to determine entries
and exits, and they are able to trade many markets and stocks. They
don’t need to be experts on the fundamentals, like a Warren
Buffett.
While discretionary traders are stressing about what the news
means, strategic traders are reacting to current, actual market
conditions. There is no opinion or prediction, just a predetermined,
automated response from their proven strategies.
Clearly, the strategic approach is superior, but it’s not easy to
follow. You’ll only follow your strategy if you believe in it deep
down, psychologically.
Have you ever seen a day trader? They’re stressed out of their
mind, and most of them lose. The biggest reason people fail in
trading is because their emotions commandeer their decision
making. They haven’t taken the time to define their beliefs and
strategies and program them into an automatic process. They have
some ideas, maybe some great ideas, but there’s no way they can
overcome their emotions and act consistently, as the markets move
up and down, and the pundits scream and shout.
This is why I ignore the news and let my computer do the work
for me. Computers don’t feel stress; let them handle the grunt
work.
You put in work up front. What do you get?
You no longer need a nine-to-five job. No more rat race—you’re
set for life, financially. You can live and work where you want. You
can travel wherever you want, whenever you want, and still make
money every day, with just thirty minutes of daily maintenance.
You don’t have to open a newspaper, read expensive newsletters,
or watch TV.
You spend time with family and friends, doing what you want.
It’s real, it’s what I do, and I’m going to show you how I do it.
I started trading in 2000 while helping manage my family’s large
retirement account, which was completely invested in a
fundamental trading approach. It was managed by a high-profile
wealth management bank in the Netherlands, in a huge, wonderful,
classic, expensive building.
I saw the fancy building and people and couldn’t help but think,
Wow, they must be smart. I saw all the money behind it and met
with the manager; they had so much knowledge, as well as massive
research reports. In the beginning, I was overwhelmed and
impressed, like most people. But I started monitoring that account
right after the dot-com boom had ended, and in two or three
months, these huge accounts had lost about 30 percent.
I started to second-guess these big and fancy wealth
management companies. In my next meeting with the wealth
managers, I challenged them: “We’re down 30 percent, et cetera,
and it’s not good.” “Well, Laurens, the market is down, so you just
need to wait it out, because the market will always go up in the
long term.”
I asked a reasonable question. “What is that logic based on?”
They didn’t have an answer. And then they told me to buy more
stocks, because that would lower the average purchase price of the
stocks we currently owned. They said, for example, we had
purchased a stock at $100, and now it was down 30 percent, to $70.
They said, buy the same amount, again, at $70, because your
average price will be $85 and the stock only needs to move up 15
dollars to be back at even.
But every time we bought, they received more commissions!
These companies were trying to manipulate the market, telling
all of their customers to buy, hoping to bring the market up, and
taking their commissions regardless. But at the time, market
sentiment was horrible. I didn’t believe in what they were doing,
and it was clear they just wanted us to buy so they’d get
commissions.
I spoke to my father, who owned the account. We had too much
risk exposed. We couldn’t be invested completely in such bad
times, I said. I recommended my father sell the entire account. We
didn’t know what we were doing, and we were relying on people
who didn’t care about how much money we made or lost, but
rather the status of their commissions.
I convinced him, so we sold the entire portfolio. It had Enron
and WorldCom in it, which both went bankrupt. We would’ve lost
over 70 percent of our family’s retirement account if we had held
on to our positions, and even more if we had doubled down like the
“experts” had recommended.
That proved to me that wealth managers weren’t as smart as they
preached, but I didn’t yet know what I was doing. I just knew not
to trust them.
 Convincing the banks to liquidate our positions was a huge step,
but all it did was take us from losing money to being flat. Making
zero money wasn’t good, either.
I started trading with a $30,000 account. I thought that by
following the news I could guess exactly where the market was
going. I had expensive software giving me up-to-date news,
earning reports and Fed reports. I thought that the faster I had
information, the faster I could take action and beat everyone else.
I’d stare at my computer all day, nervously analyzing every piece
of information as it was released. How would it affect my
positions? I prayed for favorable news, glued to TV, radio, and the
Internet. I needed every piece of information, or I’d be missing out.
I was constantly anxious. I smoked fifty cigarettes a day.
My account was swinging up and down, and it crushed me
psychologically. I had health issues. I couldn’t sleep. I was
nervous, kept to myself, and lost self-esteem. I couldn’t accept the
fact that I was losing in the markets. I knew things were bad, but I
didn’t know what to do.
Eventually, I accepted that bankruptcy was coming, and the long
road of educating myself began. I’ve now read over five hundred
trading books, after years of six to eight hours of daily study. Not a
day passed that I wasn’t working on learning about the markets. I
attended seminars and talked to any smart people I could find.
One day, I stumbled across a free book online which told the
story of a group called the “turtles” who were taught to trade a
simple, proven strategy from professionals. It turned out that the
ones who followed the rules 100 percent made the most money. It
had nothing to do with decision-making or analysis; the ones who
followed the system closest made the most money. It was so
simple, and made so much sense, but was so profound. That was
my first breakthrough.
The second was that I found a style that really resonated with my
personality: mean reversion. Basically, you buy a stock that is well
oversold, which means it has a statistically larger likelihood than
random to revert back to its mean (go back up in price). You have
an edge when you trade like that consistently, long term. I hired a
programmer and said, “Here are my ideas. Can you program this
into an automated strategy?” Then I tested the strategy, and I had
been correct. I was on to something. I had an edge. I started to
trade and make money. Later, my beliefs evolved, and I currently
trade both mean reversion and trend following, combined.
Once I started making money, I could buy more specific
educational material. I learned about every indicator, statistic, and
piece of quantified evidence I could. I eyeballed thousands of
stocks, guessed good entry and exit points, wrote them down, and
tried to create proven rules. It was insanely difficult—I had no
programming or back-testing experience. I just knew to look for
something that consistently made money long term, because then
I’d have an edge.
Hiring my first programmer was that first big breakthrough, but
it was difficult. I had ideas, but I needed to explain them to my
programmer, and make sure they were doable. It was a long,
expensive road before I figured something out. I paid people by the
hour, to work on slow computers, from 2005 to 2007. I didn’t have
millions of dollars for fancy computers—normal computers were
slow to crunch numbers back then. Now, all you need is a decent
laptop.
Back tests used to take twenty-four hours, if the computer didn’t
crash. Now, they take ten minutes. I was so convinced this would
be where my edge lay, though, that I never gave up. Eventually, I
created codes and strategy and defined exact parameters. My
opinions turned out to be right: There was a real edge in strategic
trading.
I was busy at the time and had to trade everything myself.
Eventually, though, I improved my software and made the process
less time-consuming.
Everybody doubted me. My friends, colleagues, and the media
told me I had to listen to the banks and experts. They told me I was
full of crap, or a dreamer. It was tough to bear the criticism, but I
believed in my philosophy. Even when 99 percent of my
surroundings were laughing at me, I kept going.
I haven’t smoked a cigarette in ten years, and I haven’t had a
losing year since 2007. My returns have been in the large double-
digits.
My trading has evolved, and edges have decreased slightly over
time as the market has gotten smarter, but I’ve also begun to
combine strategies. For every strategy, there are market types for
which the strategy won’t work. When you have a sideways market,
trend following does not work. You buy and sell with a loss. You
get whipsawed. But mean reversion works great in a sideways
market, and at most times, more than 70 percent of the market is
trading sideways.
If you trade those two concepts together, plus multiple others,
you’ll always have a couple of strategies that work in current
market conditions. Depending on one approach is risky, because no
matter how smart you are, you can never predict which type of
market is coming with perfect accuracy.
When markets are going down, you take the mirror of what I just
wrote—you trade short trend following and short mean reversion,
and you make money even when the markets are falling, because
your long strategies are out of the market, and your short strategies
are in, making money.
It all comes down to statistics and psychology; you have to
understand your own unique psychology and risk management. My
journey has taken me to many courses and seminars, resulting in
serious psychological transformation and a feature in Van Tharp’s
latest book, Trading Beyond the Matrix. I wrote a chapter on my
trading experiences, and how I transformed from a loser, following
the masses, to a long-term winner, following my well-programmed
computers.
I currently run a small investment fund where I manage money
for institutional traders from the United States and Switzerland.
More importantly, I have additional time to do what I love—
mentoring people to create their own automated trading strategies,
which eventually lead to financial freedom. This book exists so you
can do that, too.
As we’ll show in part 2, typical investment advisors use the
crystal-ball technique called fundamental analysis, which is risky
and suboptimal for long-term profit. My approach is quantified and
automated—the complete opposite. My strategies completely
ignore fundamental numbers.
Fundamental traders guess the future. These traders analyze
earnings reports and other company numbers, and predict where
the price will go based on their analysis. They have a conceptual
idea of where the market will go, and then they make predictions.
For example, they might say, “The economy is slowing down, so
stock prices will probably go down.”
Basically, it’s the Warren Buffett model of investing. That
sounds great, except that it’s highly skill based. Buffett is the
master in picking the right stocks, and few people are able to learn
that skill. They think they can, but when they actually try to pick
stocks, they fail. The common anecdote goes like this: If the
average investor compared his results to a monkey choosing ten
different stocks, the monkey would do better on average.
Picking random stocks beats the average investors’ skill, because
picking stocks is incredibly difficult, random, and counterintuitive.
Using Buffett’s strategy to pick stocks would be like using LeBron
James’s strategy to play basketball. Sure, slam dunking every play
sounds like a nice strategy in theory, but if the average guy tried it,
he would fall on his face. You need Buffett’s otherworldly skill,
decades of experience, and hours of daily hard work if you want to
attempt his strategy.
It’s also difficult for fundamental traders to create strict rules for
when to buy and sell, because their discipline is so instinctive and
skill based. Quantifying their exact decisions for when to buy and
sell is therefore mostly impossible. They make a trade because they
expect a certain outcome—that a company is going to do well. But
what if they’re wrong? Even the best traders will be wrong
frequently. They don’t have an exit strategy, because they’re simply
making a bet that a company will do well, and when it doesn’t,
they still expect things to turn around eventually.
Additionally, fundamental traders don’t tend to have a strategy
for when there is a big downturn. Whenever market sentiment is
down, their accounts are down, too. They attempt to spread risk by
investing in different companies and sectors; however, their
complete exposure is long. Therefore, even though they are
“diversified,” their assets are correlated; they go up and down
together. When the entire market sentiment is negative, all sectors
go down. Diversification sounds nice in theory, but if all of your
exposure is long, you will go down with the market.
When you most need protection, sector diversification won’t
help you. In bad times, your “diversified” stocks go down together,
and you suffer.
 By that, I mean this: Investors think that a diversified portfolio
will protect them from catastrophe. That’s not true, because
diversification only applies to sectors, not market types. When
there is a bad bear market and the markets are down, all sectors go
down. All sectors are correlated in bear markets. Diversification
works somewhat in bull markets—some sectors will do better than
others—but when market sentiment is down, diversification is
useless. Your entire portfolio will go down. I call this concept
“Lockstep”. It’s when emotional responses create the mood in the
market that everything is now going the other way and correlations
are either 1.00 (perfectly correlated with zero diversification) or
-1.00 (perfectly inversely correlated which means that you can’t
make any profits)
That’s what happened in 2008. It didn’t matter how you had
diversified your portfolio—all of your “diversified” stocks went
down together, and you suffered.
Once in a while, fundamental traders will be right, and it will
pay outsized dividends. Often, they’ll be painfully wrong, like with
gold, as I’ll explain in a moment. Over the past seven years or so,
writers have been saying the US economy is in bad shape. The
government is trillions of dollars in debt, and so on, which is true.
It is in incredibly bad shape. However, that doesn’t tell you exactly
what will happen to stock prices in the coming year, because the
emotions of traders are what control stock prices. You can’t predict
exactly when the inevitable downturn will occur, nor its magnitude.
It could happen in a day, a month, a year, or a decade, and it could
be of any size.
In 2011, gold was at $1,900, and I have never seen more
newsletters start to say, “The world’s going to end; the financial
system is going to collapse; you must buy gold!” They reasoned
that “gold always holds its value and maintains its purchasing
power,” “we might even go back to gold standards,” and so on, and
“then the price of gold will explode!”
Conceptually, there is truth in this analysis. The people who said
it are not stupid. Yet from 2011 to 2015, gold dropped from $1,900
to $1,050, almost 50 percent! While the fundamental analysis made
conceptual sense, and implied that gold would rise dramatically,
the price action told you something different. Price action is all that
matters.
The standard, fundamental analysis (touted by many newsletters
and media) would have lost you almost 50 percent on the big
recommendation of gold, but a simple, long-term trend-following
model would have told you otherwise. That model simply closes
the position whenever it’s below the two-hundred-day simple-
moving average, so you would have gotten out around $1,600.
As usual, the white noise of newsletters and media was wrong,
and a simple, technical exit based on price action would have saved
you from disaster.
If I were trading a long-term, trend-following strategy, I would
have definitely been in a long position on gold at $1,900, like the
fundamental traders. However, technical analysis gives you clear
rules on an exit plan. That’s the key. You can be in a position that
will eventually go bust, but you’ll get out before it goes bust,
because you’re prepared.
There will be a moment where the computer measures the trend
and tells you, “In this situation, historically, prices start to go
down.” It will tell you: “Based on past statistical evidence, this
price is broken. Let’s get out of here and eliminate our position on
gold.” Your balance would be saved.
Under a trend-following approach, you stay until the trend flips.
Your technical strategy makes you far better off, because it
understands that you must never be overconfident in your analysis,
because all that matters is what prices the market displays.
Fundamental traders, however, don’t have that safeguard against
overconfidence.
It wouldn’t have mattered which specific trend-following
approach you used. Any approach would have saved you from
catastrophe, forcing you to exit as soon as the trend was measured
over. All that matters is that you measure price action, and base
your buying and selling decisions on that. That’s the key.
Simple-moving averages (SMA), as I’ll show in part 4, are a
tenet in the philosophy of trend following. It’s simple. When the
computer tells you, based on SMA, that a trend is over, you exit.
(See Ch. 4 for an example with Enron.)
You can analyze the fundamentals all you want, but the stock
market is controlled by market sentiment. If the market doesn’t
agree with your analysis, you’ll lose, even if your analysis was
logically sound. That’s why I focus solely on price action. It’s the
best measure of market sentiment that exists.
Another example of fundamental traders failing was in early
2009, with the S&P 500. We had just experienced the large bear
market in 2008, and in March 2009, that bear market hit its low.
From then on, the S&P 500 went up in price. In mid-2009, my
trend-following strategies recognized buying signals, based on that
price action. However, fundamental traders were still in a negative
headspace, thinking, The economy does not look good, therefore
I’m not optimistic. But if they had simply followed price action, the
charts would have shown them that sometime in the summer or fall
of 2009, they could’ve again entered positions. From then on, the
S&P more than doubled in value.
Fundamental traders cried about the massive national debt and
other issues, yet the S&P tripled in value from its low in 2009. If
you had completely ignored the fundamentals and all of the
market’s issues, and simply followed price action, you would have
done incredibly well.
Technical analysis analyzes the past. Technical analysis
completely ignores fundamentals, and looks at price action instead.
My strategies analyze the historical price movements of the
market, in order to find statistical edges. There are patterns that
will repeat themselves in the long run, and if you trade according to
these patterns, consistently, you will have an edge and beat the
market. You don’t predict the markets, like typical advisors do.
That’s nearly impossible; the market is too unpredictable. You
simply react to the movements of the markets, once they happen.
The key difference is that your strategy, based on past statistics,
can accurately describe the market sentiment in numerical form
and tell you what that sentiment means for future price action. You
wait for the market to tell you something, and then you react based
on your proven strategy.
Basically, the strategy quantifies how people are feeling about
the market, based on price action. But it does this all with long-
term, statistical significance—any pattern that hasn’t been proven
over a large sample size (which is quite common) is ignored. All
recommendations are a combination of sound logic programmed
into the strategy, plus statistical analysis.
My approach works, because we use statistical evidence based
on real past historical price action data. Using price action data
allows you to react according to the market. You may own a
company’s stock that looks good fundamentally, but if market
sentiment isn’t good, the price will go down.
You could have owned the greatest company in the world in
2008, with healthy earnings ratios and the like, but market
sentiment would have killed you. All stocks went down, on
average, 50 percent. Your fundamental analysis could have been
perfect, but you would have lost half of your value because your
exits weren’t based on price action. That’s the danger of working
with fee-based advisors.
If you don’t look at price action for a stock, you have no idea
where the price is going. That’s why I advise all of my clients to
build their strategies based on price action. For the past fifteen
years, I’ve trained myself to ignore fundamentals, while all of the
“experts” who want your money do the opposite.
My approach is a quantified, technical approach. It is simply
creating a proven strategy, and then following that strategy. Once
you have this strategy (and I will teach you proven ones), you do
not need to have any skill. You follow the strategy. Fundamental
trading can work if you have tremendous skill, but most people,
myself included, do not have this skill. Unless you’re Warren
Buffett, fundamental trading is incredibly risky, and not
particularly smart.
In the end, the computer program uses a strategy with a
scientifically proven edge and predefined entry and exit rules that
are based on historical performance. The rules tell you exactly
what to do: when to buy, sell, and sit still. All you have to do is
follow its instructions, like in the earlier example about gold.
Your computer is following a strategy of proven rules based on
how investments have behaved in the past, and it knows when to
cut losses short. It eliminates the risk of ruin inherent in
fundamental traders’ recommendations, which put too much stock
in risky, unscientific predictions. Technical trading is the complete
opposite of guesswork. It is quantified technical analysis of past
price data. It only looks at price action, because that is the most
accurate measure of market sentiment, which is the best predictor
of stock prices. Everything is back tested, so every rule in the
computer has a proven scientific edge over the benchmarks that
wealth managers hope and pray to beat with their crystal balls.
My strategies use historical price action data, but there is a huge
variety in each strategy type. A classic one is trend following. We
cover many styles, but this is the easiest and simplest to start with.
The data identifies stocks that are trending up. When they’re
trending up, you have the belief that when you enter that trade and
buy, you will ride that trend until it’s over. The data tells you when
to stop, and at that moment, you cut your losses short. You get out
of the trade, because the price action is telling you that the
company’s sentiment is not good anymore, regardless of its actual
quality.
It’s no longer the misleading news messages that tell you if a
company is good or bad. The price tells you. If the price goes up,
it’s a good company. If the price goes down, it’s a bad company.
You’ll get out, because otherwise, you’d lose money.
Still, there is no better option than using past data. Would you
rather look into a crystal ball, or use beliefs based on the statistical
proof that would have made money in the past? As long as you test
your trading hypotheses and beliefs and prove them to be true and
based on sound market concepts, you should make money over the
long run.
Most importantly, using an automated strategy takes the emotion
out of what can be an emotional business.
A quantified strategy means you defer to your computer. Every
day, it tells you what to buy and sell. The computer’s
recommendations are rooted in your beliefs, because they are
programmed into the computer. You’re simply outsourcing the
number crunching, and you get clear directions on exactly what to
do. Your decisions are not based on predictive hunches—where
you think the market is going. They’re based on proven strategies,
reactions to what the market tells you about current conditions.
Emotions are the number-one reason people fail in the stock
market, but in my strategies, emotions play zero impact on your
decision making. It’s impossible for a human to behave like a
rational computer on a day-to-day basis—but it’s pretty darn easy
for a computer to behave like a computer.
 The key, though, is using multiple strategies in concert with each
other. You can’t focus only on trend following, for example. My
trading plan works because it uses a suite of noncorrelated
strategies—all traded simultaneously—so money can be made in
every type of market. Mean reversion is the opposite of trend
following, and yet it works great when the two are combined.
That’s because when one strategy is struggling, the other strategy
makes up for it. I’ll explain this in depth in part 4, when you learn
how to set up your own strategy.
The idea is this: You trade different strategies, with different
purposes, at the same time. There are three basic directional states
a market can be in: bull market, bear market, and sideways market.
We can further define based on volatility, but for this example we’ll
stick with direction. When you have a long-only strategy, like
fundamental traders, you’ll do well in bull markets, but you won’t
make money in sideways markets (the markets aren’t moving).
You’ll also lose money in bear markets, like in 2008 when the S&P
500 dropped 56 percent and the NASDAQ dropped 74 percent. The
bad times will wipe out all of the good times.
Perfect execution of a suite of noncorrelated strategies would
look as follows. We start with a strategy that makes money when
the market goes up: long-term trend following. That strategy will
thrive only when we are invested in long positions. When the
trends start to bend, those positions will be stopped out until we’re
going flat. Another type of strategy that works well in bull markets
is a mean-reversion long strategy.
But the market will go down at some point, and your long
positions will lose. That’s why you’ll be trading a short-selling
strategy at the same time—to prepare for bear markets. It’s a hedge
strategy, ensuring that you’ll make money when the market turns
and goes down. Of course, you need to make sure you’re not
giving too much back with this hedge strategy, because it will lose
money when the market is going up. But that’s all covered in my
strategies, as I’ll explain.
It’s an insurance premium, basically. You need to pay it to make
sure that when the market goes down, you’re covered. In a good
year, when the market is going up, your long strategies will make
great money, and your short-selling strategy will lose a little bit.
But if another 2008-like situation happens, or even to a smaller
degree like early this year (2016), your insurance will pay off and
you’ll end the year positive. At the same time, fundamental traders
will be losing big.

In the previous graph, we can clearly see a few things. At the end
of 2007, the Weekly Rotation strategy (grey line) started to lose
money, dropping about 25 percent. However, at the same time, our
short-selling strategy (black line) made up for that with large
profits.
In mid-2009, the situation reversed. The markets entered an
uptrend, meaning the Weekly Rotation strategy (grey line) kicked
in, and we started to execute a lot of long-term trades, making great
money. The short-selling strategy (black line) lost a tiny bit.
Overall profits were large.
That covers bear and bull markets, but there are also sideways
markets, in which trend-following strategies don’t generally work.
However, we don’t suspend those strategies. We are always trading
every strategy simultaneously, because we want to be prepared for
all unexpected market types. Therefore, we need strategies that
work in sideways markets. Those are mean reversion strategies.
Mean reversion strategies are virtually the opposite of trend-
following strategies. They buy the fear and sell the greed. If a stock
is oversold, that means there has been a lot of panic regarding that
stock. According to a mean-reversion strategy, that moment of
panic is the perfect moment to buy that stock, because there is a
statistically larger than random likelihood it will revert back to its
mean price once the panic has subsided. Once the price returns to
its mean, you exit the stock again. The strategy works in reverse,
too. When there is a lot of greed in the market and stocks are
overbought (there are too many bulls in the market), that’s a good
moment to sell greed. The reason is that there’s a statistically larger
chance than random that the market will react to the downsides.
You’re buying the fear, because it has gotten so extreme that it
has become a low-risk idea to invest, even though prices are going
down. More than likely, things will turn around. This is based on a
large sample of statistics. Sample size is key. If it were based on,
say, thirty trades, the statistical likelihood of your hypothesis being
true would be tiny. But when it’s based on scientific proof from
three thousand trades, your likelihood is high, and in the long run,
you’ll win.
Of course, you’ll also do the inverse, which is selling greed.
You’re still looking at price action. With trend following, you
look for a certain indicator which says, “Okay, now the price is
trending up.” With mean reversion, you look for price action to tell
you a stock is oversold, so that it’s becoming cheap. (With short
selling, it’s vice versa.) Perhaps the stock has been moving down
for the last four days, 15 percent or more. The simple price action
rule, if tested and proven, might be, “If I buy every stock that over
the last four days has dropped 15 percent or more in value, then
there is a statistically larger than random chance that it will revert
back to its mean. Therefore, if I trade this strategy consistently, I’ll
make significant profits in the long term.” That means you have an
edge, and we only trade when we have a statistically proven edge.
Generally, mean reversion is shorter term and is buying fear, or the
opposite, selling greed.
As you can see, combining strategies ensures that we’ll make
money regardless of how the market is performing. We do this
because virtually no one can predict what the market will do with
reasonable accuracy. We take that variable out of the equation,
depending only on our proven strategies, rather than the
unpredictable whims of the market. We accept that picking stocks
is only for geniuses like Warren Buffett who devote their life to it,
and build a computer program around our deficiencies as humans.
Humans are good at many things, but in this case, it’s smart to let a
computer do all of the grunt work. We aren’t fortune-tellers, and
we can’t crunch numbers like computers.
 Often, people have long-only or open positions, so when the
market turns sour, they freak out. Everything on TV and online is
bad, scary news, and they can’t help but react. People are basing
their decisions on what other people tell them is fundamentally
good, and then they get anxious about their positions. Of course,
you don’t need to listen to the news if you have an automated
strategy that is prepared for any market type—bull, bear, or
sideways! Your task is simply to follow your strategy, because it is
designed to make money in all market types. The news becomes
irrelevant.
Imagine a scenario like 1929-1932, when your account would
have dipped lower by the day. The Dow Jones and S&P 500 lost
more than 80 percent of their value! If a time like that ever happens
again, you’ll be grateful that you’re trading both long and short,
and not exposing yourself to those losses. By designing a strategy
that works well in both up and down markets, you’ve won the
game. Your mental state will never be affected by inevitable
downturns in the market. You can finally relax, as your money
increases long term.
Investing is my life’s work, and I’m still often wrong in my
personal predictions. For example, after the big bear market in
2008, around March 2009, many people were still writing that the
world was going to end, like in 1929. They said it would go down
another 30 percent. I actually agreed with that opinion, thinking the
worst wasn’t over. But when you least expected it, and there was
extreme fear, the market started to rise again. People’s logical
thoughts and beliefs said one thing, but the price of the market said
exactly the opposite. The prices are all that matter.
If I had followed my beliefs and opinions like most people do, I
would have lost money. But I trusted my strategy, which ignores
my personal predictions in favor of my suite of noncorrelated
strategies. My bull strategies were already in place and trading, and
I made money. By automating things and removing your opinions
and beliefs from the equation, you make money even in the
common instance that the market doesn’t make sense to you. The
stock market is wholly unpredictable, so we plan around that, and
make money regardless of what happens. We don’t hope to be
right; we defer to the unpredictability of the market. What we’re
doing is lowering our expectations but winding up with a better
result. We’re ignoring our natural cockiness and ego, being rational
instead, and profiting in the end.
 Now, how do you create your own, personalized strategy? As
I’ve explained, you base it on your beliefs, but not your
predictions. The difference is that beliefs are ideas that can be back
tested against historical price action; they are beliefs about what the
market historically does when it is performing a certain way.
Predictions are different and are based on evaluating individual
companies, rather than reacting to the entire market on a broad
level. It’s nearly impossible to predict individual stocks, because
they are so dependent on market sentiment. It is entirely possible,
however, to understand what current market conditions mean for
all stocks, when calculations are automated to a powerful
computer.
However, not all strategies are the same. Your strategy needs to
be tailored to your unique situation. You do the work beforehand
(which I’ll describe in depth in part 3) to reflect yourself in your
strategy. You start with the core market concepts I have explained
and will continue to explain: trading long and short at the same
time, and trading both trend following and mean reversion.
Therefore, you’re covered regardless of what the market does. You
don’t need to predict what the market will do, because you’re
covered in all scenarios. Within that framework, though, you will
define your own personal beliefs and preferences. Then you trade
according to your strategy, responding to the market’s price action,
rather than riskily predicting it.
If your beliefs are different than mine, your strategy will look
different. But as long as you have a clear understanding of core
market principles, both of our strategies will work. For example,
my suite of twelve noncorrelated strategies doesn’t work for people
who have IRA or 401K accounts, because those restrict you from
trading short. The solution would be to set your beliefs as long-
trading biased. You are mildly limited, but it would still be possible
to make good money. The only difference would be that there will
be times when your strategy is out of the market and flat, because
your indicators are telling you it’s currently a bear market. While
my strategy would be making money, you would be flat. However,
you would make more money in bull markets, because you aren’t
paying the insurance hedge of a short strategy.
(There are some options to work with buying inverse exchange-
traded funds [ETFs] and thus having a hedge, but the structure of
those products are often misleading, so you need to be careful.)
 Once your strategy is created, you don’t need to look at the news
at all. Fed numbers came out? You don’t care. Company reports,
yearly profits, blah, blah, blah—you not only don’t care about it,
but you actively ignore it, spending time on things that enrich your
life. You’re simply following your strategy, which tells you when
and what to enter and exit. You just follow what price action is
telling your strategy to do. The computer does all of the work and
tells you when to buy and sell.
It’s no problem to trade three or four strategies at the same time.
In fact, I trade up to twelve strategies simultaneously. This would
be impossible to do without a computer, but my years of
programming and testing thoughts and beliefs are now reflected in
my automated strategy. Now, the analysis takes just a click on the
computer. And because I only use end-of-day data, I can do my
analysis in less than thirty minutes a day, and so can you. You can
do it from anywhere in the world, because the only thing you need
to do is wait until the market has closed, download your data, scan
for the new trade setups, and then open your broker platform and
make sure that before the market opens again, you enter the trades.
You can do this without any emotion clouding your judgment,
because your task is not to be smart and pick the right stocks. It’s
nearly impossible to outsmart the market. Your task is to follow the
strategy, which anyone can do. You don’t care what the market is
doing, because you have strategies in place to profit regardless of
how it performs, no matter of how unexpected.
Most people lose money when they let their emotions get the
best of them. As humans, we can’t be levelheaded and rational all
the time, especially while losing money. For that reason, you
program your risk tolerance into your strategy. The maximum
money you can stomach losing is predetermined. Your strategy will
tell you to stop trading at that threshold. Many people build a good
strategy, but as soon as it goes down 5 percent or 10 percent, they
freak out, lose trust, and make bad decisions. If you define your
maximum drawdown beforehand, you’ll stay calm and collected.
You’ll be prepared for the worst, and you’ll know exactly what the
worst is.
For example, you may predefine that you’re unwilling to lose
more than 20 percent of your equity. When you compare that to the
max drawdown of the S&P 500 (over 50 percent), that’s not a large
number. I define risk tolerance as your maximum drawdown.
Someone may say losing 20 percent of their balance isn’t a
problem, but that answer isn’t usually based on experience. I work
with people to visualize this loss vividly, to check the accuracy of
their answer. “You say you’re OK with a 20 percent drawdown, but
let’s say your $1 million trading account is down to $800,000. Are
you OK with losing $200,000?”
If you haven’t visualized this potential loss, clearly defining the
point where you will lose hope for long-term recovery, you’ll
override your strategy as soon as the inevitable downturn hits. That
will end in catastrophe. You need to trust in your strategy’s ability
to recover, long term. If you’ve analyzed yourself enough to know
what you can truly handle (and I’ll explain how), then you’ll know
that big drawdowns are part of the game. You won’t panic, because
you know you need to risk money and lose it temporarily to make
money long term. Yes, you’ll make money consistently, in up and
down markets, but there will still be times when the market is so
bad that even with a perfect strategy, you’ll lose money. You’ll lose
less than fundamental traders and virtually everyone, but you’ll
still lose. You need to be able to stomach losses and trust your
strategy’s long-term, scientifically proven results.
Now, what do you have to do before creating your own strategy
to achieve financial independence in thirty minutes a day? First,
you need to take serious time to analyze yourself, so you deeply
understand your personality, preferred lifestyle, and trading beliefs
and preferences. You may not like shorting stocks, for example.
That’s fine, but if you don’t account for that when creating your
strategy, you’ll have trouble following your computer’s orders, and
you’ll fail. You need to be honest with yourself and make sure
you’ll follow your strategy. You can only trade according to your
beliefs. Those beliefs must reflect sound, proven market principles,
but they also must suit your individuality. There are plenty of
sound principles, so not everyone needs to trade the same
strategies.
For example, if you are impatient, trend following is going to be
difficult to follow. You will have long positions that will last for
two or three months without profit. You wait a long time, see no
results, then make a big profit. It’s effective, but boring. Impatient
people will get bored and exit too soon. The profits don’t come
quickly enough. There’s not enough action. You might believe in
trend following, but your beliefs also must mesh with your
personality, or it will be a disaster.
 If you’re following mean reversion, you must be able to ignore
the news completely. I never watch the news. The principles for
mean reversion are buy fear and sell greed. If you watch the news,
it’s difficult not to be influenced by experts shouting. You need to
buy when there is a lot of panic in the market. You go against the
herd and the shouting. That is not for everybody, nor is the opposite
(selling greed). Mean reversion is the opposite of trend following,
where you follow the whims of everyone. If you’re not comfortable
ignoring mainstream opinion and going against the herd, you’re
going to struggle trading mean reversion.
It’s also key to incorporate your preferred lifestyle into your
strategy. If you want a life where you only need to watch the
market thirty minutes a day, there’s a strategy for that, like the one
I use. If you only want to watch the markets once a week, there’s a
different strategy. If you only want to watch the markets once a
month, there’s a strategy for that. If you love activity and want to
make ten to fifty trades a day, there’s a strategy for that. I have
students with busy jobs, traveling around the world as big-time
executives, and they don’t even have time for those thirty daily
minutes. But they incorporate that into their strategies, and do
great. Each strategy works as long as it is clearly defined
beforehand, so it will be followed precisely, with no trouble, doubt,
or panic.
You put in the hard work beforehand to create a strategy and set
of rules that you know you can follow, long term, and then you
simply follow them and profit. As long as you’re honest and
diligent up front, you’ll have tremendous success. The only way to
fail is to fail to be honest with yourself.
Before we continue, it’s important to understand what we’re up
against. Financial institutions will tout their performance versus the
benchmark, often the S&P 500, but more than 80 percent of
institutional traders fail to beat it. That is mainly due to
commissions, fees. Here’s a visual look at the S&P’s performance
since 1995.
As you can see, the benchmark has been far from impressive, with
an average compound annual growth rate (CAGR) of 7.37 percent,
a maximum drawdown of 56 percent, and two large drawdowns
that lasted over five years. If you had started at an equity high like
in 2000 or 2007, you would have entered in a drawdown, and
waited over five years to get back to the breakeven point. Not
good.
Since 2009, the benchmark (and stock indices in general) has done
well, so buy-and-hold approaches have worked. This is a problem,
because it causes people to look at the recent future and forget the
past. The next big downturn, like 2000, 2002, or 2008, is just a
matter of time. It will happen, at some point, so we need a strategy
in place to survive.
Looking at the previous chart, it’s obvious that buying a mutual
fund that tracks or closely correlates to the index is unwise,
because you will lose half of your equity when the downturn hits.
What if you started with a million dollars, and now you’re
suddenly at $500,000? Will you still trust that your money comes
back?
In the following chapter, I’ll show you how to set up simple
strategies, based on fundamentally correct trading principles,
following simple indicators. My purpose isn’t to show you how
smart or great I am. My purpose is to show you that beating the
market can be simple, if you know what you’re doing and ignore
mainstream financial advice.
If you turn on the TV or read the news, you can’t help but think
that investing is treacherous and time-consuming, and that you
need to hire an expert to manage your accounts. Daily financial
media throws complicated numbers at you, so wealth managers
swoop in and promise to hold your hand and make you money.
They say, “If you don’t know the earning reports and insider
numbers, you’ll never pick the best stocks to hold long term. You
don’t have the time, information, or expertise, so hire an expert!”
It’s overwhelming, disempowering, and confusing.
It’s also complete nonsense.
Most people hire wealth managers via the typical, fee-based
advisor system. But this system is designed to make them money,
through your commissions. It’s not designed to maximize benefits
for you, individual investors.
You hire a big firm, and they charge you a yearly fee to control
your investments. They also charge you transaction fees for when
they buy and sell your stocks and tweak your portfolio, plus
performance fees.
They virtually all use the same strategy: buy and hold. Pick
stocks, and stick with them, long term. Their goal is to beat the
market indices, like the S&P 500. They mostly use what is called
fundamental analysis. They look at a bunch of numbers, like
earnings reports, and guess where each particular stock is headed.
There is no clear exit strategy, nor is there scientific evidence that
buy and hold works. Big firms justify their logic by saying, “The
market always goes up in the long run.” But as anyone who has
witnessed the market’s multiple crashes knows, the market
inevitably sees big drops, and it doesn’t always recover.
This was exactly the case in both 1929 and 2008, and the results
were disastrous. The 1929 crash led to a bear market that continued
until 1932. As shown in the following chart, if we assume that
people started to invest at the equity high (~380), they would have
seen a drawdown of 88 percent, and it would have taken twenty-
five years for them to fully recover their losses. Of course, most
people wouldn’t have the patience to wait twenty-five years. When
people see big drawdowns, they generally run away from their
advisors and quit trading for at least five to ten years, holding their
extreme losses.
When you don’t have a complete strategy that prepares for bad
times, your emotional state will dictate your decisions. In bad
times, you’ll liquidate your portfolio at the worst possible time, and
be forced to live with your losses forever. You’ll sell, not based on
a strategic decision, but rather by the sight of your bleak bank
account. This happens to almost every trader. It happened to me,
before I woke up and realized I needed to prepare for these
inevitable bad times. The solution is an automated strategy that
trades both long and short simultaneously. Without a clear strategy
in place beforehand, drawdowns are impossible to recover from,
because you’ll liquidate before the market goes back up.

When the markets go down (and they always will), your portfolio,
if you’re invested in a buy-and-hold strategy, goes down with it.
Also, since big firms have so many clients, they can’t advise on
lower-volume stocks. Trading lower-volume stocks with a massive
client base would impact the market and evaporate any edge.
They’re forced to only recommend large companies, which means
their model loses just as much as the general industries.
Also, they only make money when you have money in the
market.
When the market crashed in 2008, and the S&P was down 56
percent, the firms kept your money in the market, as your balance
tanked. If they had taken your money out, as a smart investor
would have done, they wouldn’t have received any commissions.
The firms are controlling your money, but have different incentives
than you. Would you give your car keys to a fast driver who would
bill you for any damages he inflicted?
When the market crashes, advisors will say: “Yeah, you’re down
45 percent, but the index is down 56 percent! We’re actually doing
well, relatively. The market will go up long term, and you’ll make
your money back.” They don’t know when the market will go back
up, though, or by how much, and you’re forced to deal with the
stress of losing your hard-earned savings in the meantime. You
may never see that money again. They’ll tell you, “You just have to
deal with this.” They make you believe that it’s “part of the game,”
that this is normal and happens to every investor. It’s not, as you’ll
learn in this book.
Of course, you don’t have to deal with this, because your money
should have been out of the market. You only have to deal with a
tanking balance if you hand your money to someone without skin
in the game. There is no guarantee your balance will turn around.
The “experts” are lying to you, because they have a different
agenda—they want commissions.
And the thing is, when you add up all of the hidden fees, more
than 90 percent of advisors don’t even beat the index. Advisors
need a huge staff to conduct their complicated analysis, and they
pass that cost off to you, through management and transaction
costs, and sometimes performance fees. If you bought the index
yourself, you wouldn’t have paid any of these costs. You could
have done what they’re doing, on your own, for free.
The wealth management industry wants you to depend on them.
They want you to think you can’t invest on your own, even though
you can. That the only people in the know are smart analysts from
the big banks who can analyze company fundamentals, pick the
right stocks for you, so you hold and profit forever.
But the analysts from big banks are not traders. They don’t make
a living buying or selling stocks. They make a living
recommending stocks, writing what people want to read, and they
don’t have any skin in your game. They get their salary and that’s
it, regardless of how their recommendations perform.
Their job is to sound smart, look good, and convince you to hire
them. They’re good at that. They’re not good at making you
money. They get paid whether you win or lose. They get paid when
they beat the index, even if the index is tanking, and you’re losing
half of your money. If they beat the index, they’ll not only get paid,
but they’ll also get praise from their bosses, and bonuses, as your
retirement funds vanish.
Hiring one of these firms would be like a basketball coach hiring
a sportswriter to make his lineup decisions. “I’m sorry, Kobe
Bryant, but a writer said that you aren’t playing well, so you’re not
playing tonight.” If the team lost, the writer would keep his job and
his salary, but the coach would get fired. It sounds ridiculous, but
that’s how the financial world works.
Not only are advisors’ incentives misaligned with yours, but
their strategies are flawed.
In certain times, like bull markets or the recent up markets since
2009, their strategies will work. Those times are great for buy-and-
hold strategies, but they aren’t sustainable, because the market will
inevitably shift. Sooner or later, it will end in catastrophe, like 1929
or 2008.
The good times, like right now (October 2016), are the most
dangerous. The market has been on an uptrend since 2009, so buy
and hold has outperformed most quantified strategies. That means
inexperienced traders are convinced that buy and hold works, that
stocks will always go up in the long run. The longer this happens,
the more stupid capital will be invested in the market, and the
larger the downturn will be when the happy days are over. Excess
greed will cause the inverse reaction of excess fear, and the market
will drop sharply.
Another example was after the dot-com boom. There was a bull
market from March, 1995 to the early 2000s. Everybody was
trading long in tech stocks, and making 30 to 50 percent a year,
easily. Everything was going up. Then the NASDAQ dropped 80
percent in two years.
This trend has happened over and over. Don’t get greedy. Prepare
for the inevitable bad times, so that you don’t lose your hard-
earned savings.
Fundamental traders say, “This stock should be priced at X
based on our fundamental analysis.” Then they’ll peer into their
crystal ball, saying, “This company’s management is good;
therefore, their price will go up.” But you don’t know everything
that’s going on in a company from a few numbers. That’s
pseudoscience.
A company’s stock price is not determined by its fundamentals. A
market, by definition, means prices are determined by money
flowing in and out—supply and demand. This is decided by the
emotions of the traders and investors who create the demand, or
basic desire, to buy or sell the stocks. A stock’s price is the result of
the aggregate perception of traders, not the company’s
fundamentals. If the market likes a company, its price goes up. It’s
as simple as that.
 You could have had the greatest company in the world in 2008,
with healthy earnings ratios and the like, but market sentiment
would have killed you. All stocks went down, on average, 50
percent. Your fundamental trading analysis could have been
perfect, but you would have lost half of your value because your
exits weren’t based on price action.
If you use a fundamentals approach—“I believe in this stock,” “I
think management is good,” or, “The price is going down, but that
just means we can get a good price”—you’ll have irrational
confidence in holding a losing stock. If the stock keeps going
down, like Enron in the 2000s, when the press told you to keep
riding this “great stock that was so cheap,” reality will hit you like
a ton of bricks. You’ll lose all of your money. Enron went to zero.
Without exits based on price action, you’re forced to rely on
company reports and the news. By ignoring price, you’re exposed
to the next potential Enron scenario. You can’t wait until your stock
drops 70 percent, and banks and analysts tell you to sell. That’s far
too late; you will have lost a fortune.

Price earnings numbers are based on earnings numbers, but if those

reports don’t reflect a clear and honest reality, which they often
don’t, those numbers are useless. They’re often manipulated. Price
action is real, yet it’s ignored by most fundamental traders.
 Any type of trend-following strategy (like the ones in the
following example) would have saved you from staying in Enron
until it was bankrupt. However, two brokerage firms, using
fundamental analysis, RBC Capital Markets and UBS Warburg,
didn’t downgrade Enron from a “strong buy” until the stock had
fallen from its fifty-two-week high of $84.87 to $4.14, in late 2001.
In the following table, you’ll see nine different trend-following
exits. None of these exits follows a magic formula—they’re all
simple, with one thing in common. They all follow price action.
They ignore analyst reports and price-earnings ratios—the exit
point is defined by looking at price action, nothing more.
Any one of these various exits would have prevented disaster
easily. Some exit earlier, and some later, but the evidence is clear
that any kind of simple price action would have saved you from
catastrophe. Which one you chose wouldn’t have mattered—the
problem was that most people didn’t have an exit strategy at all.

What happens when the earnings information you’re relying on

isn’t correct? Enron. Bankruptcy. You must base your trading
decisions on price action. Fee-based advisors don’t, and they
therefore expose you to the risk of ruin.
Why would you pay someone money for a suboptimal strategy,
where you bear all the risk, and they get paid even if you lose
money?
 You’re smarter than that, which is why you’ve picked up this
book.
I’m not here to sell you my expertise in picking stocks. That’s
not a winning strategy. My philosophy is that anyone can set up a
winning, automated stock trading strategy that need not require
more than thirty minutes of work a day. Your strategy will beat the
market consistently, and employ varied strategies so that you’ll
make money even when the market is going down.
It involves using a quantified approach in which we define our
trading decisions based on programming proven rules, based on
historical price action data, into a computer, which then does all the
grunt work for you. It’s backward looking, based on statistical
evidence, rather than forward looking, paying “experts” to peer
into a crystal ball.
You’ll be able to ignore misleading TV messages, because your
computer will tell you exactly what to do. It takes the confusion
and stressful emotions out of trading.
You’ll have to work hard up front, in identifying and crafting the
perfect strategy for you to make money long term. But I’ll walk
you through the process, step by step (this is what I do with my
coaching clients), so that you won’t need experts anymore and can
make money on your own.
This is how the process works.
First, you formulate a hypothesis of how the stock market
works. In order to trade successfully, you need a clear vision of
your beliefs. Your beliefs are the core tenet to any successful
trading strategy. Without clear beliefs, you won’t be able to define
rules nor trade a strategy successfully.
Next, you need to use those beliefs to create a rule-based
process of entry and exit criteria for which stocks to buy and
sell. Once your beliefs are clear and proven true based on sound
market principles, they need to be quantified into specific rules.
The more specific they are, the easier your trading.
Then, this is all converted into an algorithm by a
programmer, with back-testing software. I hired a programmer
to do this for me. The human mind is unable to process such large
quantities of information on a daily basis, so you leave the
computing to…a computer. You automate my beliefs and rules, and
the computer evaluates them in a matter of minutes. Not only does
it save time, but it evaluates without your natural human bias,
which we all have. The computer does nothing but computes the
strategy and spits out accurate data.
Next, you need a historical data provider to back test your
strategy. In order to actually trade your strategy, you need
scientific proof that it has an edge. Otherwise, you’ll lose money.
We need to first determine if there is an edge, then quantify it so
that we know what to expect in the future.
Finally, you optimize the combinations to get your desired
results, and then determine whether or not it’s tradable. Once
you have a data provider and your rules correctly coded, you define
the exact parameters. There is a specific process for this, and it
must be done correctly. The task is not to create parameters that
show the best results, because past results don’t guarantee future
results. It could have been a coincidence. You need to test your
parameters and see if they can be trusted to perform well in the
future, too. Your strategy must be robust.
Once your strategy is created, implementation is easy. Every
day, you download the daily price updates. Then, you scan with
your software and code (written for stocks that fit the criteria
of your strategy). These two actions simply require clicking a few
buttons. The computer does all of the work.
Every day, the software provides you with the buy and sell
orders, automatically.
Then you simply enter the orders in your broker platform
manually or in an automated way, and go about your day.
As you can see, the process can be divided into three areas:

1. Your beliefs of the stock market, and how you can make
money
2. Programming and testing
3. Execution

This looks like a lot of work, but it’s not. I began turning my
beliefs into a strategy in 2007, and it has taken me a long time to
perfect it, but once it’s done, you have it for life. Creating your
strategy is difficult work, but it grants you a lifelong asset.
 Now, the whole trading process takes me less than thirty minutes
a day. All I need to do is the execution part, clicking a few buttons
and entering my orders into my brokerage platform.
You’ll have to work hard up front, in order to identify and craft
the perfect strategy for you to make money long term. But I’ll walk
you through the process, step by step (this is what I do with my
mentoring clients), so that you won’t need experts anymore—you
can make money on your own.
To build your own thirty-minute trading strategy, you need to start
by getting to know yourself. Who are you, in terms of trading?
What’s the optimal trading strategy for your personality? Are you
impatient? Not at all? Are you a crowd follower, or an independent
thinker? If you have one of those qualities, then what should you
do about it, to compensate or take advantage?
 There are three elements to knowing yourself. You must know
your personality type, your edge, and your beliefs (which can be
broken down into psychological beliefs, strategy beliefs, and
position beliefs). You need to define yourself in each of these terms
before creating your strategy. Otherwise, you’re destined for
failure.
Let’s start with your personality type. Knowing yourself, and
how your personality meshes with market principles, is essential. If
you’re impatient, you’ll need to account for that. If you’re
disciplined, you can follow a higher-frequency trading strategy, but
you’d better be sure you’re actually disciplined. If you don’t have
the discipline to follow a daily routine, make sure you have a
strategy to compensate for that. It may be smart to use a strategy
that trades once a week, for example. If you want to watch the
news every day, you need to understand the potential harm of that,
and plan accordingly.
Trading success comes down to understanding and quantifying
your edge versus the market. One of the biggest edges you can
have is understanding yourself, and how your beliefs will reflect
your trading. It’s difficult, but it will pay massive dividends—
literally.
We all know this stuff intellectually, but few people put in the
work to understand themselves. The results are catastrophic. I
know this, because I’ve made all of these mistakes. I had to learn
the hard way, but you don’t have to.
First, I learned to acknowledge the limitations of human nature.
We all think we can avoid them, but we can’t. It is, indeed, our
nature. Here are some universal principles I’ve learned, through
ignoring them all and suffering the consequences.
It goes against human nature to ever sell a stock at a loss. When
you’ve lost money, human nature is to wait for the stock to
rebound. It’s the sunk cost fallacy; our brains don’t want to admit
we made a mistake. When you reframe the result to understand that
it wasn’t a mistake, but rather one small result in an overall sea of
long-term profitability, you can let that go. No individual trade
matters; what matters is the long-term result of thousands of trades.
Selling at a loss isn’t a bad thing, and it’s often the best thing you
can do. It means you saved yourself further losses, which could
have destroyed your balance.
 Next, decisions to sell should never be influenced by your initial
buying price. Considering your initial price makes you fall prey to
the sunk cost fallacy, or its reverse, thinking you haven’t milked
the stock for all its worth. It makes you lose objectivity and rational
thinking.
This is easy to understand intellectually, but hard to follow in
practice. Our emotions have more sway over our decisions than we
care to admit. Most people refrain from selling a stock because
they don’t want to close a position with a loss. That’s ridiculous.
The market doesn’t care how much you paid for a certain stock, so
why let your entry price impact your buying and selling?
It’s crucial to learn this all through real-world experience,
because there’s no way to simulate your emotional response to the
unpredictability of the market. You need to know how it feels to
win money, and more importantly, how it feels to lose money. You
can read and study and think you know how to trade, but until you
know how your psyche is impacted by constant losses (which
everyone experiences), you are not ready to trade seriously. Start
small, with money you can afford to lose. Treat it like an
apprenticeship, or internship. Pay your dues, and learn through
cheap failure. Otherwise, you’re doomed to fail expensively.
Overconfidence in stock trading can ruin your life.
I was so naive when I started. I had an initial base capital of
$30,000, but I expected to earn $100,000 (or more) a year. That
was ludicrous, and it led to impatience and overaggressive trading.
I wasn’t unique, though. Many people I work with think they can
make 300 percent profits or more a year, not understanding that
aggressive trading comes with serious risk. I was undercapitalized,
and it was the death of me.
Worse, I didn’t have a plan or strategy. I just wanted to be Mr.
Hotshot Trader. I needed clear and realistic objectives and goals,
and a method of achieving them. I wanted to project a certain
image to the outside world: a rich trader dominating this exciting,
fast-paced world. It was nonsense. I needed a plan. I never defined
which kind of strategy I would trade, or considered which strategy
would suit me. Would I trade fundamentally, algorithmically, or
through technical analysis?
I just sat at my screen every day, watched the news and charts,
and bought when I thought prices would rise. I always put a stop
in, but neither the buying decision nor the exit point was based on
rational strategy. I was just guessing, but I convinced myself that
with experience I’d be able to “feel” the movement, and then I’d be
rich.
With an account of $30,000, I needed to take enormous risks in
order to potentially make a living. My account rose and dropped 10
percent in a day, constantly, but I thought nothing of it. I thought I
was close to finding the Holy Grail, that 100 percent correct
strategy that would never fail.
I had no self-knowledge. I didn’t know my strengths or
weaknesses; I didn’t know who I was. Therefore, I had no idea
what my edge was. I had no knowledge of psychology, and I did no
work on myself. Trading is comparable to professional sports; you
can only succeed with the proper mental state, training, and
strategy. Trading is psychological warfare, yet I was going out
there clueless. I had no chance at becoming a successful trader.
Now I can see that I wanted to trade because I had a lack of
adventure in my life. I thought trading could fill that void while
getting me rich. But through years of transforming my thoughts,
beliefs, and psychology, I’ve learned that trading is the worst place
to look for excitement and adventure. Looking for excitement in
the markets is a virtual guarantee of failure. It’s essential to have
proper motives for trading. If you need adventure, find it
elsewhere. That’s why I do adventure sports and travel constantly.
It took me years to figure out how to build a successful strategy
from the ground up. The truth is, a strategy built on sound trading
concepts and your personal beliefs, with a relatively small Sharpe
ratio (risk/reward measurement) of 1.5, is infinitely better than a
strategy developed through rigorous back tests to find the “perfect”
combinations. Sound beliefs and personalization matter more than
anything, to ensure your strategy is sustainable and impervious to
changing market conditions. A strategy based on beliefs is superior
to any other, because when your trading setups are supported by
your beliefs, you won’t have trouble trading them. You’ll actually
follow your strategy.
Your one goal is to trade the strategy, but if your strategy isn’t
based on your actual beliefs, you will override the strategy when
times get tough. Don’t let that happen.
If you haven’t traded before, you need access to a proven
strategy (like the ones in part 4). Then you can simply execute it
and learn as you go. Most people start trading and think they can
come up with their own, unique strategies. That would be like
someone reading four books on brain surgery and then stepping
into the operating room. For brain surgery, fortunately, no one
would let you into the operating room. For trading, though, access
is easy. Open a brokerage account, and you’ll get bonuses. That’s
to encourage you to trade, so brokers can get their commissions.
Once you’re in the game, it’s hard to quit. Beginners are allowed to
play with the pros, but they’ll lose.
To start, write down everything you know about yourself, in
terms of trading. Don’t make the common mistake of evaluating
yourself half-heartedly. It will destroy your financial future.
I’m a big fan of the Myers-Briggs personality assessment;
knowing your type is essential before creating your strategy. This
isn’t so that you’re put in a box and classified as a certain type of
trader; it’s so that you understand how your inborn personality will
reflect in trading. Next, you’ll identify the steps you can take to
improve on your weaknesses.
Myers-Briggs is based on four dichotomies—each person leans
toward one of the two options in each category. It’s not all-or-
nothing; it’s simply a side you veer toward more.
First there is extraversion versus introversion. Next, there is
sensing versus intuition, thinking versus feeling, and judgment
versus perception. There are sixteen different personality types,
determined by whichever combination of those four dichotomies
the test says you prefer.
I haven’t seen any difference between extroverts and introverts
in terms of trading, but for the others, the differences are
significant.
People who prefer intuition tend to see the big picture better than
those who prefer sensing—the more detail-oriented bunch. For
developing strategies, intuition is preferred.
As for thinking versus feeling—thinking has a huge edge. In
trading, you can’t make decisions with your heart.
Finally, judging types are more disciplined and better planners
than perceiving types, who are more open-ended and dislike
routine, discipline, and deadlines.
It’s important to understand that these are simply preferences.
You can work on your weaknesses, and you can win money trading
even if you aren’t the “ideal” trader. Also, your weaknesses in
trading may be your strengths in other areas of life.
I’m a perceiving type, but I’ve worked on and account for this
weakness. Once you accept it, you can overcome it. I hate working
with a planned, nine-to-five routine; I work when I’m inspired. For
that reason, I’ve outsourced and automated my trading. My
programmer is the one that needs to be disciplined, and I hired him
with that in mind. It’s the perfect solution.
Thinking of the big picture comes easily to me, but I also have a
slight tendency toward feeling rather than thinking. It’s inborn. But
I know that trading requires rational, objective thinking, so I have
worked to step into that proverbial “thinking person” when I’m
working. I’ve worked hard on that, and it has paid off.
Work on yourself to improve your weaknesses, and outsource
what you struggle with. Your weaknesses are other people’s
strengths. They’ll be happy to get paid to do what they’re good at.
If you’re a feeling type, that’s a weakness, but having 100 percent
awareness of that fact is the most crucial thing you can do.
Weaknesses can be overcome, but only once you admit them. Take
a Myers-Briggs test. If it turns out you have a weakness, accept it,
realize it’s a strength in other aspects of life, and put routines and
rules in place so that it doesn’t impact your trading.
Also, realize these aren’t absolute. If you’re a feeling or
perceiving type, that’s just a preference, an inclination. The first
step to overcoming it is awareness. Next is looking for a solution:
outsourcing, automation, transformation. It’s possible to get more
disciplined, by training yourself with things like Neuro-Linguistic
Programming (NLP).
When you’re trading in the markets, you’re trading your beliefs.
Therefore, accessing, identifying, and understanding your beliefs is
essential.
The best traders use a wide variety of strategies—mean
reversion, scalping, long-term trend following, short-term trading.
They all can work under the right circumstances, for the right
person. That said, there are a few common beliefs that virtually all
top traders share, and they’re essential to understand. Your
strategies can vary, but you should pay close attention to these core
beliefs.
Most importantly, top traders understand the importance of
having beliefs. That sounds simple, but it’s crucial. The average
trader never defines his beliefs, and it crushes him. You can’t have
a clear strategy without clear beliefs. That leads into the next point:
You must have a proven strategy that you believe in, and you must
follow it to the letter.
Whether you’re Ray Dalio, Warren Buffett, or Paul Tudor Jones,
if you want to make money, you need beliefs that inspire a strategy,
and then you need to vow to follow that strategy completely. The
strategies vary, but the commitment to having and following them
doesn’t.
It took me years of failure and study to adopt these beliefs, but
finally, they’ve become second nature. Pay close attention to the
list below, and start to drill these beliefs into your head.
The Beliefs All Top Traders Share
Know your goals and objectives before you start trading, and
before developing any strategy.
By knowing what outcome you’re seeking beforehand, your
strategy will take about 80 percent less time to create. When you
don’t have an objective or goal, you tend to tread water, because
you can’t make a plan without an endpoint. Set your objective, then
make a plan to get there. You need to take a bit of extra time
beforehand to save 80 percent of your time later and guarantee
success.
The clearer your objectives, the easier the development process,
and the easier the execution. Don’t skimp on this.

Don’t trade at all on days in which there are no low-risk trades

available.
It’s common to think you have to trade every day, but that leads to
big losses on days when you shouldn’t have traded at all. Don’t be
afraid to sit out a day. You should only be trading low-risk ideas
that fit your strategy, and that has nothing to do with your calendar.
A day without a trade isn’t a lost day; it’s a win, because you’ve
avoided losses.
Good trading is boring.
The way to succeed in trading is to overcome all of your
psychological weaknesses as a human. Those weaknesses can
make life fun, but trading is about being rational, even robotic. The
only reason I am so profitable is that I apply the rules of my trading
strategy perfectly. That means following protocol 100 percent,
which goes contrary to my earlier mistake of using trading as
grounds for adventure. That was a recipe for disaster. Setting good
rules and then following them to the letter is the only way to be
profitable. To win the game, you have to follow all of the rules of
the game, as boring as that may be. Break rules elsewhere.
That frustrated me at first, and I didn’t want to execute the
boring parts of trading (order management, setting and following
rules and protocol). I wrote a complete script, hired an employee
who enjoys executing rules to a tee, and trained him for two weeks.
The process used to cost me many hours a week, but now it’s
outsourced to an employee who enjoys it. He sends me a report
three times a day, which costs me a couple of minutes, total, to
monitor. That saves me from boredom, and it allows me lots of
time to research for more noncorrelated strategies and ways to
improve the big-picture trading operation. That’s my strength and
what I enjoy.
When I finally mastered my psychological state, outsourced my
weaknesses, and got disciplined, my accounts blossomed. I stopped
thinking about the money as exciting money, but rather as boring
transactions that I could measure objectively and precisely. I was
finally able to trade comfortably at a risk profile that suited my
needs. I stopped thinking about money gained and lost on a daily
basis, because I knew that focusing on my proven rules would lead
to long-term success, which is the true purpose of trading.

Daily results are irrelevant. All that matters are your long-term
objectives. When that has been set correctly, your state of mind
shouldn’t change based on daily results.
That means no elation on good days, but no misery on bad days.
My wife can no longer tell the difference between winning and
losing days, because I’ve defined my risk and long-term objectives
correctly. I can’t fail, because short-term fluctuations are irrelevant.
I don’t freak out or get stressed.
I have many losing days each year, but this no longer bothers
me. I consider the day a win if I followed my rules with 100
percent perfection. On that scorecard, I never fail. The daily losses
are part of the game of getting rich long term. As Ray Dalio said in
the book The New Market Wizards, “I’m not paid when I’m right
80% of the time. I only get paid when I make money.” Daily wins
and losses aren’t real money made; they’re just temporary,
meaningless changes in the scorecard. Trading is a business, and
the losses are expected business costs in a profitable endeavor.
Would you question needing to pay rent for your jewelry store?
Every business has necessary costs in order to achieve a profit at
the end of the quarter, and trading is no different.
To be successful in trading, you need to lose to be able to win.
Without risk, you can’t win.

Entry size matters more than entry price.

The first time I read this was in Jack Schwager’s book, Hedge
Fund Market Wizards, and he is spot on. If you’ve sized your
entrance correctly according to your risk tolerance, you’ll stay with
the position. You won’t override it, because you’ve risked the
proper amount of money, and you’re OK with losing an exact,
predetermined amount based on said risk tolerance. You aren’t
risking enough to affect your mental state so that you override your
position.
On the other hand, when you’ve sized your entrance too high for
your risk tolerance, you’ll look at things differently when you start
to lose money. If you bought a stock at 40 and the price drops to
39.50, you shouldn’t be affected. However, if your entry was too
big, you’ll think in terms of dollars lost, and want to get out. Your
exit won’t be determined by price movement, as it should, but
rather because of your dollar loss. Proper entry sizes will protect
you from this.

Successful trading can be effortless, when you’re committed and

have worked hard up front.
Trading is easy for me, but only because I put in the preparation
and years of practicing and commitment. I know every aspect of
my trading strategies, so implementation is easy. I don’t get tired or
stressed anymore. You can do the same, if you work to get there.

Everyone has inborn personality weaknesses for trading, but as

long as you account for yours, you’ll succeed.
There are certain personality aspects, like patience and discipline,
that are ideal for successful trading. But everyone has weaknesses,
and you’re only doomed to fail if you don’t admit and account for
your weaknesses.
The key is having the willingness to work on your weaknesses,
so that you can transform them. Also, acknowledge them, so that
they can be leveraged.
I personally hate discipline and rules, but I’ve committed myself
to working on that weakness. You can do the same; it’s your
willingness to improve that matters most. I chose to work on
myself, and now there is no doubt I will follow my rules, daily.
That said, I’ve made my rules realistic, sacrificing some potential
profits to ensure I follow my rules. Otherwise, I’d fail, and
catastrophe would ensue.
It’s just money. Be humble in victory.
You will see huge, daily profits at times. But remember: All that
matters are long-term results. If you get cocky or greedy, the
market will teach you a lesson.
You must know your risk tolerance. It’s lower than you think.
If you try and guess your risk tolerance, you’ll be wrong. You can’t
know until you’ve visualized losing money intensely, or ideally,
actually lost money. That’s how I learned. Now, it’s a joy that I
know my results can never affect my state of mind.
You won’t lose a minute of sleep, even on your worst day of the
year, because you’ve defined your low limit precisely and have
crafted your strategy so that you never exceed your risk tolerance.
This means you sacrifice a small percentage in profits, long term,
but it ensures you’re 100 percent comfortable at all times. You’ll
never lose your cool and override the strategy, and you’ll still make
more than enough money, long term. Of course, the upside has to
be there, too, but we ensure that when creating our strategies. It’s
not like you’ll liquidate all positions at the slightest scare.
 Virtually everyone overestimates their drawdown tolerance.
Think you can handle a 30 percent drawdown? You’ll almost
certainly feel uncomfortable at 15 percent, losing sleep, wanting to
override your strategy. That’s normal. Don’t set your risk tolerance
until you’ve clearly visualized how such a change in your account
balance will impact your psyche. And remember: The higher the
drawdown, the harder it is to come back and break even. At a 30
percent drawdown, you need to make 43 percent to return to
breakeven; but at a 50 percent drawdown, you’ll need to make 100
percent. Ouch.

Project your strategy’s results in all market types.

The main tenet of my strategies is that we don’t try to predict
which type of market is about to occur, because it’s too difficult.
We trade a set of noncorrelated strategies, so that we can make
money in any type of market. You must know how your strategy
works in each market type, so you’re set for all possible scenarios.
Each strategy has times when it loses some money. That’s
common sense. A long-only strategy will struggle to make money
during bear markets. As long as you knew this beforehand, you
won’t worry. You are ready for this and have other noncorrelated
strategies in play that are making money. You will often have
individual strategies losing, but the others will make up for them.

There is no Holy Grail strategy that works at all times.

I spent years searching for the perfect strategy. It stressed me out,
and I lost years of trading because when I couldn’t find the perfect
strategy, I thought I was missing something. I beat myself up
mentally and sat on the sidelines. Once I realized the perfect
strategy doesn’t exist, I was free to trade a decent strategy that
makes money. The truth is, this strategy I thought was decent was
about as good as it gets. All that matters are long-term profits.
The Holy Grail is in yourself. The Holy Grail is about
conditioning your psychology and discipline and finding a strategy
that suits your personality and objectives. You won’t be right all of
the time, but you will make more money than you need, long term.
It’s freeing to know that perfection is impossible, and “good
enough” is truly more than you need.
 The Holy Grail of stock trading is in the perfect execution of an
automated suite of noncorrelated strategies, traded simultaneously.
Your strategy’s back-tested success rate is not the same as its
future success. Trust me, as all of my strategies are created through
back testing. The best you can hope for is similar success, but you
may have your worst drawdown ahead of you. Your strategies must
not only back test well, but they must be conceptually correct,
otherwise you simply found something that was coincidentally
lucky in the past and that is doomed to fail in the future.
Having the belief that you can’t predict the markets is valuable
and freeing, because it gives you the confidence to close a trade
that has gone against you. You understand that short-term losses
are inevitable, and you’re OK with admitting you were “wrong,”
because you’ll be right in the end.

Be wary of super-successful, back-tested strategies.

There might be a bug. You might have unconsciously
overoptimized your strategy parameters. It might have been a
coincidence. The key for all strategies, after development but
before implementation, is to do everything possible to try and
disprove your strategy. You must ensure that it’s conceptually
correct.
This is uncomfortable, because it goes against human nature to
try and break your impressive creation. But in the end, you’ll be
grateful. I do this often with my business partner—when I’ve
finished creating a new strategy, I send it to him and say, “Try and
break it.” I tell him to ensure that the great results from back
testing were real, that the parameters weren’t lucky, overoptimized,
or due to huge data mining without conceptually correct ideas.
The future cannot be scripted perfectly from the past. Evaluate
every parameter in your strategy. If you disprove a promising
strategy, that can be frustrating, but it will save you a lot of money.
Celebrate the fact that you avoided disaster.

A mistake isn’t a losing trade. A mistake is failing to follow your

rules.
Losing trades are part of the game. Don’t consider them a failure.
As long as you follow your rules 100 percent, you will succeed,
because you have created the foundation for success beforehand.
On the odd chance you overrode your strategy and it made you
money short term, you should consider that a loss and a failure.
You can get lucky short term, but the market will soon teach you a
lesson.

Profitable trading can be simple.

I always used to think you needed to be a highly educated genius
who knew every bit of financial news to be a successful trader.
Most people think that. Once I realized that the news is all noise,
and that your psychology is what determines results, my mind-set
transformed.
A perfect example is the famous “turtle experiment.” The
strategy, created by Richard Dennis and Bill Eckhardt, was a
simple breakout strategy with advanced position sizing. That was
all. Yet the best-performing turtle achieved his results because he
followed every rule. Some of the other turtles didn’t follow their
rules strictly, and their performance suffered. They were all using
good strategies, but the winner was the one who followed his most
closely.
The simplicity of a strategy, and its conceptual correctness, is
what gives you your first edge. Then add proper, realistic
objectives and a smart position-sizing strategy, and you’re set if
you follow the rules. It’s not magic, just common sense.

Only trade strategies that fit your personality.

Long-term trend-following strategies work, and yet I don’t trade
them as a single strategy. I only trade them in combination with
other strategies. I know myself, and I tend to be impatient with
strategies like that. You have to be willing to give back a portion of
your profits with long-term trend following, and that frustrates me.
It works for other people, but I know it will affect my psychology
and cause me to ignore the rules, so I simply forget about it.

Position sizing is key in helping you achieve your objectives.

The strategy isn’t what makes you achieve your objective; position
sizing does. I always thought that if I had a great strategy, I could
make 100 percent a year. But it all depends on your drawdown
tolerance, which determines your position sizing. If your
drawdown tolerance is 10 percent per year, it will be hard to
achieve a 100 percent yearly return. Your expected return
(depending on your strategy) will be closer to 20 to 30 percent, at
best. If you’re willing to lose 50 percent, you can shoot for the
moon and potentially achieve a 100 percent return.
It’s important to know that your strategy must have a statistical
edge. You cannot turn a negative expectancy strategy (one that
doesn’t make money in back tests) into a winning strategy by using
a magic algorithm. That algorithm doesn’t exist.
It’s not about which particular stocks you buy; it’s about your
strategy, and your objectives, which define your position-sizing
strategy and therefore your potential returns. Trading without a
clear objective, as I did for years, is like driving with no direction,
turning on whichever streets catch your eye. You won’t get to your
desired destination.

When in doubt, liquidate your position, or at least lower your

exposure to the point that it doesn’t influence you psychologically.
All good trading books discuss this. You must have an objective
view of the current market. When you’re in the market, your brain
tends to justify any type of market behavior, and all objectivity is
gone. As soon as a position makes you anxious, get out. You can
always get back in later.
Let’s say you are long in a certain position. The market is going
down, and you keep losing on that position. However, you’re
frustrated, and you have a big emotional charge on this position.
No matter what happens, you’ll defend it. You will find any reason
why it’s good to stay in the stock, because you want to be right and
not admit defeat. Of course, this is confirmation bias—the mind
just feeding you with the information you want to hear.

You must log all of your trades and mistakes.

I hate documenting my trades, but it’s essential to be successful,
because it gives you a wealth of insight. It tells you how your
strategy is performing and the percentage of trading rules you’re
following. For discretionary traders, you can document your
thoughts of each trade, then later identify winning and losing
patterns to evaluate your decision making. I’ve logged my trades,
with mistake logs, since 2009, and I discovered there was a bug in
my software that overstated testing results. If I hadn’t logged my
trades, that would still be affecting me.

You are not your thoughts.

This Buddhist sentiment might seem an odd inclusion for a trading
book, but it’s been one of my biggest insights. For years, I had
limiting beliefs and low self-esteem, and this crushed my hopes at
making money trading, not to mention my happiness.
The internal chatter in your head is holding you back from
creating a profitable strategy. I was living my negative thoughts,
yet totally unaware of it, and it hindered my performance in both
trading and life.
Your thoughts are not reality; they’re your perception of reality.
For example, I used to think only a few people had the privilege to
know the secret formula of the markets, so I could never be
successful. But I realized I only thought that because of my past,
failed experiences. My brain connected the dots incorrectly, saying
that my past failures must have guaranteed future failure. But the
truth was, I just had to change my beliefs to believe it was possible,
then find a winning strategy.
Five years ago, I used to think all of my thoughts were true. I’ve
since worked deeply on myself, and I’ve realized I was making
everything up. My beliefs were all stories I told myself and
accepted as true, even though they weren’t. After deep practice, I
am aware of any thought that isn’t based on reality, so I can let it
go. I no longer concern myself with what others think of me;
they’re just thoughts that don’t affect who I am, as long as I’m
being true to myself.
I’m happier, and I approach problems differently. Problems used
to consume me. Now, I know I cannot change external situations. I
see everything as a minor issue, because blowing something up
into a big issue does nothing to change the situation and everything
to destroy my state of mind.

Know your strength and weaknesses.

I never knew who I was, so I didn’t do anything with 100 percent
commitment or conviction. I knew I had potential, and I knew it
wasn’t being used.
My journey of self-discovery and psychological transformation
changed everything. I realized I no longer had to be the model
corporate-type person to succeed—I could be myself. Those people
had their strengths, but they also had their weaknesses, and I had
my own unique strengths.
Now, I’ve accepted my weaknesses. I dislike working on details
and have no programming skills nor the desire to learn. For that
reason, I’ve hired a programmer to test my ideas. My biggest
strength is creativity and the ability to create strategies, so I simply
tell them to my programmer and double my leverage. I’m great at
translating a complex, difficult world like trading into clear and
simple-to-understand concepts.
I used to be full of trading ideas but never followed through on
testing or implementing them. By accepting and outsourcing my
weaknesses to someone for whom it’s a strength, we both benefit,
and I’ve succeeded with a more than 99 percent efficient
application of my strategies. I’ve overridden my strategy on less
than 1 percent of trades, and unsurprisingly, the profits have been
massive.
Create Your Strategy
After you’ve understood these beliefs and how they relate to you,
you can move on and create your strategy, which starts with
defining your objectives. If you can define your objectives clearly,
the development process of your strategy is actually quite simple,
because you know exactly what you want it to achieve. Most
people start with ideas, looking for strategies that work, but they
don’t know what they’re looking for. You must start by defining
your objectives, then moving on to identifying sound market
principles.
In order to clarify your objectives, start by defining your initial
trading capital. That’s self-explanatory, of course: How much
money are you willing and able to invest? But it’s important to
write it down, so that the other steps are done properly.
Based on that number, what’s the largest percentage
drawdown you can withstand? We define that number in
percentage points, but you need to be aware of what that number
will look like in terms of your trading balance—in dollars lost. It’s
easy to pick a number like 20 percent, but how many actual dollars
is that, and are you sure you would be OK losing that much? I’ve
met plenty of people with $1 million trading accounts who say a 20
percent drawdown is fine, then freak out when they’ve lost
$200,000.
Then consider: How long of a drawdown can you withstand?
At what point will you stop trading and reevaluate? Do you
differentiate between drawdown from base capital and profits
drawdown?
For both of these questions, visualize the loss in your account
balance. Do you still want to trade your strategy, or are you anxious
to get out? If your mental state will be affected, you need to set a
more conservative number. The most obvious example was people
who were trading buy and hold from 2005 to 2007 but who hadn’t
defined their drawdown threshold beforehand. Then 2008 came,
and they didn’t sell because they didn’t know when to. So they hit
50 percent to 70 percent drawdowns, sold everything, and refused
to trade ever again. They weren’t basing their decisions on sound
market principles but rather on just the temporary position of their
equity.
Since that time, the market has tripled in value. If they had set
their risk tolerance beforehand, they would have sold earlier, gotten
back in the game, started to make money again in 2009, and
profited ever since. Their buy-and-hold approach still worked, but
they let their emotions override the strategy.
Don’t think only in terms of percentages losses. Think also in
concrete terms of dollars lost. You need to be in a mental state
where losing money won’t affect your decision making. Thinking
in terms of percentages makes sense rationally, but humans are not
rational when money is involved.
You need to trust in your strategy 100 percent, because you put
in the work to perfect it beforehand. You need to know that short-
term losses, even losing months of 5 to 10 percent, are part of the
process. If you’re down 5 percent, while your peers are making
money, will you still follow your strategy?
A general rule I’ve found is that people can handle about half of
what they think they can. If your instincts say you can handle a 20
percent drawdown, start with a 10 percent max drawdown to be
safe, and learn from experience. It’s far better to be safe than sorry,
because overriding your strategy negates all of the work you did
and destroys your finances.
 If you have past trading experience and were comfortable losing
a certain amount of money, start there.
By trading within your drawdown tolerance, you ensure that
you’ll stay comfortable and therefore rational.
I also recommend including a small margin of error in your
strategy because you might make some trading mistakes and
override your strategy occasionally. That’s not ideal, but it’s normal
and not catastrophic if you’ve built in margin for error. If you set
your compounded annual growth rate (CAGR) at 25 percent, are
you OK with achieving 18 percent? And if your maximum
drawdown is set at 7 percent, are you OK if it reaches 12 percent?
Humans make mistakes, so make sure you’re OK with slightly
worse-than-expected results, compared to your back testing.
What is the CAGR you’ll use in back tests? The larger
drawdown you defined, the larger CAGR you can achieve. The
more potential risk you can tolerate, the more potential reward you
can reap. But it’s important to define your risk first, otherwise
you’ll shoot too high. It’s better to be safe than sorry. If you need to
be conservative with your risk, that’s fine, but don’t expect huge
returns. Lots of potential clients tell me they won’t tolerate a
drawdown beyond 10 percent, but they want a CAGR of 100
percent per year. I tell them that’s not possible and to ignore
anyone who tells you it is. You might get lucky for one or two
years, but not long term. If you’re testing a maximum 10 percent
drawdown, aim for a CAGR of around 20 to 30 percent. The longer
you trade, the more you will realize that even the best strategies
will have a larger than expected drawdown. Prepare for that
beforehand.
Will you trade on margin? You need to define if you will only
trade the amount of equity you have, or if you are willing to go
over that, on margin. For example, you can trade 150 percent of
your account value, if 100 percent is long and 50 percent is short.
That’s allowed, because your exposure is only 50 percent net long.
The short positions are allowed to offset the long positions.
However, are you comfortable trading on margin? Also, if you
trade IRA accounts, know that you can’t trade on margin.
How will you handle larger-than-expected profits? This
would be a good problem to have, but you still need to consider it.
Let’s say you’re trading a long strategy on volatile stocks, and
you’ve tested a return of 25 percent per year. In your first year, you
see a return of 120 percent, because of something like the dot-com
boom. It’s important to answer beforehand: Will you want to
withdraw capital? If so, you need a strategy in place that accounts
for specific profit targets at which you will withdraw a specific
amount of money. Otherwise, you’ll withdraw money and it won’t
be accounted for in your strategy, and you’re in trouble. Many
people can’t handle unexpected success. It’s also important to
consider this on an individual scale. How will you react if you earn
a 150 percent profit on one positon? If you’re going to feel
compelled to withdraw money, you need to account for that. It’s
fairly easy to design a position-sizing algorithm to help you with
such a problem. Make sure that greed isn’t ruining your strategy.
Everyone thinks this is a no-brainer, but greed always kicks in.
Will you use a benchmark? If so, which one, and why? In my
strategies, the benchmark isn’t important. A benchmark is a long-
only performance of an index. We trade a suite of noncorrelated
strategies, so we don’t really care what the benchmark does; we do
our own, separate, noncorrelated thing. But the whole world and
media is obsessed with benchmarks: What did the S&P do today?
It’s important to think about how you will react if, for example,
your strategy earns you 10 percent one year, but the index is up 40
percent and everyone around you is bragging about their long-only
strategies. That could influence your mental state. It’s important to
know how you’ll react to the news.
Intellectually, it’s easier to understand that a benchmark is not
useful for trading. As we’ve shown, the benchmarks don’t perform
particularly well, and they have seen huge drawdowns. They’re
simple and easy to beat, so you shouldn’t look at them, because
outside noise will influence you.
That said, reality sometimes interferes with this. Not everyone
can ignore the news. Let’s say you’re trading a noncorrelated
strategy of long-term trend following, mean reversion, and other
strategies together. Suddenly, there’s a bull market like the 1999–
2000 dot-com boom. All you’ll hear on TV and at parties is how
easy it is to make money in the stock market. They’re handing out
60 to 70 percent returns, every year! Your friends are bragging,
nonstop.
Short-term, this is easy to deal with. But what if there are two or
three years of outside noise? What if your spouse starts to ask,
“Why is everyone making more money than us?” She doesn’t think
you’re doing a good job, and you can’t blame her—all of her
colleagues and friends are bragging, too.
You know that there will be a turnaround—that the people
creating noise will lose their money, eventually. But as we’ve
drilled in—there’s no way to predict when the markets will turn.
Are you patient enough to wait a couple of years? The years of
noise could get to you.
If you think there is a high likelihood of your hearing outside
noise—from your friends, colleagues, spouse, or the media—
consider the benchmark. Don’t be a slave to it, but consider it.
Make sure that you will make outsized gains in bull markets,
because otherwise, you may struggle to follow your strategy.
The benchmark is only relevant in bull markets. In all other
markets, you’ll be positive, while others are losing. As long as part
of your strategy is long-term trend-following positions with
volatile stocks, you should be prepared.
As you’ll see in part 4, the first strategy—the “Weekly Rotation
strategy”—is perfect for this.
How will you react when you’re underperforming the
benchmark by a little? A lot? Will you accept years when you
underperform the benchmark? I don’t compare my results to the
benchmark, but some people like to. That’s fine, but make sure you
have a strategy for when the benchmark outperforms you. Be
aware that this will happen occasionally, but it shouldn’t bother
you. When the markets are up huge, yes, the benchmark will beat
you. But when the markets are down, you’ll be losing less than the
markets. Long term, you’ll be making much more money than
someone who follows the benchmark.
Are you OK with cutting losses short and riding profits out?
With trend following especially, people have a tendency to take
profits and let losses run. It’s a normal, cognitive bias, but you need
to be aware of it and not fall prey. People want to feel good about
themselves, so they take a profit. Feeling good about yourself has
nothing to do with good trading, though, and nor does taking a
profit when you could have made more.
It’s common for people to want to take a profit 80 percent of the
time, but those profits will be small. Winning 80 percent of the
time means you’ll lose 20 percent of the time, and people who
behave like this will be unable to cut those losses short. The 80
percent of wins could be, say, $10 each, but the 20 percent of losses
will run and could be $200 each. Despite “winning” 80 percent of
trades, you would have lost a lot of money.
Winning trading isn’t about winning more frequently; it’s about
your overall balance. You’ll end up bankrupt if all you care about is
taking profits, especially if you can’t accept losses. We’ve been
trained since youth to see losing as wrong. We’ve been trained to
never admit defeat, or that we were wrong.
When we went to school as kids, we were graded for every exam
—if you get A’s or B’s you’re “good,” and if you don’t, you’re
“bad.” “Bad” students are forced to think that they can’t make
mistakes, and they’re often stuck with this mentality for life. Well-
meaning parents raise their kids to be afraid of making mistakes,
by teaching right versus wrong. Even though I’m aware of this,
I’ve done it with my own kids, accidentally. It’s unfortunate, but
it’s reality.
The belief that you don’t make mistakes, because you’re perfect,
or you can’t make mistakes, because then you’re “bad,” is trading
suicide. A strategy that is only “right” 30 percent of the time can be
the perfect strategy, if your winners are five times larger than your
losers.
Intellectually, this is easy to understand, yet people still fall prey
to these biases. Just because you know something doesn’t mean
you’ll execute it when your psychology and emotions come into
play. You need to understand deeply that wins and losses aren’t
measured by individual trades; they’re measured by how perfectly
you’re executing your strategy. It’s not the profits on a single trade
that will make you rich. It’s the net balance of all of your wins and
losses, and how big each one is. Keep your losses as small as
possible, and maximize your wins. Your strategy will take care of
this, if you follow it.
Success has one definition: How closely are you executing your
strategy, and trading within your risk tolerance? That’s the only
way you can grade yourself.
When creating your own personal strategy, be aware that every
trading strategy is different (long, short, combined, etc.) but has the
same twelve ingredients. Even fundamental traders, which I don’t
work with, should use these same twelve steps. The better you can
define these twelve steps, the easier it will be for you to understand
every part of your strategy and therefore execute it.
 In part 4, we’ll go through each strategy I teach, specifically. For
now, I’ll give a brief overview of each of the twelve universal
ingredients.
1. Objectives
We’ve discussed personal objectives (how much money do you
expect to earn, long term?), but not the objectives of your strategy.
Both are important.
Let’s say you’re going to trade a long-term, trend-following
strategy. You want to always be positioned in the high-flying,
uptrend stocks, capturing as much of the move as possible with
particular trends. Therefore, your top objective is to ensure you’re
making a huge amount of money when the market is going up. You
need the opposite objective, too, to be realistic: You will get out as
your strategy has determined the trend is over. That’s how you
execute a trend-following strategy, by defining how to maximize
wins, while accepting losses and cutting them as short as possible.
Before you test, and eventually trade, a strategy, you need well-
defined objectives of what you hope to achieve. In order to trade a
strategy successfully, it needs to be built on your beliefs, which
work toward your objectives.
There are four types of objectives you must define:
psychological, operational, personal, and strategy. Strategy
objectives can be split up into single (for one strategy) and multiple
(for a suite of strategies trading simultaneously).
Psychological objectives are set so that trading your strategy
never affects your mental state. That involves setting your
maximum drawdown, CAGR, trade frequency, if you will take any
profits out of your strategy, and if you care about having a high win
ratio, versus a high win-loss ratio. The higher win ratio you need,
the better off you’d be using a mean reversion strategy with a profit
target. A high win-loss ratio would mean the average winning trade
is larger than the average loser, which would mean you should use
a trend-following strategy.
Basically, if you prefer more wins of smaller magnitudes, you’ll
prefer a high win ratio (mean reversion with profit target). If you
prefer fewer wins of larger magnitudes, you’ll prefer a high win-
loss ratio (trend following).
Operational objectives are set to ensure you can operate your
strategy stress-free, in a way that suits your lifestyle. Will you enter
trades weekly, or daily? Some people like to do it intraday. Do you
want to enter the trades yourself, automate them, semi-automate
them, or hire someone?
Personal objectives are important, too. Will your spouse,
children, or other family members influence your trading strategy?
Does your spouse work at an investment bank, where he or she
can’t ignore benchmarks? That could cause problems in years
where there are big bull markets.
Next, strategy objectives. If you’re going to trade multiple
strategies, what are the single objectives for that strategy? What
does it do? How does it react in bull markets? What about bear
markets, sideways markets, volatile markets, quiet markets, and
normal markets? What about different combinations of those? You
need to plan for every possible scenario. Once you start combining
strategies, you have to make sure your strategies work well with
each other. If you have a long-term, trend-following strategy and
then develop a short strategy, does one make money when the other
doesn’t?
When trading multiple strategies, it’s important that they’re
designed to help each other. They’re like partners, complementing
each other’s weaknesses.
All of my students who fail to define their objectives struggle to
create a strategy. Once you do, you simply use the indicators to
measure price action, define your rules, and get going.
Most people want the highest possible return with the lowest
drawdown and think that is their main objective. That leads to the
creation of strategies that don’t suit their psychology or objectives.
They self-sabotage themselves to bankruptcy.
2. Beliefs
Your objectives are linked to your beliefs. For example, trend
following is a sound belief that the markets are mostly trading
sideways. However, when they trend, you can make huge money if
you capture the trend. Your objective could be to capture just 25
percent of the moves, because profits are so big. You’ll need a
profit target in your objectives, so your indicators and rules can tell
you what to do. Another belief could be to buy fear when everyone
is panicking, because there’s a larger than normal likelihood that
the market will revert back to its mean. Those are two core, simple,
yet effective and proven beliefs. For every strategy, you need to
understand the underlying core belief and market principle. If you
aren’t clear on the belief you’re trading, you’ll lose confidence and
fail to execute.
It’s essential to test your beliefs and make sure they’re based on
sound market principles.
You’re not trading the markets; you’re trading your beliefs.
Inside the stock market, you’ve got hundreds of thousands of
people, each with their own opinions. Maybe 5 percent of them
really make money, but 100 percent of them have beliefs about
where the market will go. In order to make money, you need to
hypothesize beliefs, back test them to see if they’re true, and if they
are, develop a strategy based on those beliefs. The market does
what it does. It doesn’t care what you think. You can only trade
according to your beliefs, and you’ll only make money long term if
your beliefs are scientifically and logically true.
Often you’ll start with a belief, back test it, realize it doesn’t
work, but in the process, see something else that works. For
example, you might start with the beliefs that buying the highest
high of the last twenty days has an edge, because the Turtles Group
used to trade that entry signal. The Turtles Group had been
extremely successful in the futures market in the 1980s, and that
belief seems sound. But if you back test, you will see that while it
made huge money in the 1980s, it has mainly been flat, with some
huge drawdowns, ever since. However, you’ll see that a larger
timeframe like one hundred or two hundred days actually works, so
you can shift to that belief.
By documenting and tracking your trades, you’ll develop new
beliefs and get stronger evaluations of your current ones. At least
once a year, you should reevaluate your beliefs and make sure they
are all still sound—that nothing has changed. That doesn’t mean
you should change parameters frequently, but you should monitor
things occasionally. If you start seeing statistically larger-than-
expected downturns, you may need to scrap and redefine your
beliefs.
3. Trading Universe
Are your objectives and beliefs clear? Move on. What are you
going to trade? This book only addresses stocks, but of course
there are other instruments you can trade. In the United States, we
have over seven thousand listed stocks. What’s your trading
universe? Do you want to trade the complete basket of NYSE,
American Exchange, and NASDAQ stocks? Do you want to trade
an index like the S&P 500 or NASDAQ 100? They all have their
pros and cons.
If you want to trade a high-frequency strategy, it might be easier
to have a large portfolio. Therefore, you’ll need a larger universe to
trade within. The same goes for mean reversion; since your
expected profit per trade is low; you capture a short profit, get out,
and repeat frequently. You make numerous, frequent trades—
trading mean reversion on a small index like the Dow Jones can
result in some great trades, but you won’t have enough
opportunities to make a significant profit. Generally, the larger the
universe, the more trade opportunities. You need a ton of
opportunities for mean reversion to be worth trading. Twenty trades
a year will not do enough for your finances, regardless of how
many of them are winners.
If you want to trade a long-only strategy, you’re basing it on the
belief that since indexes rebalance every three months, the weaker
companies are kicked out. That might be information that would
benefit you when developing a trend-following strategy. Trend
following is the opposite of mean reversion, because you’ll stay in
one position for a long time, but capture a big profit.
On the other hand, it’s OK to use trend following on a very large
portfolio, with strict selection filters. You can trade trend following
on the complete stock universe, but you need more filters to get the
stocks you really want.
That’s why I recommend adopting the belief that you need an
index, even though there is nothing wrong with including stocks
not yet in an index. Microsoft, for example, was a tiny stock when
it started—not yet it an index. Therefore, it’s fine to include early
stage stocks in addition.
4. Filters
You need a filter for liquidity, to ensure there’s enough volume to
buy the stocks your strategy dictates. It depends on your account
volume, though. If you have a $50,000 account, you can trade
fairly low-volume stocks (average trading volume of ~100,000
shares). If you have a larger account, you can’t trade those stocks.
You would move the market too much with each trade. One idea is
to set your volume filters based on your account size. Another one
is to make sure you have a filter to never trade more than a small
percentage of the average dollar volume. For shorting, volume is
even more important, because you need decent liquidity—you need
to have some shares that are available to short.
If you have a lower account, you actually have an advantage,
because you have access to stocks that the big players don’t have
access to. That is a huge edge. Use it if you can.
You also need a minimum price filter. Some people don’t like
penny stocks, so they’ll need to set a higher minimum price.
Lower-priced stocks move differently than stocks trading at, say,
thirty cents. If you trade a stock that is priced at eighty cents,
expect crazy moves and volatility.
You need a volatility filter. I think it’s smart to filter out stocks at
the extreme ends of both high and low volatility. That’s a
controversial belief, because some people think that using
volatility-based position sizing is enough. I think you need some
filters, because if you’re selecting a stock that has an average
volatility that’s twenty-times less than the S&P 500, it will not
move at all and won’t help you. Trading on the higher end is
possible, but it provides us with margin issues. Setting volatility
filters beforehand is safe. Based on your beliefs and objectives,
you’ll decide what kind of volatility you want in your portfolio.
5. Setup
You need to define the exact rules of what the movement of a
particular stock should look like before you enter a trade. We only
use end-of-day price action data, so we ask: Which numbers will
fulfill our rules that tell us which stocks to buy or short the
following day? An example setup could be to buy a trend that is
closing above the two-hundred-daily moving average—or short sell
a stock that is highly overbought. A setup can define a trend, a
pullback, or anything else, as long as it defines a clear situation that
fulfills a set of criteria that tells you what to buy or short sell the
following day.
If you have clear beliefs and objectives about what kind of entry
you’re looking for, then you just use a technical indicator that does
what you want. If you know what your entry needs to look like—
say, your objective is to enter a trending stock—use a technical
indicator (moving average, highest high, etc.) to quantify your
belief and objective.
For example, if your belief/objective is to find stocks that are
oversold, because they’ll revert back to their mean, you need an
indicator that measures that. You could use the Relative Strength
Index (RSI), buying when it dips below a certain threshold.
Define your beliefs and objectives first, then look for indicators
that help quantify them.
6. Ranking
There will be times that your strategy generates more setups
(suggested trades) than your position sizing allows. It could tell
you to make fifty trades one day, but your position sizing (risk
management) only allows ten. You decide which ten to trade based
on your ranking parameters.
It depends on your strategy and preferences, but you could trade
the ten stocks with the highest volatility, lowest volatility, largest
rate of change, the most oversold, or perhaps the strongest short-
term trends.
For a mean reversion example where you buy pullbacks, you
could say you want the ten pullbacks with the most volatile
movements, or the most oversold, but those are different things. It
can make a big impact on what you trade, so you need to define
this beforehand.
7. Entry
Next, define your entry for situations in which the setup
requirements have been fulfilled and you need to place an order.
How are you going to enter the stock the next day? Will it be when
the markets open, or does it need to advance for a certain amount,
like a percentage or average true range? Or does it need to drop
even further down? Is it a limit order? Is it a market order? Define
this beforehand.
In part 4, I’ll show you specific rules for each strategy, which
should clarify these generalizations.
8. Stop Loss
When entering a position, you must have a predefined exit point, in
order to limit your risk. This ensures that you don’t stick with your
losers if a trade doesn’t work out as planned. You acknowledge
your losers and sell them, taking your losses humbly, and moving
on. That’s a long-term win, despite feeling like a loss.
9. Reentry
After you get stopped out and sell a stock, will you reenter the
stock immediately if it gives another signal? Or will you decide to
hold off for a certain amount of time? It depends on the strategy.
You could get the signal the day after you sold, which makes
people uncomfortable. If you won’t want to buy a stock you lost
on, you had better put a rule in there. If there is a statistical edge to
reenter, which is something you should have tested, you must obey
your strategy and buy anyway.
10. Profit Protection
If you’re in a trade that becomes profitable, will you have a set
point in which you’ll protect your profit? You can do this via a
trailing stop, which will sell the stock when it loses more than X
percent from its highest point. The trailing stop will move as the
stock price rises. It’s a way to protect your profits if a stock
suddenly drops down.
11. Profit Taking
People who can’t escape their ego and need to feel good about
having as many “wins” as possible should set a profit target. You
can say beforehand, for example, “When the stock achieves a 20
percent win, I’m getting out.” It depends on your beliefs,
objectives, and personality, but if you define it beforehand, it’s fine.
There are great strategies like this—they of course have smaller
profits per trade, but they have higher win rates.
12. Position Sizing
Position sizing is what determines how much you are going to
invest. Which strategy or mathematical algorithm and rules are you
going to use to define the sizes of your positions that you trade?
This is essential, so that you achieve your predefined objectives.
I’ll explain them in part 4, but the various strategies define your
optimal risk. Proper position sizing is crucial, to ensure you make
the most of your proven rules.
In the following part, we’re going to show a variety of different
strategies—each with different beliefs and objectives, suited for a
variety of people. All of them have great edges and have been
tested over a long period of time; the one you’ll use simply
depends on what you want—the one that most suits you.
Then, we’ll show you how to combine the individual strategies
into a suite of noncorrelated strategy, which multiplies your edge
exponentially. That’s because the strategies all perform differently
in different market types, and as you know, the markets are crazy
and unpredictable.
It’s much easier than you think, and all of the strategies use
simple, straightforward rules. Each one is an example of a strategy
I’ve built, or helped clients build in my Elite Mentoring program,
through my Trading Mastery School.
Are you too busy to enter and exit trades during the week? The
Weekly Rotation strategy only requires you to enter trades on
weekends.
Or maybe you just have better things to do, or you’re lazy. That’s
not a problem, as long as you account for it up front. If once-a-
week trading fits your lifestyle best, or you don’t want to be
involved in the markets on a daily basis, this is the strategy for you.
 It’s also great for people with IRA or 401K accounts, because
they can trade long only—and this strategy is long only.
If you listen to or watch the news, or are exposed to a lot of
outside noise through work or social settings, this strategy will
help. You’ll mainly be in high-flying stocks like Netflix and Tesla
—strong companies that attract positive media coverage.
It’s a simple strategy that anyone can follow.
Objectives

Trade long only, a big index, mainly blue-chip stocks that rise
in value.
Only execute trades once a week (during the week you don’t
need to check the markets at all).
Jump on the train of big trending stocks, with the expectation
that they will continue to rise.
Strongly outperform the S&P 500 (at least double the CAGR),
with lower drawdowns in bear markets.

Beliefs
Markets trade sideways, and they trend. My belief is that if we
jump on the strongest performing stocks, we will have outsized
returns trading them. We will stay in those positions as long as they
continue to be the strongest performers in the markets. History has
shown us over and over again that stocks can trend for a long time.
Perfect examples are Microsoft, Apple, Dell, Netflix, and so on.
The biggest edge in this strategy is the unexpected, outsized,
favorable returns.
As long as the trend is up and the stock is within the best ten
performers of the universe, we remain in those stocks. Why would
we sell a winning stock?
Trading Universe

Only trade stocks from the S&P 500 index.

For testing, this means we take into account all listed and
delisted S&P 500 stocks, and their joiners and leavers data.

Filters
 Minimum Average Volume of the last twenty days is above
1,000,000 shares (so that we have enough liquidity).
Minimum price is 1 USD.

Position Sizing

We trade a maximum of ten positions, and we divide our

equity by ten to calculate our position size. This is a very
simple position-sizing strategy. Of course, depending on your
objectives, we can trade the same strategy using a different
algorithm.
Example:
Total equity: 100,000 USD
Size per position: 100,000 / 10 = 10,000 USD
If stock price is trading at 40.00, we buy: 10,000 / 40.00
= 250 shares.

Entry Rules

1. Today is the last trading day of the week (typically a Friday

afternoon or evening, after the market has closed). We take
end-of-day data.
2. The close of the SPY (exchange-traded fund, or ETF, of S&P
500 index) is above the two-hundred-daily simple moving
average (SMA) band.
There is a band set at 2 percent below the two-hundred-
daily SMA.
The price can go below the two-hundred-daily
SMA, but not by more than 2 percent.
The two-hundred-daily SMA is a powerful and
simple tool. Many institutional traders look at this
moving average, but there is some noise involved.
Many times the SPY closes below this average, only
to go up again the following day, so we include a 2
percent buffer.
As long as the stock is above the two-hundred-daily
SMA band, we are allowed to enter positions.
The SPY tracks completely the price of the S&P 500.
 3. We trade up to a maximum of ten positions, and we select
them as follows:
The three-day RSI (Relative Strength Index) of the stock
is below 50.
RSI is an oscillator that measures how overbought
or oversold a stock is. The higher the RSI, the more
overbought the stock is.
Our method ensures the stock isn’t completely
overbought. We like to enter trending stocks, but the
statistical edge diminishes if they are in extremely
overbought conditions.
4. If rules 1–3 are true, then we select the ten stocks with the
highest rate of change (ROC—percentage increase) over the
last two hundred trading days.
We want to be in the biggest-moving stocks.
We’re measuring momentum.
5. We enter the first day of the next week: market on open.

Exit Rules

1. Today is the last trading day of the week.

2. We stay in the same position as long as the stock is in the top
ten of highest ROC over the last two hundred days. This
means the stock is still on an uptrend. There is no reason to
sell it.
3. We rotate into a new position as soon as the stock is not in the
top ten anymore. This means we sell market at open on the
next trading day and we replace the stock with a new stock
that is in the top ten of the highest ROC (percentage return)
over the last two hundred days.
4. In this strategy there are no hard stop losses.
The reason for this is because of the exit rotation
character. Since we rotate and are only in the strongest-
moving stocks, a stop loss is not helpful, nor necessary.
 Also, setting stop losses on a weekly basis doesn’t make
sense, and our objective is only to trade once a week.
The testing results are almost identical with or without
stops. That is because the stop is rarely reached—when
the stock starts to lose value, it gets replaced
automatically.
If you feel uncomfortable trading without stops, and
would like to better define your risk, just place a 20
percent stop loss, which equals 2 percent risk of your
account (20% stop loss x 10% position).

This is an example of the 200-SMA band. The dark grey line is the
two-hundred-daily SMA, and the light grey line is the SMA band,
which is 2 percent lower.
For my testing, the software generated the following statistics:
MAR, Sharpe ratio, R-squared, R-cubed, Sortino ratio, and Ulcer
index. Each has its pros and cons. The most important thing is to
clearly define your objectives before testing, so that you can
identify which statistics will be most illustrative for your situation.
None of the statistics is a “magic number.” There is no such
thing as hitting a certain mark on one and being set for life. All of
them are based on past data.
Institutional traders often use the MAR ratio and Sharpe ratio.
The MAR (which stands for “Managed Accounts Report,” the
newsletter that developed this metric) is simply the relation
between the CAGR and the maximum drawdown, a simple and
clear g) ain-to-pain ratio. It’s great to use, but it doesn’t tell you
anything about the duration of the drawdown. Also, once you’ve
had a larger drawdown, the MAR will be punished for the duration
of your time trading the strategy.
The Sharpe ratio is also used often by institutional traders—it’s
the most widely used method for calculating risk-adjusted returns.
If you want to trade for institutions, a high Sharpe ratio will be
useful to impress them. It measures the average period return, in
excess of the risk-free rate, by the standard deviation of the return-
generating process.
A variation of the Sharpe ratio is the Sortino ratio, which does
not punish upside volatility and can be useful for trend-following
strategies, where the edge lies in a small amount of outsized gains.
R-squared measures the slope of the equity curve, and R-cubed
measures the relation of the CAGR, max drawdown, and the
duration of the drawdown.
The Ulcer index measures the downside risk, and takes both the
maximum drawdown and duration into account. The lower the
Ulcer index, the better.
There is no magic indicator. Define your objectives and see
which statistic or combination of statistics is most useful for you.
The benchmark is the S&P 500 in this example. As you can see
in the back-tested results above, the CAGR is almost three times
higher than the benchmark, the max drawdown is almost half, and
the MAR (CAGR divided by maximum drawdown) is far superior.
The Sharpe ratio is almost three times as good, and the strategy has
a low correlation.
The win rate is not high, but a win/loss ratio of two to one means
the average winning trade is twice the average losing trade. With
trend following, that’s your edge.
From 1997 to early 2000, there was a huge increase. Then, it was
flat for two years. That’s exactly the time where the S&P 500
dipped below the two-hundred-daily SMA band, meaning we
stopped trading. During the bear market, we were flat. With the
market going down, that’s a great place to be.
After that, things kick off again, but go flat after the big bear
market of 2008. By not doing anything with our money, we limit
drawdowns, staying safe in cash. When the market recovered, we
saw outsized returns.
It’s crucial to understand that this strategy can be boring—in bear
markets, you don’t trade at all. That’s a good thing—you’re flat
while others are losing.
The years 1998 and 1999 saw insane results, as you can see.
Even in bear markets, we were still positive. Our benchmark here
is the SPY, and as you can see, we outperformed it by a lot.
Basically, this strategy outperforms in bull markets, and it limits
drawdowns—going flat—in bear markets. When the markets are
going down, we don’t have many trade setups. In sideways
markets, it does OK—there isn’t a clear up or down trend.
 When you see huge, outsized returns one year, there may be a
time when the market turns and you’ll pay a price, with a big
drawdown. That is to be expected when you’re a trend follower.
As I’ve explained, you don’t need to trade this strategy with stop
losses. However, some people are so used to trading with stop
losses that they feel uncomfortable when acting otherwise. The
following chart explains how to trade the Weekly Rotation with
stop losses.
 We can clearly see that if we want to use a stop loss, small stop
losses do not work well. That’s because with these strong-moving
stocks, we must allow them room. They are often quite volatile, so
if we set small stop losses, they’ll get stopped out. When we place
the stop loss around 20 percent, the results are close to the original
strategy’s.
 Now, we’ll show some trade examples.
Example 1, Entry
After a long rise, DELL has entered the top ten stocks with the
highest ROC over the last two hundred days, and it has an three-
day RSI less than 50, so we enter on the open at the first day of the
week.
Example 2, Exit

This was a dream trade, which we stayed in for over two years. The
stock kept rising and was the whole time in its best performers.
Example 3
Entry: 85.04
Exit: 131.08

The Weekly Rotation strategy shows how easy it can be to make

high double-digit returns, while working just thirty minutes a week.
The simplicity of the strategy makes it easily tradable, yet you
wind up with almost three times the annual return (19.7% CAGR)
of the S&P 500, with almost half the drawdown.
You have one task each week. Check if the trend of the overall
market is up, and if so, select the ten strongest-performing stocks
(highest ROC) over the last two hundred days. Anyone can do it.
This strategy is great for people who like to be a bit more
contrarian and who are comfortable trading against the herd. That
means people who won’t have trouble ignoring the news, and
won’t be susceptible to being affected by outside noise. Also, it is
good for people with IRA accounts.
Objectives
 Trade long only on a large universe of stocks, taking
advantage of oversold conditions by buying the best stocks
and selling each when it reverts to its mean.
Execute trade in less than thirty minutes a day.
Take advantage of stocks that are in a long-term uptrend, that
have significant volatility and are oversold on the shorter
term. By buying these stocks even lower and selling them
when they snap back, we have a consistent edge, and aim for
60 to 70 percent winning trades.
Beat the overall market in both bull and sideways markets.

Beliefs
There are always times in which the markets will show such
irrational, fear-based behavior that there is a statistically larger than
normal probability that a reaction will cause a significant, opposite
move.
Markets are driven by fear and greed. If we want to take
advantage of this on the long side, we need to look for candidates
that have shown a lot of fear. These stocks are mostly out of favor
and have shown large sell-offs, mostly accompanied with larger
than normal volatility.
There will come a time when the panic selling of these stocks
will stop, and often this is when professional traders jump in and
look for bargains. Statistically, there is an edge in “buying fear”
and selling it when it has reverted, or shown some upward
movement.
This kind of trading goes against human nature; it is trading
against the herd. It is not easy to be a buyer when everybody is
selling and all news messages show panic, but that is exactly what
makes it a profitable strategy.
Since we are looking for a shorter-term trade (a couple of days),
we need a large trade frequency. This is done by both scanning
over a large stock universe, and creating exit rules so that we get
out quickly.
Trading Universe

We trade all US stocks from AMEX, NASDAQ, and NYSE

(around seven thousand listed stocks).
 We trade a large basket of stocks, because we want a high
number of trades (mean reversion trades are short term—
therefore we need a high number of trades for significant
profit).
We do not trade ETFs, pink sheets, or bulletin board stocks.
For testing, this means that we take into account all listed and
delisted stocks. Since 1995, this list consists of around forty
thousand stocks.

Filters

Minimum Average Volume of the last fifty days is above

500,000 shares.
Minimum price is 1 USD.
Dollar volume is at least 2,500,000 USD.
This is to make sure that, if we’re trading low-priced
stocks, there’s enough dollar volume for it to be worth
trading.

Position Sizing

- Fixed fractional risk: 2 percent

This means we take into account the dollar volatility of
the stock.
The higher the volatility of the share prices, the
lower our position will be, and vice versa.
We trade a maximum of ten positions in this strategy.
Each position risks 2 percent of our equity. The calculation of
this is as follows.
Equity: 100,000 USD
Risk per trade: 2 percent
Dollar risk per position: 2,000 USD (2% x 100,000)
The risk is calculated by the difference between the entry
price and stop loss price.
If the entry is at 20.00 USD and our stop loss is 17.00
USD, then we have a dollar risk per share of 3.00 USD.
How we calculate our desired position:
If we are risking a total of 2,000 USD per position,
and this equals 3 USD per share, our size is: 2,000
USD / 3 USD = 666 shares.
We use this type of position sizing so that we know exactly what
percentage of our equity we can lose on each position. Also, we
define risk by the difference between the entry and stop loss. Since
we use a wide stop loss, few trades get stopped out. If we close a
position with a loss, we typically lose less than the total amount
risked.
However, we have not yet defined our total size, just our risk per
trade. There could be a time where a position gaps against us. In
the previous example, we entered at 20.00 USD, and our stop loss
was set at 17.00 USD, but there’s a chance that an overnight news
event could cause the stock to open at 10.00 USD. If that happens,
our stop is irrelevant; we will suffer a large loss at the open price of
10.00 USD.
Also, in times of low volatility, the stop can limit us, because the
stop is set based on the volatility. The lower the volatility, the
smaller the stop size, and the smaller the stop size, the larger the
total position.
To combat these two issues, we limit the total position size to a
percentage of total equity.

Max size: 10 percent.

In this example, we had been allocated 666 shares,
13,320 USD, or 13.32 percent of our equity.
This is will be adapted to 10 percent of our equity. So,
the final size is: 100,000 / 10% = 10,000 USD / 20 USD
(STOCK PRICE) = 500 SHARES

This second rule only applies in certain times, mainly times of low
volatility, depending on the stop size.
When we only use fixed fractional risk, we define our position
sizing based on past volatility. Of course, it’s good to base our
sizing on volatility—however, we’re using the past, and we don’t
know if the future will be the same. That’s the drawback of this
method. There are many ways to deal with this, with advanced
sizing algorithms, but this is just a simple example that limits our
position sizing to a percentage of our total equity.
Entry Rules
1. Close of the stock is above the 150-daily SMA.
We want stocks to be in a long-term uptrend.
2. Seven-day average directional index (ADX) is above forty-
five.
ADX measures the strength of the (shorter term) trend.
The higher it is, the stronger the trend is.
Here, we’re looking for quick, short-term profits. For
that, we need stocks that move significantly. (High
ADX.)
3. The average true range percent (ATR%, measures volatility)
of the last ten days is above 4 percent.
It’s important to use ATR percent, to adjust for share
prices.
If not, the higher-priced stocks would show a much
larger ATR versus low-priced stocks, but that’s not
an objective comparison. By expressing ATR as a
percentage of the closing price (ATR%), we
objectively compare the volatility of all stocks.
For perspective: The S&P 500 has a long-term ATR% of
1.6 percent. So, at greater than 4 percent, we’re only
trading high-volatility stocks.
4. The three-day RSI is below thirty.
RSI is an oscillator that measures overbought and
oversold conditions.
The lower it is, the more oversold the stock.
With this rule, we make sure we select the stocks that are
oversold on a shorter-term basis.
This is our first method of quantifying fear.
5. When rules 1–4 apply, we place a maximum of ten orders.
6. We rank the orders by the lowest three-day RSI (these are the
most-oversold stocks).
It’s important to rank them, because we are only trading
the ten most-oversold stocks. Without rankings, we could
have fifty to two hundred setups to choose from.
In this rule, we ensure that we’re selecting the stocks
which have the most fear.
7. The following day, before the market opens, we place a limit
order of 4 percent below the current day’s close.
That is because if there is intraday movement in which
the stock moves further down, that simply means there is
 more fear.
That makes our trade stronger, because fear is good. We
want fear in our stocks. There is a significant edge if we
buy lower than we could have at the beginning of the
day.
8. At the end of the day, we look at which orders were filled.
9. If we wanted to use a stop loss on the first day, we would need
to watch the market the whole day in order to place a stop.
Since we only want to work thirty minutes a day, we don’t
place stops on the first day. We could, but it’s too much work
and doesn’t fit with our objectives. It also would make
virtually no difference on your bottom line.
Test results are similar whether or not we use stops on
the first day, as shown in the examples.

Exit Rules

1. When an order gets filled, we place a stop loss after that day’s
close. The stop loss is 2.5- times the ten-day ATR. That’s
wide, because we need to give the trades room. We are buying
falling stocks, and for mean reversion, these stocks need space
to develop.
It’s important to know that these trades must have a large
stop loss. If we trade with small stops, this strategy
doesn’t work. The trade needs room to develop.
This can be difficult on a psychological basis,
because many positions will first show a loss after
entry.
2. We stay in the trade until any of the following conditions is
met:
1. Stop Loss: The trade gets stopped out.
2. Profit Target: When the position has earned a profit of 3
percent or more, we exit the following day, market on open.
3. Time Exit: When four days have passed without A or B
occurring, we exit market on close.
Here’s an explanation of the statistics used in the previous chart.
R-squared measures the slope of the equity curve—it goes from
0 to 1, so 0.96 is excellent.
R-cubed is a measure of the relationship between the CAGR, the
maximum drawdown, and its duration. The higher the measure, the
better.
The Ulcer index measures how many ulcers you might get while
trading—clearly, the lower the index, the better. In the world of
trading, a 2.92 ulcer index is very low. It factors in the size and
duration of drawdowns.
As you can see, this strategy has a great CAGR, reasonable
drawdown—but contrary to the Weekly Rotation strategy, our win
rate is extremely high. This is great for people who struggle to
handle losses and don’t like strategies with low win rates. The
reason for this is because we have a very short-term profit target of
3 percent. Many trades reach that 3 percent and are exited with a
profit. Mean reversion strategies are good for people who want
higher win rates.
 Also, the average exposure of 10 percent is very low. You may
be 100 percent invested at times, but overall, your equity will be
unexposed. We only trade when the time is right.
This strategy destroys the benchmark in all aspects, without
correlating to it, as you can see.
The strategy would have turned $100,000 into more than $7
million, if you had traded it since 1995.

This chart shows the equity curve, juxtaposed with drawdowns.

With this strategy, it’s normal to be in drawdowns, but your
winnings make up for it.
Before the largest drawdown, in 2000, there were significant gains.
The drawdown occurred because of large accrued profits.
Therefore, it’s easier to stomach. It’s expected.
The one negative year was very small. With mean reversion, the
more volatility, the more trades we get. The mediocre years are a
result of low volatility.
As you can see, there are far more dark grey months (making
money) than light grey ones (losing money).
Performance has been mediocre in the last few years, but that is
simply due to low volatility. In 2016, performance has picked up.
With mean reversion, the more volatility, the more trades we get.
If there isn’t a lot of volatility in the markets, we don’t see a lot of
setups, and our trade frequency is too low. I’m certain that as soon
as the volatility picks back up, this strategy will perform
exceptionally, as it has in previous high-volatility environments.
Example 1
Entry: Long at 26.64
Initial Stop Loss: 23.91
Exit: Two days later on open (slippage included)
We see a clear uptrend lasting for a while, then before we enter,
you could see a lot of fear. We like fear—we buy when there is a
short-term pullback that implies there is a lot of fear. We put in a
wide stop loss, which in this case wasn’t reached, and we closed
out the next day, with a solid gain. We hit our profit target and got
out.
Example 2
Entry: Long at 3.21
Stop Loss: 2.29 (not shown)
Exit: Two days later at open, slippage included at 3.57
Again, we see a stock that was on a huge uptrend, when panic
intervened, showing a pullback. That’s our time to pounce. Our
automated strategy tells us to buy while everyone is panicking. It’s
not easy for most people to buy at these points—there’s probably a
big, negative event in the news. People can’t help but sell off at the
sight of bad news, and that helps us. We love that fear—the more
fear, the better.
Example 3 (Losing Trade)
Entry: Long at 7.25
Stop Loss: 6.60
Exit: Time exit after four days, market on close 6.94
We entered on the same path here—uptrend, pullback due to fear,
and then we pounce. The difference here was the stock never
reached its profit target, nor was it stopped out. After four days, we
accepted our loss (with a time stop) and sold. If we had stayed in,
we would have lost more. This is why we always put in a time
stop. A time stop tells us that this is not a good stock to be in, so
we can then look for a better opportunity.
Example 4
Entry: Long at 29.82
Initial Stop Loss: 27.74
Exit: After profit target has been reached, third day market on open
Here we see the same story again. Uptrend, panic, buy, large stop
loss, and the stock shot up soon after. We got out the next day,
market on open.
Summary
As you can see in the previous examples, the strategy is simple.

1. Look for an uptrend.

2. Look for significant volatility.
3. When the stock shows fear through a pullback, we buy even
lower the next day.
4. We get out on a small target profit—we have a stop loss and a
time stop.

The key to trading this strategy profitably is to have a large number

of trades. The average profit per trade is not very high, so we need
a large trade frequency to ensure large overall profits.
Most people don’t want to be involved in short trading, because
they’re unfamiliar with it. However, it’s a great way to capture
profit in the markets. For people who are comfortable trading
against the herd, won’t have trouble ignoring the news, but want a
different strategy than mean-reversion long, this is a great strategy.
This strategy is designed to make money when the market goes
down. That’s its biggest advantage, especially when used in concert
with the mean-reversion long, or Weekly Rotation strategies. That’s
the ideal way to trade this strategy. They all work in perfect
harmony, as I’ll discuss in part 5.
Short strategies are a little less reliable than long strategies
because shares to short are less available, and occasionally the
government will ban selling stocks short. That has happened in big
market panics—the government will say, “You can’t short stocks
right now.” We have to be aware that could happen.
Also, there is no guarantee your broker will have the shares you
need available to short.
More than 96 percent of my short trades in the past five years
have been executed, so this isn’t a huge issue, but you should be
aware of it.
Objectives

Trade short only on a large universe of stocks, taking

advantage of overbought conditions by short selling the best
stocks, and buying each back when it reverts to its mean.
Execute in less than thirty minutes a day.
Take advantage of stocks that have significant volatility and
are on the shorter term overbought. By short selling these
stocks, we get a strategy that performs well in bear markets
and sideways markets.
Beat the benchmarks, especially in bear markets.

Beliefs
This strategy is similar to the long mean-reversion strategy, but
now we’re looking for overbought situations, rather than oversold
situations. Before we were buying short-term fear—now we’re
selling short-term greed.
When markets have shown irrational, fear-and-greed-based
behavior, there is a statistically larger than normal probability that
we will see a reaction in the opposite direction.
Markets are driven by fear and greed. To take advantage of this
on the short side, we need to find greed-based situations. These
stocks have been high-flying stocks, mostly in favor with amateurs
that have jumped on the fast-riding train. This typically is
accompanied by large volatility.
 In these situations, there will come a time when professional
traders will start to take profits. Statistically, there is an edge in
selling greed and buying it back when it has reverted or shown
some downward movement.
This kind of trading goes against human nature and is trading
against the herd. It is not easy to be a seller when everybody is
buying and when all news messages show panic, but it is exactly
what makes it a profitable strategy.
Since we are looking for shorter-term trades (a couple of days),
we need a large trade frequency. This is both done by scanning
over a large stock universe and creating exit rules in which we get
out fast.
Trading Universe (Same as Mean-Reversion Long)

We trade all US stocks from AMEX, NASDAQ, and NYSE.

We do not trade ETFs, pink sheets, or bulletin board stocks.
For testing, this means that we take into account all listed and
delisted stocks. Since 1995, this list consists of forty thousand
stocks.

Filters

Minimum Average Volume of the last twenty days is above

500,000 shares.
Minimum price is 10 USD.

Position Sizing

Fixed fractional risk: 2 percent

Maximum size: 10 percent

Entry Rules
It’s essentially a mirror of the long strategy. The main difference
is that we do not use an SMA filter. That’s because we want to
make sure this strategy assists our long strategies—this ensures that
they work in harmony. Often the long strategy starts to lose money
when the market is in an uptrend that starts to trend down, and this
protects against both strategies losing money.
 1. 7-day ADX: above 50
2. ATR% of past ten days: above 5 percent
3. The last two days were up days
4. 3-day RSI: above 85
This, combined with rule 3, is a measure of greed in the
stock. That’s what we’re looking for. As the character
Gordon Gecko said in the movie Wall Street, “Greed is
good.” There will come a moment when people sell, and
that’s when we’ll profit.
5. When rules 1–4 apply, we place a maximum of ten orders.
6. We rank the orders by the highest three-day RSI.
The most overbought stocks indicate the most greed.
7. The following day, before the market opens, we place a limit
order to sell short at an equal of the today’s close.
8. At the end of the day, we look at which orders were filled.
9. If we want to use a stop loss on the first day, we need to watch
the market the whole day and place the stop as explained in
the previous example. Since we only want to work thirty
minutes a day, we don’t place stops on the days on which we
trade the stock.
Test results are similar, whether or not a stop loss is used
on the first day.

Exit Rules

1. When an order gets filled, we place a stop loss after the close.
The stop loss is 2.5 times the ten-day ATR, above the entry
price. It is so wide because we sell fast-rising stocks, and
mean reversion trades need space to develop.
2. We stay in the trade until any of the following conditions is
met:

1. Stop Loss: The trade gets stopped out.

2. Profit Target: When the position has a profit of 4 percent or
more, we exit next day, market on open.
 3. Time Exit: When two days have passed without A or B
occurring, we exit market on close.

Here we see the same characteristics as the long strategy—a high

win rate, low exposure, low trade duration, and also a low ulcer
index. The results are superb.
Again, if you compare with the long strategy, they are perfect
complements. The short strategy is great in bear markets (2000–
2002, 2008), as you can see. In times of poor performance (2012–
2013), the long strategy did great.

Example 1
Entry: Sell short at 15.00.
Initial Stop Loss: 17.27
Exit: 14.31

The story is simple. We see a lot of greed, sell short, with a large
stop loss, and capture a quick profit. This was a significant win.
Example 2
Entry: Sell short at 63.50.
Initial Stop Loss: 81.12 (not shown)
Exit: The following day, at 57.91
In about a week, the stock moved from 45 USD to 65 USD, which
signaled greed. Again, we saw that greed, and we captured gains.
There was a fast reaction downward, as expected.
Example 3 (Loss)
Entry: Sell short at 35.02.
Initial Stop Loss: 40.05
Close: 37.37
This was closed with a loss, but as you can see, we did not come
near getting stopped out. The time stop closed out this position.

We sold a lot of greed again, but it turned out greed hadn’t yet hit
its peak. Our time stop saved us.
Example 4
Entry: Sell short at 12.22.
Stop Loss: 14.84 (not shown)
Exit: Close at 10.79.
Here’s one more example of selling greed, and its paying off.
If you like trend following, but can’t handle the large drawdowns
paired with it, this is a good strategy for you.
The idea is to combine lots of open, long positions with short-
term mean reversion strategies. By doing that, our drawdowns are
lower. Trend following alone saw a 30 percent drawdown; now
we’re at 23 percent. In addition, CAGR increased from 19 percent
to 26 percent.
 We’re combining two directions (long and short) with two styles
(trend following and mean reversion).
Here’s a chart comparing them when used alone, versus in
concert.

As you can see, they work incredibly well together. By adding the
mean-reversion short strategy to the Weekly Rotation, the CAGR
increased almost 7 percent, while the maximum drawdown
decreased 7 percent, and its duration was cut from thirty-eight
months to sixteen. That’s a tremendous improvement.
The strategy beats the benchmark quite easily. Drawdowns are
shorter than with the uncombined strategies, and their magnitude is
lower. The win rate is lower than the combined long and short
mean reversion strategy, but that’s expected—because trend
following strategies have a lower win rate, but larger win-loss ratio.
Most importantly, this strategy beats the benchmark by a large
magnitude, with low correlation.

Again, when one strategy is down, the other is up, and vice versa.
In the bear markets of 2000–2003, when the trend-following
strategy was flat, this strategy continued to make money.
There are some sharp drawdowns—that’s what happens when the
long-term trend following strategy was making a lot of money
beforehand. We have to give money back, because we’ve profited
handsomely. That’s a consequence of trend following. However, by
combining strategies, these drawdowns are much smaller than they
were with trend following only.

When one is flat, the other makes money. In 2008, the Weekly
Rotation was losing, then flat—but the short strategy was making
great money. Since 2012, the short strategy hasn’t done much, but
the Weekly Rotation has skyrocketed. In the beginning of 2015, the
Weekly Rotation started to give back profits—and the short
strategy started to make profits again. They balance each other out
perfectly.
In 1999, the strategy made over 100 percent! As expected, it gave
money back afterward (the consequence of trend following), but
not nearly as much as if we had been only long invested. It wound
up making a profit in 2000—this is a great combination.
In 2008, that horrid year for the index, the strategy was a slight
minus, but destroyed the benchmark.
By combining long-term trend following and short-term mean
reversion, we make money in bull markets, bear markets, and
sideways markets. We make money in all markets.
This strategy is great when you want to make big gains in bull
years, but you still want protection for when the market goes down.
It’s a phenomenal combo.
This strategy combines both the mean-reversion long strategy and
the mean-reversion short. We trade them simultaneously. The
result, as you’ll see, is that the CAGR increases significantly, and
the max drawdown is significantly lower. That means you lower
the risk, while gaining upside!
When one strategy starts to lose money, the other makes up for
it. The long position starts to lose money, but the short positions
recover those losses. It balances things out, and performance is
exponentially better than using either one alone. We trade both
strategies at 100 percent equity, when possible. I don’t mind
trading 100 percent both when I can, because by being 100 percent
long and 100 percent short, I’m basically market neutral.
Sometimes we will be more directionally invested—say, 70 percent
long or 70 percent short instead—and that’s fine, too.
When you trade mean-reversion long by itself, there will be
times when it’s completely flat. That means you’re not making
great use of your capital. By trading both simultaneously, you
better use your capital and take advantage of the fact that the two
strategies are designed for two different market types, so you’re
covered in all scenarios.
Here’s a table comparing the two strategies being used alone,
versus together.
As you can see, the MAR ratio (CAGR divided by biggest
drawdown) is excellent—and there’s almost no correlation with the
benchmark.
Because it’s a mean reversion strategy, the average days in a
trade is low, and you need a lot of trades. This strategy outperforms
the benchmark exponentially—about four times more, with five
times lower drawdowns! That’s the magic of combining
noncorrelated strategy, getting maximum bang for your buck.
There is a low Ulcer index, high R-cubed, and over 80 percent of
months are profitable.
As you can see, the drawdowns don’t last long. We recover
quickly, because trade frequency is high, and therefore
opportunities abound. The pace helps you.
The largest drawdown of the long strategy was about 20 percent,
but by combining strategies, it shrunk to 11 percent. The CAGR of
the long strategy was 21 percent—by combining strategies, it
increased to 26 percent.
The strategy has been profitable every year since 1995, even in
the big bear market of 2008, when it performed 64 percent better
than the S&P 500. There are only a few years in which the index
outperformed this powerful strategy.
Recently, results have been mild, but that’s because volatility has
been low. That leads some people to conclude that mean reversion
no longer works, but that’s ridiculous. We know that low volatility
equals mild results with mean reversion. You can see that in our
trading rules. We simply don’t get enough trade setups, which
means we don’t have lots of opportunities to create short-term
profits.
Risk-adjusted returns are still good, but our net results are
underwhelming. We don’t have enough volatility to see a large-
enough volume of trades. Once volatility starts to structurally
increase, our mean reversion strategies will see better results.
 In the following table, you can see the results of all described
strategies—including the benchmark (buy and hold of the S&P
500).

Clearly, all of the quantified strategies have a clear and

consistent edge, and combining them increases that edge
exponentially.
I personally trade a suite of twelve noncorrelated strategies, and I
train most of my clients to combine all of the described strategies,
if it suits their personality. The more proven strategies you
combine, the higher your risk-adjusted performance. Combining all
proven strategies is fairly easy to scale, and then you can have the
option of adding more, later. When it comes to automated training,
it truly is “the more, the merrier.” Each added strategy increases
upside while decreasing risk.
As mentioned before, through position sizing, you define your
objectives. First, your strategy needs an edge. Once you have an
edge, position size is the missing ingredient, enabling you to trade
your strategy according to your objectives and within your comfort
zone.
There are many ways to define your position sizing, based on
your objectives, risk tolerance, and whether or not you’ll trade on
margin.
The variety of models is beyond the scope of this book, so I’ll
show some simple adjustments, based on profit objectives and risk
tolerance. Through the following example, you can see how
position sizing affects both CAGR and maximum drawdown. For
the purpose of this example, we’ll use the combined suite of long
and short mean reversion. Remember: We’re trading 100 percent
long and 100 percent short.
The results of trading long and short mean reversion combined
are these:

CAGR: 26 percent
Max Drawdown: 11 percent
Risk per Trade: 2 percent
Maximum Positions: Ten long and Ten short
Maximum Size per Position: 10 percent of total equity

The Conservative-Sizing Model

Now, here’s an example of a strategy for the more conservative
trader. This strategy is for someone who likes combining long and
short mean reversion, but can’t stomach the daily and monthly
swings and drawdowns. They’re too large, and he or she won’t be
able to follow his or her strategy. The following is a simple
adaptation for traders with a lower risk tolerance.
We basically cut our sizing in half:

We trade the same amount of positions—a maximum of ten

long positions and ten short.
Risk per Trade: 1 percent
Maximum Size per Position: 5 percent
Since this is long and short combined, we can get up to 50
percent long exposure and 50 percent short (10 positions x 5%
of equity).
See how the drawdowns lower from 11.6 percent to 5.6 percent?
We take a hit on the CAGR, of course, but we’ve chosen that. The
CAGR is still 14.6 percent—double the CAGR of the S&P 500,
and the drawdown is almost ten times lower! The lower the risk,
the lower the CAGR.
The Aggressive-Sizing Model

Now let’s take a very aggressive model, where we trade

significantly on margin. This position sizing isn’t possible to
trade at some brokers, but at mine, Interactive Brokers, this
option is available to portfolios above $125,000 USD, using
portfolio margin.
We trade the same amount of positions—a maximum of ten
long positions and ten short.
Risk per Trade: 3 percent
Maximum Size per Position: 15 percent
Since this is long and short combined, we can theoretically get
up to 150 percent long exposure and 150 percent short (10
positions x 15% of equity).
The CAGR goes through the roof, at around 40 percent annually,
but of course the drawdown increases as well. Still, at 18 percent, it
is more than three times lower than that of the S&P 500. As
always, seeking more profit requires you to risk more.
I do not recommend trading these position sizes—most people
will overestimate their risk appetite. This example was provided as
a guideline to see what the impact on your overall returns and
drawdowns are when you use a different position-sizing algorithm.
Summary
There are many more advanced techniques to achieve your
objectives through position sizing, but that’s a little beyond the
scope of this book. There are many options, and you’ll find one
that suits you.
Here is a comparison of different position sizing models:
Most people wonder, These strategies look great—but are they
exactly what I’ll get in the future? It’s important to understand that
back tests are representations of the past, based on past data. They
are not guarantees of future results.
There is only one guarantee about the markets—they always
change. We’ll always have bull markets, bear markets, sideways
markets, and different levels of volatility. If you have a strategy
that takes all of this into account and is based on your beliefs, you
will do well. That said, your results will vary based on market
conditions.
I cannot promise perfect results, but I can promise that if you
follow the steps outlined in the book, you’ll beat 90 percent of
traders.
There will come a time when your largest tested drawdown will
be exceeded. The same will happen for your longest drawdown.
That’s the reality of trading. This sounds easy to handle, but if you
have a tested drawdown of 15 percent, which took ten months to
recover from, many people will see a drawdown of 17.5 percent for
thirteen months and panic. They think their strategy is broken,
because the “maximum drawdown” was exceeded. But the key
word is tested. The past can approximate the future, but back tests
are not perfect. Of course, the people panicking still have a good
strategy. It’s not broken. The problem is with their psychology. You
mustn’t have your judgment clouded by looking at your bank
account. In the worst of times, still follow the strategy!
However, the converse will happen. There will be times when
volatility is so high that your mean reversion strategies go nuts, and
you make more money than expected. There will be another time
like the dot-com bubble, and your Weekly Rotation strategy will go
crazy. There will be good times, and there will be bad times. But
you’ll be better prepared than almost anybody.
You will succeed long term if you’re consistent in following
your strategy.
Remember the steps to trading profitably.
First, define your beliefs. Are you a trend follower? Are you
using mean reversion? Are you combining them to increase their
effectiveness? Define this, and be crystal clear. Then, make your
objectives as clear as possible.
Next, define your position sizing and cut it in half to be safe—at
least at the beginning of your trading.
Trading should be treated as a business. It’s your money, so be
serious about it. Have a plan.
Finally, execute consistently. You can have a great strategy, but
if you don’t trade it perfectly, you’ll turn a winning strategy into a
losing one. You must follow your rules and refrain from overriding
strategies. Ignore the news. Overreacting makes your strategies
useless.
I have seen many people who have great strategies with perfect
trading rules and a clear edge, but their psychology is in conflict.
They can’t avoid looking at the news, and the outside noise clouds
their thoughts and leads them to ignore the computer’s orders on
certain days. They don’t trade when the strategy says they should.
Most of the time, they missed out on trades that saw great returns.
They turn a great strategy into a useless strategy because they don’t
have the discipline to trade it consistently. Consistency is key.
To solve this issue, I founded a company that specializes in
executing your trades. You receive reports each day, and we trade
exactly how the strategy is supposed to trade. With a group of
skilled people, we handle your discipline and consistency for the
strategy.
We can do this in two ways:

1. We develop your strategy based on your desire.

2. You have a strategy developed, and we trade the signals for
you.

(For more information, visit [Link].)

If you’ve followed the step-by-step approach—first defining your
beliefs, second, your rules, third, automating your strategy, and
fourth, trading it—you have succeeded in creating a consistent,
scientifically proven way to make money investing for the rest of
your life. You’re on the path to create financial and emotional
freedom—no more stress.
You can, in other words, finally relax.
The only way you can fail is if you haven’t defined your beliefs,
objectives, and position sizing thoroughly. I can’t emphasize this
enough—trading is virtually all psychology. You can have the
perfect strategy, but if it doesn’t suit your beliefs, you will override
it, and it will be useless.
It’s hard work to create the strategy, but once you’ve done it, the
hard work is done. It’s hard work to define your beliefs, strengths,
objectives, and exact strategies, and do the testing. But when
you’re done, the process of executing your strategy is effortless.
Everything is automated. It takes a half hour a day to achieve
effortless financial freedom. You just need to follow the process
every day, and check in occasionally to ensure your real-time
results match your back testing—that nothing has changed.
Most people don’t understand the importance of the initial hard
work, though, or they aren’t strong enough to be honest with
themselves and admit their weaknesses.
If people are unclear in defining their trading style, objectives,
and position sizing, they override their strategies. That leads to
disaster. Their strategy has a clear edge—like the ones I’ve
presented in this book, and executed myself—but they don’t follow
it. They don’t trade every day. Or, often, they’ll do a great job for
the first three months, but when a drawdown hits, they’ll start
doubting their strategy, because they’re emotionally attached to the
money they’re losing.
If that’s the case, then they didn’t define their objectives
correctly. Drawdowns shouldn’t affect you, because we have
planned for drawdowns in the strategy’s creation process. If you’re
going to doubt your strategy and ignore the proven signals, your
strategy becomes useless. It’s useless to put in so much work only
to not follow the strategy and fail. You must be honest with
yourself beforehand, then trust and follow the strategy to the letter.
I had one client who was an experienced, skilled trader, but used
a fundamental approach. He contacted me because he wanted to
shift to a technical and automated approach. We developed a great
strategy that I could have used myself. That’s how great it was! Yet
I checked in with him six months later, and he said he “wasn’t
doing well”; he was down 10 percent. That was strange, because
market conditions had been favorable for his particular strategy. I
asked him to send me a back test, and it showed a profit of 10
percent. There was a 20 percent gap. I asked him what the problem
was. He should have been happily making money.
He told me he had gotten “really uncomfortable” when he had
his first drawdown, which had only been 10 percent. He skipped a
couple of trades that he didn’t like. Of course, they turned out the
complete opposite. He missed all of those profits, and instead of a
10 percent profit, he was on a 10 percent loss after just six months.
He didn’t trust the strategy, because he hadn’t been honest up front
about his risk tolerance. His position sizing wasn’t suiting his
stomach. He couldn’t handle it, and he started to doubt the strategy.
 He has overcome it now, but only because I worked with him to
completely redefine his objectives. We didn’t change the strategy.
The strategy was phenomenal. We needed to redefine his
objectives, so that he could trade his strategy under all
circumstances, in a clear and relaxed mental state. We designed a
new position-sizing strategy that actually suited his risk profile,
and now he can actually follow the strategy and execute all of the
trades.
Now, it’s working well, and he is making consistent, double-digit
annual returns with low volatility. He follows his strategy
consistently, and he’s happy.
In my experience with managing other people’s money, nine
times out of ten, people cannot handle the drawdowns they say
they can handle. I trade for some of my customers, and I have to be
extra cautious to be sure I understand their true risk tolerance. For
certain people, I’ll only use low-volatility strategies because I want
to ensure I’m within their risk-tolerance parameters. I don’t want
people feeling anxious about their money, calling me up, and
freaking out about a temporary drawdown. My objectives don’t
matter. Perhaps a different strategy or more aggressive position
sizing would have higher upside, but if it’s going to make the client
an emotional mess, it’s too risky. What matters is the client’s
objectives and what he or she can truly handle.
Whenever a client first defines his desired position sizing, I tell
him to cut it in half, then see how it goes. When you look at your
strategy’s back test, you see the equity curve rising from the lower
left quadrant to the top right—you see yourself making money long
term. It all looks so good and simple. But that equity curve doesn’t
show your feelings when it suddenly goes down, and real money is
on the line. Your retirement savings have been shaved down.
Whatever you think you can handle in your current, clear mental
state, cut it in half. Start there, and you can adjust later.
This is a lifelong approach, so take it slow. If you think you can
easily handle a drawdown of up to 20 percent, start with an
algorithm that can only get to 10 percent. You’ll be infinitely more
comfortable. When you begin to observe your feelings while
you’re trading, and when you’ve done it for a consistent time
period and proven you can handle certain drawdowns, then you can
move up. This way of trading is intended to set you up for life. It’s
not about maximizing profits right away. The first six months
aren’t important or profitable. It’s important to use those six
months to develop the ability, skill, and comfort to follow your
strategy and achieve financial freedom for life.
Your beliefs need to be based on real-life experience. If you say
you can handle a drawdown of 20 percent, what real-life
experience is it based on? Everybody’s circumstances are different.
Do you only have your life savings and no other income, or do you
earn $25,000 a month on top of your $100,000 of trading capital?
If you have that monthly income, you can be more lenient with
your risk tolerance. You’re still covered. If that’s not the case and
your pension depends on your risk tolerance, you had better be
thorough and honest in determining your maximum drawdown. It
all depends on you. What do you want? What are your objectives,
and your risk tolerance? The answers are different for everybody.
One of my clients is an ex-floor-trader. He has seventeen years
of experience, but he can’t trade on the floor anymore because
they’re closing and shifting to electronic trading. He contacted me
in order to create a different approach. We had a long talk about
objectives. When he said, “I can handle drawdowns of 25 percent,”
I asked him, “Are you sure? What is that based on?” He said that it
has happened countless times in the past seventeen years. He knew
exactly what it feels like, and he was sure he could handle it. I
believed him, because he had experience. When a beginner tells me
that, I second-guess their estimate immediately. Most people don’t
know what it’s like to lose a quarter of their equity. It’s human
nature to get upset and react emotionally, and you need to account
for that. Failing to do so is the surest path to failure. People need to
accept that they can be smart and make money while also admitting
their natural weaknesses.
When I discuss drawdowns with clients, I make them visualize
their account balance, to simulate their emotional response.
Imagine your initial capital, then imagine the amount you have
lost. Let’s say it was $500,000, and you said you can handle a 25
percent drawdown. Picture that drawdown of $125,000. That
$125,000 is just gone. You look at your account statement every
day, and it’s not $500,000 anymore; it’s $375,000. How do you
feel, exactly? How would you feel if eight months later, it’s still
below $400,000? If you’ve been trading for eight months, and lost
$100,000? Would you feel uncomfortable? Would you still follow
your strategy? If you translate the percentage into real money and
visualize it, you can have a better view on what percentage
drawdowns you can really handle, and how your emotions would
change. Nothing is a substitute for real-world experience, but
visualization is a good start.
My clients always learn the most important lessons when they
lose money, rather than make it, because of our natural bias toward
risk aversion. If you’re up $50,000, your ego turns on and you tell
yourself how great you are. You forget the important things. You
don’t observe yourself. You just feel great. But when you’re losing
$50,000, it sticks in your mind. You start to feel anxious and
second-guess. You look at your strategy. Why isn’t it making
money? Why isn’t it doing what it’s supposed to? You start to
redefine and reanalyze your objectives. Were they set correctly?
You start to feel uncomfortable. Fortunately, that uncomfortable
feeling will teach you if your strategy is truly right for you. You
only know if you’re comfortable trading long and short together—
if you’re comfortable with trend following or mean reversion—
from real-world experience losing money. You don’t know if a
strategy is right for you until you’ve seen it at its worst and
experienced your emotional response. You don’t yet know if it’s a
strategy you can follow for life.
When you’re up $50,000, you think about how great you are,
and what you’re going to buy, and how you’re going to retire
earlier with more money. You don’t analyze your trading; you just
pump up your ego.
I can’t stress this enough. Your strategy will work and grant you
financial freedom only if your objectives and beliefs have been
clearly defined and tested based on real-world experience. You
must know if you will be able to stomach your strategy and still
follow instructions when you’re experiencing the inevitable,
maximum drawdown.
Many people trade stocks because they want fast-paced
excitement. Their personality likes excitement, and they think
trading is the perfect hobby. This is terribly wrong. If you get
excited when your strategy does well, I can guarantee your risk
management sucks. Getting too excited about wins means that you
are too attached to the money you’re making. That means sooner or
later you’ll be in a drawdown, and you won’t be able to handle it.
To be profitable and successful in trading, you need to have a
process-oriented approach to trading rather than a results-based
approach. That’s not exciting. It’s quite boring. But good trading is
supposed to be boring, because the objective is simply to execute
your proven process. You can’t look for excitement in the markets;
you’ll fail. Make your trading boring so you can find excitement in
other areas of your life—love, travel, adventure, whatever you
enjoy.
Take a long-term view of your trading. Be aware that you will
always experience drawdowns, even with a proven strategy. In fact,
most of the time your strategy will be in a drawdown. The S&P
500 has been in drawdowns for seven years straight, historically.
That’s way too long, of course. Your strategies, though, will
sometimes go through a period of a year or longer where you’re
not making any money. That’s part of trading. In order to make this
work, you can’t think that time period means anything. It’s just like
running a business, or investing in real estate. You will have
months when your business is losing money, or the housing market
isn’t good. Trading is the same. You need to look at your results
over a ten-year period. What results can you achieve in ten years?
It doesn’t work if you look at just a couple of months. Trading is
not a game where you can make money in a short time. Most who
try that go out of business. There might be some lucky people who
make a huge amount of money short term, and they’ll brag—but
they’ll blow up eventually, and you’ll never hear from them again.
This process-oriented, long-term approach requires you to shut
out the noise and go live the life you want. You need to ignore what
the media tells you to buy, and what the newspaper says. It won’t
help you if everyone says gold is going up or down. The only thing
that counts is trading your strategy, which follows price action. It’s
not prediction. The whole noise around investing must be ignored.
A client of mine is a busy executive who has a high-paced job
that pays well, and he has significant equity on the side. I did four
days of private consulting with him, and we developed a great
strategy that consists of several substrategies, well defined
according to his beliefs and objectives. He’s been trading for seven
months and is up about 23 percent, including the big drop in the
market in January 2016. He has made over 300,000 USD this year,
and is outperforming the index significantly, because he’s
executing his strategy the way it’s supposed to be executed.
He’s having such success because he basically acts like a robot
now that the work is done. He focuses on his busy job and life. He
travels a lot. He schedules thirty minutes a day to blindly enter his
trades, and then goes on with his otherwise exciting life. Because
of this, January’s drawdown had no effect on him, and now he’s up
big. He understands the value of a robust strategy. This mind-set of
understanding that his up-front hard work will gift him a tool he
can use for life is unique, and the key to his success.
Because he’s so busy, he often does his thirty minutes of trading
at 10:00 p.m. We had to make some concessions. We were realistic
with what his energy level would be like after work, and so we
created a strategy that requires him to enter fewer trades. He wasn’t
realistically going to put in forty orders at 10:00 p.m., so we
sacrificed some potential return. It was better to ensure he would
follow the strategy rather than try to maximize profits. He’ll still do
exceptionally well, and he can be sure he’ll follow his strategy.
With your strategy set up to grant you financial freedom, you
can start shutting out the annoying noise, so you can live your life.
You don’t need to look for excitement in the markets, because you
can wake up and swim in the ocean, take your kids to school, stay
in bed with your wife, go skiing, hiking, skydiving, or do whatever
it is that excites you. The strategies in this book have been proven,
not only based on back testing, but based on the real-world results
of my experience and that of my clients.
Now, the strategies in this book are outstanding, but they’re not
optimized and personalized for you. If you’re a truly committed
trader looking for the best results, visit [Link]
to design your own strategy, step by step. We have various
programs—from a video course to my popular, competitive Elite
Mentoring program—in which you’ll learn together with a group
of highly skilled and committed people.
When the back test shows one thing and real-time results show
the same thing, that is as scientifically proven as trading can get.
This isn’t high-frequency trading, with fancy computers that you
can’t compete with—it’s simple, proven trading that has worked
for decades, and will continue to do so as long as you do the work
I’ve outlined. Work hard, be honest with yourself, trust your
strategy, and enjoy your freedom.
The final step is the most important: You need to take action!
The key to success in the markets is to put this information to
work, and to actually apply it to your own trading, based on your
preferences.
The best way to implement what you’ve learned into your
trading so that you can reach the next level—financial freedom—is
to join my Trading Mastery School’s Elite Mentoring program.
 Alongside a group of ultra committed traders, you’ll build your
own suite of noncorrelated trading strategies, perfectly suited to
your personality, lifestyle, and risk tolerance. We’ll take you
through everything, step by step, and you’ll graduate the program
with a perfect strategy you can use for life.
Whether you like day trading, swing trading, trend following, a
combination, or anything else, we’ll find what’s best for you and
design a solution, together.
You’ll have access to our Trading Mastery School Elite software
—the same software I use to develop my strategies—exclusively
available to Elite Mentoring students.

For more information, visit:

[Link]
Laurens Bensdorp is the founder and CEO of Trading Mastery
School.
In his younger years, he traveled the world instructing white-
water rafting guides—growing their guiding skills and general
performance, and developing contingency plans. Laurens’s training
was highly demanded, and he has worked in Germany, Austria,
Turkey, Israel, Dominican Republic, Costa Rica, and Chile.
 In 1998, Laurens started his own adventure tourism company in
Mexico and successfully sold his shares in 2000.
In 2000, Laurens was hired to manage a small boutique venture
capital company in the Netherlands. This started his career in
finance and helped him discover his real passion—trading and
beating the markets. He began managing all of the company’s
investments, first lowering its risk profile. It was a great learning
experience, but Laurens disliked the corporate environment.
From then on, Laurens devoted a large portion of his
nonworking hours to educating himself about trading and risk
management. After years of endless studying, Laurens created a
trading style that suited his personality, lifestyle, and beliefs.
He then devoted a decade of his life to developing automated,
algorithm-driven trading platforms to maximize profit, while
limiting risk, and keeping management time to virtually zero. From
2006 on, he had vast success trading his family’s accounts.
Laurens was featured in Van Tharp’s book Trading Beyond the
Matrix, in which he explains how he transformed himself from a
losing trader into a winner.
Outside of trading, Laurens enjoys spending time with his
family, traveling, wine collecting, skiing, and taking long walks on
the beach.
Through his personal foundation, “Fundación Albenco,” Laurens
and his wife help disadvantaged children in Colombia gain an
empowering education.
As a stock trader who only needs his software and an Internet
connection, Laurens has the freedom to choose his dream location.
Laurens has lived in eleven countries, speaks five languages, and
currently lives with his family in southern Spain.
As a thank-you for reading my book, I’d like to offer you free
access to a video course in which I dive deeper into the settings and
parameters of each of the strategies, discussing the charts and
statistics in more depth.
Simply visit:
[Link]