Hey hey, what's up my friend. So in today's episode we have Kevin Davey in the house baby. So in case you do not know who that is, right? well Kevin is a World Cup trading Champion He's a full-time Trader and an investment manager and if you've been in a trading Circle for a while you know that in the world of trading it's hard to find someone who's a World Cup trading champion and at the same time who's willing to share his Secrets right? So this is I have to get Kevin in know to bribe him. you know to pull him in and say Hey Kevin let's do this right and he he said okay and this is why in today's episode, right? Uh, here's a breakdown or an overview of what you learn, right? So we talk about first and foremost Kevin's growing up, years, his formative years, and how he made the transition to full-time trading.

Then of course we talk about you know, what is Elo trading and how it works. So for those of you who are not familiar with ELO trading, don't worry, it's nothing complicated or complex to get you overwhelmed. We explain it in a very simple step-by-step manner even a 10-year-old can understand. Yeah, we also talk about the surprising truth to why Kevin has 200 trading systems and he trades about 30 to 35 at any one point in time.

We also talk about how to tell when your trading strategy has stopped working right and what you should do about it. We also di into know the reason why he avoids trading the stock market and it's not what you think. Plus we will get him right to share. You know how to tell whether ELO trading is suitable for you because let's face it right, it may not be suitable for everyone.

So how do you know whether you're suitable for ELO trading right? That's what you'll share as well. And of course right, how do you get started with ELO trading? Especially if you have no experience. So Kevin Wright is coming in with you know years and Decades of experience to give it as all in today's episode sounds good then let's get started. Alrighty so Kevin welcome to the show and for those of you who are watching this is actually right the first guest we have right on the podcast so welcome Kevin happy to have you! Wow! I'm uh I'm impressed I'm the first guest but uh thanks for having me on I appreciate it.

So one thing to share Kevin is that I appreciate you actually because you know I know that you you're a World Cup trading champion in the Futures market and it's not easy and what's really remarkable that make me you know want to you know salute to you is because you also write multiple trading books on trading to help retail. Traders and trust me I've written books myself. One book is you know almost one thing. Live already and I believe you have read multiple of such books right? You know, Helping retail Traders out there in the world.

Plus right having your credentials of winning the World Cup World Cup of trading. So thank you right? for your effort right trying to educate us I appreciate you Kevin oh hey I appreciate the the kind words. Thanks Great! So let's uh, let's kick things off right. just wanting to hear a little bit about your your life right know? So I think most of the time we people will ask you how you get started in trading.

why do you become a Trader But let's think things maybe a little bit behind right in the earlier years, right? So if I were to ask you right Kevin to give me one word to describe your childhood, maybe that'll be between five to 12 years old. What would that one word be? Wow, that's a that's a good question. Um I would probably say playful and the reason I would say that is because back, uh when I was that age, kids played outside all the time. You know we didn't have phones, we didn't have computers, we didn't even have uh uh, you know video games yet.

they were just starting to come out and so I'd end up spending a lot of my time playing outside. I wasn't very good at things like baseball or football, but I enjoyed it and that's that's kind of the way my childhood was. was spending just a lot of time outside which unfortunately, uh, you know a lot of kids now. just don't get that.

Just don't do that. They're so tied to their technology and uh I think that's a little bit sad I can resonate with it right? So you know, always looking at a phone when I see people on the street, they look at their phone instead of you know, embracing the now the present and I think it's a waste and and like you I have kids I try to as much as much as possible educate them and at times you know restrain the amount of screen time that they they are watching. Yeah yeah, that's tough to do though. Isn't it a learning hold them back? Yeah, so what about Okay, let's say uh, your teenage years right? Maybe between 13 to 21 years old.

If I were to ask you one word to describe your teenage years, what would that one would be I would say uh, driven and uh what? I mean by that is just high school and then College University you know I was I was driven to do well in school and try to get good grades and try to end up with a a good degree out of University and so that was just a lot of my focus was just trying to do well with all my studies hoping it would prepare me for you know, further down the the road and what was interesting is in University I went into engineering specifically it was aerospace engineering so it was like designing aircraft and where I ended up and I was in that field for probably 20 years. that goes a little bit later. but I ended up somewhere completely different which was in trading. But some of the lessons I learned the persistance.

you know, dealing with frustration when I was studying in my teens kind of helped out in my later life. So I'm hearing the word driven right? So I'm just thinking is there any thing that happened that made you driven cuz I think at least from the people around me right when we were teenagers right? almost none of us are driven, we just want to play, have fun and and the word driven is something rare if you ask me. So was there any any that happened that made you feel man, you know, let me Ace my studies, let's do this. uh yeah I think it, it's a lot of it.

was probably just my my family like uh you know my mom and dad. my mom was always pushing me really hard and my dad uh he was great. he was uh a firefighter and he also owned a pest control company and he did so he basically had two full-time jobs and so he never pushed me and said hey you got to do good in school but he what he did was he set an example by just the way he lived his life and by the way during those teenage years, uh well some of the teenagers he actually endured uh three open heart surgeries so he first had one when I was I think in uh I was seven or eight, another one when I was a teenager in high school and then he had another open heart surgery in his 30s and he never complained. Uh, you know he just kept pushing on and I think a lot of that was a lot of the fact that I was driven was just from watching him and seeing what he was doing and you know that kind of led to me being ger wow I think that sends a very powerful message like like as a parent myself, right? sometimes I wonder how can I best educate my kids But it's what you mentioned right? Sometimes actions is really the thing that matter.

You can say say say say all you want but if your action doesn't tell with I mean if your saying doesn't tell with your action, the kids will probably follow your actions, not your saying. So I think leading by example is such. It's such a classic right? but it works in your case as well as you've mentioned. can you hear me Kevin I'm starting to you a little bit can see me Yes, Okay, great.

so I think just maybe the the data is slow. Okay, no worries. So yeah earlier you mentioned aerospace engineering. so so I guess that's your first job? um that would that would be my first uh, real job out of University So you know my first professional job obviously before that when I was in high school I uh you know, worked at a local ice cream store I stocked uh, canned goods at a convenience store I worked as a bus boy you know did all the the typical first jobs for people.

but um, yeah, I was an engineer uh for an aerospace company in California and that was my first quote. unquote, you know, career type job. So what were you doing back then as a aerospace engineer? so um, some of it I can't really talk about because I had a a secret clearance and and uh, okay, uh, but you know it, it was basically um, defense related projects of Designing uh, you know the next generation of air of military aircraft for example. um I also worked on a project that was kind of interesting.

it was. this was when uh, people were worried about uh, commercial airliners being shot at with missiles you know, like surface air missiles and I was on a project where we developed uh, an object that would be launched out of a commercial aircraft and it would intercept a missile, you know, and protect the aircraft. and so it was things like that, uh, that was my first job and then after a couple years I went more into the space part of it and I was working for a small company in California that actually made in uh this is gonna sound weird uh inflatable balloons for outer space and you might say well that's weird. Yeah well like it's basically like a a a Myar balloon and what you do is you fold it up and it it becomes really small.

You put some kind of material like moth balls crushed up moth balls in it and then when you send it to outer space because it's a vacuum out there, what'll happen is that little container. You know that little package will expand and be huge and what it would do is they could make shapes and it could resemble for example a missile. Warhead uh in outer space and so uh, other people would then see it and you know other defense people and then they would design their tracking systems and their laser systems or whatever to track that in coming nuclear warhead. or you know, uh, simulated nuclear warhead.

So it was kind of neat and we also did some uh experiments that actually flew on the space shuttle where we uh I was involved with a project that designed a huge antenna that was an inflatable antenna and it was deployed in space. So there were a lot of lot of little different projects that I worked with. I Heard earlier you mentioned the commercial airline W have something sticking out to prevent missile effect I haven't seen that yet. Is it like live right now that still kind of like in in the books? No it it actually.

uh it was a great idea, it just never got implemented and it was. The company I was working for was kind of a it was a larger defense uh firm and what ended up happening was there was a lot of infighting between uh, a group in California and a group in Georgia that made a component and everybody you know each group group thought they should be in charge of it and um you know doing that kind of turned the government off to it and they said well you know you guys aren't really serious or you know this isn't really going to happen because ultimately the government would have funded it so it ended up getting cancelled and never really got built. We ran some tests that was about it but that was. a lot of the things in the defense world are like that that they would get designed and people would you know be all crazy gung-ho about.

oh this is going to be great and then it would die and never get built and that unfortunately was just part of the business. And why do you see or rather what's some of the biggest reasons to why projects just just fail? Is it because of other funding issues right? or there are other more pressing matters to pursue? Yeah, I mean a lot of what I was involved with was was pure research and development and so we were always fighting with other projects not only within our company, but within the whole defense industry as a whole. And you know the government would pick and choose which ones to fund which one's not. And so then it starts getting into a lot of politics.

Um, and you know may not be the best ideas that go forward, but maybe a politician uh has there's an idea with a company that's in his district and so he's going to push for it to get funded and things like that. So uh, it was really kind of survival of the fittest, but a lot of times from what I saw, the best ideas didn't always get put to the front they they died a lot of times. and but I I Suppose that's the way it is with R&D at pharmaceutical companies I You know, with drugs it's probably the same way with R&D at places like Amazon where you know they're deciding on new features and maybe it isn't the best features that get put forward. but it's uh, you know, sometimes the best political ideas that get put forward.

So I hear the what best a few times. So how do you like maybe Define what's the best feature? Yeah, I mean that's a tough one. It it's it's very subjective. Um, you know you might think, well, hey, uh, protecting commercial airplanes? that's the best idea but somebody else might say no.

uh, coming up with some kind of new guidance system for an aircraft that's a better idea and um, you know sometimes it comes down to money I'm sure. but uh, a lot of times I don't know why different things got picked that you know at the time I was just a, you know, a midlevel engineer I wasn't one of the top decision makers and uh, those are the people who got to make the choices, right? Okay, so I'm I'm curious. So you study aerospace engineering and you help develop such ideas. So when you are working such a firm, how how often are you like dealing with math? H You know, course from what I at least my own my own knowledge is that you know, Will you be like looking at the calculations, the equations on a day-to-day basis? Or there's more to it than just numbers and equations in the real world working well.

A lot of it. A lot of it was numbers. Uh, a lot of it was calculations, computer programs, simulations. uh, you know you had to do a lot of that.

But the other thing I found with a lot of engineering in work was a lot of it was uh, promotion and uh, sort of self-marketing and so to give you some examples like it wasn't necessarily that you came up with a good idea, but it was how you could stand up in front of people and present that idea and get them over to your side and make them understand what was going on. I Remember the first time I ever had to do it it was uh I believe it was a three or fourstar General uh who had come to visit our plant and there were lots of pretty high level people at our plant and somehow I was chosen to talk on a certain topic and uh, you can believe I was scared to death. it was like I was like wow, these are some pretty high up people but that taught me the importance of putting yourself out there and trying to get your ideas across where you know they didn't Those guys didn't care about the math, you know, they assumed the math and all the programming and everything was right. They wanted just to hear the ideas and you know Envision it kind of thing and a similar thing was uh, part of that program to uh develop the commercial airline helper you know for the missiles was I uh worked with somebody in another department to create a computer-based simulator where it was actually a graphic one which nowadays you could do it.

you know it would look like uh, any kind of video game but back then that was a big deal and so I created helped create the simulation where I could run cases of hey, the plane's flying like this and then somebody shoots a missile at it and then you see the missile coming at you. If you look different camera views, you know simulated camera views and and um so I'd be running those and people would Dr would see it. you know in this computer area and higher ups would see it and that's what got them fascinated. So again, there was math behind all the ideas, but what really brought it out was the presentation of it and the promotion of it.

which you know, uh, that's you. we were talking about kids earlier. That's one of the things I'm big on uh, teaching my kids like I have a daughter who wants to be a writer I said' well realize being a writer hey that's great But in the end, if you want to write books or whatever, probably 80% of your time is going to be promoting the book, not actually writing the book. It's uh, you know that's what it ends up becoming is promoting yourself and putting yourself out there.

And that's true in a lot of things in life. how to sell yourself In essence, right? Yeah, absolutely. Which? I never as an engineer um you know I took one class that I remember in uh University for uh presentations. You know it was like and you did one standup presentation and that was it in four years and I look back on it now.

I'm like wow, you know they just did not. uh, prepare me enough for doing that sort of thing. You know there should have been a lot more and a lot of people are like, yeah, but that's all. Um, you know, salesmanship and and promotion.

That's not real work. That's what I used to think. and as it turns out as I've gotten older, I've realized that promoting your work, promoting what yourself, what you do, no matter what your career is, is a huge part of being successful. Well said.

I Couldn't agree more, right? Not just in trading or or business. Even in as an employee, right? If you want to sell your ideas to your uppers, you know to you know, get certain things moving, you have to sell, sell the other ideas, sell yourself, and that also helps with promotion right within the company. If you can sell yourself better than your peers, even though as much as I hate to to, or as much as we hate to emit it, sometimes your work quality may not be as good as your peers, but if you can sell yourself better, you have that higher chance of that promotion. Yeah, yeah.

and you know a lot of people tend to think that uh, it's not genuine when you do that and and they feel bad about like promoting themselves. but ultimately, uh, like we were just talking about the best ideas don't always become reality, it's it's the ones that are promoted the best that are good ideas and that's what people have to realize. So you said you're 20 years in the aerospace engineering before you know you got a second career in in trading. So how did that transition happen? Well uh, it took a long time and uh, it started Actually when I was working as an engineer, I was in California and uh IED something in the mail.

this wasn't email, this was like paper mail and it was uh like a 15 20 Page booklet that talked about trading uh and said oh, if you had bought sugar here and sold it here, you would have been a millionaire kind of thing and uh I saw that and I was like wow, this is this is neat and you know I didn't even know what futures or Commodities were really uh but that started it and I started digging into it and trying stuff and losing money and then trying other stuff and losing money and it one. It was hard to get good information or any information really. There were a few books and that kind of thing, but there was no internet. You know there were was no trading software where you could just pull up a chart and throw a moving average on it.

Um, you know back then you'd get if you wanted Futures data. it. was either the Daily Newspaper it would give you the prices for the previous day or there were some subscription services that once a week would physically mail you a copy of charts and then you could add to them and draw your own lines on them and that kind of thing. and that's what it was back then and so that started my obsession.

I Guess with the markets and from that point on I just kept trying stuff. Usually I would try in the real world and lose money so I'd be like oh, okay, you can't do that and I'd move on to something else. you know, for the longest time I thought I was going to create the ultimate money machine where it would be some kind of indicator or pattern or whatever that would just make a ton of money and I could just sit back and just wait for the money to to flow in. Uh, of course everybody thinks that and it just doesn't happen.

Uh, but eventually I started getting a little bit better in. It had some huge setbacks along the way. uh, but I was doing all that part-time so it was. It was my part-time hobby.

It was really the only thing I did uh, outside of work and um, this was before kids and you know they took up time and that kind of thing. And eventually I I got to the point where I was pretty decent part-time trading and that led me to uh, enter the World Cup trading contest and I was able to finish second a couple years in first one year and right around that time after that I started to feel like yeah, you know, maybe I can do this full-time and the way it worked with my job uh, the company I was in charge of quality assurance and also engineering for this uh, like F four or 500 person firm that made fuel pumps for aircraft. uh, which was a pretty high high stress job. Now looking at it because if the fuel pump fails on a jet engine, uh, the jet engine stops and that's not a good thing.

So we, uh, you know, we had super tricks, strict tolerances, and that kind of thing and uh, we were always worried about bad product escaping and but eventually our company got sold to a big company and uh, I had the opportunity to walk out of there with uh, basically an extra year's salary. Um, because I stayed on through the transition and that just turned out to be the perfect time I said, you know I've always loved trading. it's been my hobby I'm think I'm decent enough at it. Maybe I should just do this fulltime and give myself a year and if it doesn't work out, I'll go back, get another job in Aerospace but if it does work out, I'll stay in trading and uh, that was like I think 2008.

So that was about what 15 years ago turns out it worked out and uh, here I am today still trading full-time so correct me if I'm wrong. So from what I'm hearing is that you took part the World Cup World Cup of trading You. you came in first place while doing it parttime. Did I hear that right? Yes, Wow! 2005, 2006 and 2007.

So I was working full-time then and it wasn't just, uh, you know, an engineering job. this was uh, it was upper level management at this company. I was probably one of the top three or four people at this company. Um, so I couldn't It was good and bad.

It was good because what I did was I created trading systems that would only trade, maybe at the market open and it and they really didn't do much during the day. Um, you know I didn't have a lot of I wasn't doing active trading during the day because I really couldn't Uh, you know I had a full-time job so I could check during lunch and you know, maybe one or two other times in between meetings or something. I could sneak a look at the markets, but I didn't really trade that much during the day. Uh, and that actually probably helped me because I didn't try to overdo things.

You know, most people who start trading tend to overdo it and trade too much and take on too much risk. And I think having a full-time job actually helped me in that regard. Yeah, you should put somewhere in your buy right? Uh, World Cup Trading Champion Doing it parttime. Okay, so maybe maybe you can share with us right today.

Like the audience. what is your your trading methodology today I Know it's ELO trading, but I think most of them some of them might not be familiar with it, so maybe you can expand on that. Okay, Um, so Algo Trading What it really means is you trade according to established rules and these rules could be anything. It could be a when the price crosses a moving average.

that's a Buy Signal It could be when you see a a doy Candlestick and something else. that's a sell short signal. Could be anything. The point is, and the idea is with an Algo, you write down those rules and you program them into a trading platform.

I Use trade station, but there's a lot of other pieces of software out there that'll do it. You program the rules so let's just take an example of a moving average crossover. Uh, if the close yesterday was below the moving average and the close today is above the moving average, then buy next bar at the market. so that would be an Algo.

Rule and you could have the exact opposite. For a sell short, you could put a stoploss in there. all kinds of variations so you you come up with that idea and then you program it and then you run what's called a back test on it or an historical test. So you go back 10, 15, 20 years.

Whatever it is and you apply. You let the trading platform apply those rules to a chart of crude oil or a chart of Amazon or whatever you want to test and it will quickly do it and you'll come out and you'll say wow. If I had done that and followed those rules, I would have made this much money and had these kinds of ups and downs. and then you know historically it did that.

That's really what Algo trading is and it's different than how a lot of people trade which is, a lot of people use uh, charts and they'll stare at charts all day and they'll draw their support and resistance lines and trend lines and they'll say well, if the price, they'll watch it in real time. If the price breaks a trend line, I'm going to go short that kind of thing or they'll look at order flow and say oh, when the the there's a seems to be a buying imbalance I'll buy or sell. Uh, so those people trade a lot differently. They're more focused on what's happening right now and try to react to it, but they don't necessarily do the historical testing to prove that what they're doing ever worked.

Um, so that's the big thing is, Algo trading allows you to back test it and show that something is worked. Now, the fallacy or the or the big drawback to Algo trading is just because something worked for the last 10 years, 15 years, Whatever it is, doesn't mean it's going to keep working for the next one month. three months, six months, one year. It could be just a nonsense uh, you know, random lock type thing where it just happened to work the last 10 years.

but going forward it won't work at all and that's where people get tripped up. They think, well I had a great back test. Therefore, it should work going forward and that's not the case at all. Uh, you know the the disclaimer.

the US government always has us put on all our Uh slides and stuff says past performance is not necessarily indicative of future results and that's 100% true. But what I found is when you back test a certain way, you back test correctly and do things like you don't over optimize which is uh, you or try put too many rules in your strategy and try to complicate over complicate it. When you don't do things like that, there's a tendency for the back test to continue on and do good. It's not a guarantee, but the way I always describe it is is you're Shifting the odds in your favor a little bit and a lot of times that's all you need.

If you think about think about gambling and and uh, casinos, they have a small Edge When you're playing roulette, you know it's not a huge. they don't have a huge Advantage but they have a small one and it's always there and it works all through time and there's no way around it. so all they need are people to play it and eventually they'll be winners in the long run. So they they can get by with a very small Edge and uh what? I found in trading is a lot of times you don't need a huge advantage to do fairly well, you just need some Advantage uh So that's really in a nutshell what Algo trading is and kind of how it works.

Speaking of, be test right? Uh, this reminds me of a quote right? Uh, I'm paraphrasing here by by Jim Simmons right? The one who uh, runs one of the I think the most successful H Fund in the world. He said that uh, past performance is the best predictor of success I think I came across one of his code and yeah, I I I Really agree with that, right? Some more coupling What you say if done correctly, that's one of the best ways to kind of like assess whether something's likely to work or not, but the context that he has to be done in the right way right? And you know one way, to think about it is, uh, if you run a back test and it shows it lost money every year for the last 10 years, would you even consider trading it? Uh, probably not because you'd be like, well, this has never made money. Why all of a sudden now would it make money? So there's that part of it. The flip side to it is just because it did make money the past 10 years doesn't guarantee it will make money going forward.

But uh, if I had my choice between the two or really? I guess there's three choices. You know the one choice. one back test is negative all through history Choice two back test is positive through history. Choice three: You have no idea you didn't do any testing.

Uh, you know just from a logical point of view. which one you going to take. You're going to take the one that was profitable in the past. You're you're going to eliminate the one that didn't make money and the one you didn't test.

Well, you know how much confidence would you have trading that and yet I See that a lot where people just say well I think this will work and then they just go and do it without doing any testing. Uh, which is crazy but I guess it kind of explains why a lot of people lose money in trading Also I believe like one of the reason back testing so many people don't do it is because they probably need programming, knowledge and tools and resources to do it. which is ADD adds on to the obstacles you know to to overcome. so maybe maybe later on we can talk about you what some of the tools and resources you know that they can do to help overcome those obstacles.

But maybe for now I like to hear your thoughts. You know. as you've mentioned, there are different ways to trade the markets ELO Trading discretionary trading. You know, order flow.

Etc So why or what made you decide to go down with this approach? Um, probably because I failed so miserably at discretionary trading. which is you know, looking at a screen and trying to to make decisions in real time. Uh, I I seem to be really good at making the wrong decision. so I'd be watching the chart as the day goes on and I'd be like oh, now's a good time to buy Soon as I bought, the price would fall and eventually I kind of got smart to that and I said well, maybe whatever I'm thinking I should do the opposite.

Um, and I actually tried that and that didn't work. Um, you know it's it's uh, it. it was discretionary trading and just tra trying to trade to just some principles rather than rules and you know you say, oh in an uptrend you always want to buy, look for buying opportunities kind of thing. Um, that was just it just didn't work for me.

And so what I found was writing down rules and testing them Seem to fit my personality more. and I find that's true for a lot of people who are technically based numbers based. So I'm talking like Engineers Finance yeah um. doctors.

uh a lot of people I work with are are medical doctors? What? I don't get are people who are um, like social workers or uh, philosophers or you know, like English Majors uh. people who or even like I do get a few Mu musicians but even musicians a lot of times are more I Guess you'd say feeling oriented or you know they go left brain, right brain and left brain's more logical. right brain's more a feeling and emotion. those kind of people.

Uh, the right brain don't tend to do algo trading, but numbers people. logic people. that and that's what I am. That's where Algo trading.

Uh, it really fits those kind of people. Nice. And maybe perhaps you can give us an example of of a trading system, right? So so the audience can kind of like understand this better. Of course, it doesn't have to be a trading system that you currently trade right? Don't want to, you know, take your secrets.

But maybe just a sample trading system so they kind understand. Oh, this is what Kevin is talking about or this is how this works. Yeah, okay okay um so uh. a simple breakout system uh is a great example that a lot of people will say oh, breakouts don't work but to catch long-term trends uh which is a good way to make money.

Breakouts work great. So what you'd say the rule would be hey, if today's close, let's say you're working with daily bars. Today's close is the highest close of the last 20 bars. so be if you think uh, you know every day that's roughly a month.

So if today's close is the highest close in the last month I want to buy the next bar at the market uh and conversely if you're trading Futures it's easy to go short and you could say and if the close is the lowest close of the last 20 bars sell short next part market. So right there there's your entry rules and you could put uh, a stoploss you say Okay, well if I lose $11,000 or you could make a volatility base stop loss a lot of different things you could say I'm just going to exit or you you could do a profit Target there's all sorts of things you could do or you could just say those those two entry rules are going to be my exit rules. So if I'm long and I get a short signal I'll go short and I'm always the market long or short And with that kind of system, you're pretty much guaranteed to catch all the long-term trends because obviously, uh, a long-term uptrend is going to have higher closes and higher closes because that defines a trend. So uh, in that respect, if the trends are long enough, you'll make quite a bit of money during those.

It's just those periods of time where the market goes back and forth. Uh, where you'll get a lot of false signals and that will usually lead to periods of draw down. Uh, which every trading system has draw down. I See a lot of people out there claiming oh, hey, this approach has no draw down and a draw down is actually just a loss from your Peak Equity Every trading system has draw downs, and as long as you can withstand the draw, Downs you'll enjoy those profits.

But if you can't handle the draw, Downs If they're too severe, or, uh, you know, just too long in duration, then you might decide. Well, hey, The Profit that I'll get from this strategy isn't worth those draw Downs Because the draw Downs Ultimately, you know the down periods and the flat periods. That's what kills people a lot of times in trading. you know a lot of people love to see new Equity highs every day.

Uh, I certainly do. But hey, there's times where you can go for months and be in a draw down. Uh, I mean I recall years of my trading where the first 10 months of the year I was either flat or losing money and then all of a sudden the last couple months of the year things just turned around and skyrocketed and it made like a Year's worth of profit in two months. But I had to endure 10 months of draw down in flat.

Uh, you know, flat periods and that's really really hard for most people. It's those draw Downs that you know they just they suck the confidence out of you. uh and they make you doubt everything. but if you can withstand them, you can get somewhere.

And so that breakout system I just mentioned is a pretty good example of one that could make money but would also have some uh could have some significant draw Downs Maybe I Just like to, you know, do a bit of clarification. So ELO Trading You know some people use the terms systems trading, systematic trading, quantitative Trading. Would you say that they all refer to pretty much the same thing? It's just a way different way of calling it. Um, yeah.

I Mean there's a lot of different variations on it, so some people will for example, uh, consider Algo trading using statistical rules and they find out they know they. they research past prices and they find out hey, Monday is a good day to buy and Wednesday is a good day to sell in a particular Market But again it it no matter how they got the idea, it always goes down to rules and it's rules you can program and pure Algo trading is just rules so it it doesn't have any discretion. Uh where you saywell normally I'd take this trade but oh the FED has an announcement today so I'm not going to take it. That leads to a lot of issues, but uh, you know, wanted invalidates your back test because you didn't do that in your back test.

But pure Elgo trading is just creating those rules and then just following them and you can automate them. That's the nice thing and you just let them run and it is uh is not easy A lot of people I've seen this a lot where people will say oh hey, just Algo Trade You won't have any emotions, you just set the rules, you program them, you turn on Automation and just go with it. And the reality is Algo. Trading even if you're automated, still has emotions as long as you have real money on on the line.

Uh, because it's the money that creates the emotion. You know losing money and it hurts and making money is always makes people happier and so you always have to deal with that with Elgo trading and from my understanding, your ELO trading is for specific markets like the Futures markets. Commodities Etc Yes so I mainly do Futures markets. uh and there's a few different reasons for that one.

Uh, with Futures you can get great leverage as far as uh, you know you can control a lot of coffee, crude oil uh, mini S&P uh Futures You can control a lot with a little bit of money and so you can really get some some outsid returns. Obviously the downside to that is that leverage when it goes against you can really hurt. so you got to be careful with that. Uh, I.

Also like it for the diversification because with uh, let's just take us Futures markets you have six or seven unique sectors. You know you have your eggs, your wheat, corn, soybeans and you also have Metals you have your gold and your silver and your platinum and those to Just as an example: A Lot of times don't act the same. You know they're under different uh fundamentals and so you can create a gold algo. You can also create a different soybean algo and they could balance each other out and when one's up, the other one might be down.

but you combine them and you get a nice Equity curve so that there's that. And then for people in the United States Futures Trading has a huge tax advantage with the way uh, they treat short-term gains and long-term gains. Uh, so for example, if you were to buy a stock in the US if you hold it I believe it's less than a year, it's considered a short-term gain and it's taxed at a higher rate than if you held it more than a year. They're trying to encourage people to hold it longer periods of time, but with Futures I could hold a Futures Contract for literally 1 second and a large and let's say I make money in that one second and I exit for tax purposes.

Uh, that's not considered all short-term gain, so there's a a good percentage of it I Think it's a 6040 split between long and short term where a lot of it's considered a long-term gain taxed at a lower rate, so that that's a huge advantage to trading. Futures And then also a related thing is the bookkeeping is so much easier. Anyone who's ever done stock trading in the US knows at the end of the year, you got to list all your buys and sells and you know you might have pages and pages of that if you're active with Futures. It's literally one number you get from your broker and you literally have to transfer one number to your tax form.

It's your marketto market gain or loss for the year in that account and it makes recordkeeping so much quicker and easier. So all those reasons you add them up and uh, that's why I trade Uh, Futures got it. and I I I hear you saying? You know El go for you know, soy bean and gold stuff like that. So I'm guessing you trade multiple trading system.

So how many trading systems do you currently trade? So right now I uh actively trade about roughly about 30 to 35 strategies in various markets I have a a a stable or a bullpen of about 200 strategies that every month I uh do some review and look at which ones I should be trading and that's based on not only their performance, it's also based on uh things like their volatility and also the market sector they're in. So for example, just because I the last month I had all my crude oil strategies do great doesn't mean I'm going to just trade crude oil 30 crude oil strategies the next month I Want to be Diversified Uh, because you never know when a a trading strategy is going to either permanently or temporarily stop. uh I've had cases where I've had strategies that for a couple years they'll just go flat and they'll just kind of be up and down, not really doing much and then all of a sudden they take off again and start performing well. Uh, so you can't predict what's going to work in the future.

So what I do is I try to have a balanced portfolio of some eggs, some metals, some energy, some currencies and try to be in a bunch of different markets at the same time. So I think a question that is going to be and the audience hit is said. man. Davey how do you manage? You know 35 200 trading systems right? So so what's your take on that? Um, well, it doesn't happen overnight.

Uh I Remember this is probably 20 years ago. Uh I remember Building Systems and at the end of the year I'd say okay, what am I going to trade next year Oh well. I have four strategies that I could use. So oh I really need more and so you got to constantly do the research and development to build new strategies and then over time uh I've gotten obviously gotten a little bit better at it.

The tools have gotten a ton better. So now I can use some tools. Uh, actually one one tool I use a student of mine actually wrote, uh, he took some of my principles and made it so he automated a lot of things in development. So so it makes developing strategies a lot faster, but you you obviously have to just keep developing.

You also have to have like you said, some kind of organization for how you're going to track 50 100 strategies, how you're going to select which ones you're going to trade and so there's a lot more to it than just developing the strategies themselves. But that's where it starts. I mean if you if you can't develop strategies that make money in real time, uh, you know it doesn't matter if you have a hundred of them or 200 of them. If you can't do that, you're not going to get anywhere.

And that same thing holds true for position sizing because some people say oh well, it's all about money management and position sizing. That's very important. But if you don't have good strategies to start with, money management isn't going to save you. It isn't going to turn an unprofitable system into a profitable one.

So yeah, there's definitely a lot to it. Um, but the the way to really do it is just to start doing it small and say okay the next six months. maybe if I can develop one or two strategies I'll be okay and you do that every six months. Well, a couple years from now you might have five 10 systems strategies you could trade and you're well on your way.

Um, you know to to just building more and to trading more. So let's say you know you say you have like about 200 trading systems like kind of like at your disposal and you trading about 30 to 35 right now and also I'm hearing that you try to expose yourself to the different sectors like maybe currencies Commodities Etc because you just do not know which Market will will shine. So my question would be you know, how do you determine? Okay, this system will be trading Commodities right? Let's go with system ABCD Trade Commodities XYZ Trade maybe uh, currencies. So how do you pick the systems to trade that specific sector? How you determine which to go.

So the the way I usually develop strategies is already Market specific. So uh, let's go back to that breakout system. example I will test that on different markets and find out Oh oh, it only works well with crude oil. Okay, so that's now a crude oil strategy that will be part of my 200.

Uh, maybe it doesn't work on any other Market Uh, well then I'll never use it on any other. Market It's got to work first on whatever target market and also Target bar size I've had strategies I have plenty of strategies that work great with 30 minute bars, but you give them daily bars and the system falls apart and you know there's a lot of people out there say well, it's it's got to work. My strategy's got to work on every Market or every bar size or it's got to work in at least 10 markets. Um, and if that's your criteria, more power to you.

but my experience is that is really tough to do. It's hard enough to find strategies that work in one market and now you're saying well, it's got to work in 10 different markets. Um, the reality is th those are very few in in far between and um I've found more success being very Market specific. So when I start looking at those 200 to trade every month I already know the market, the bar size, and the strategy itself.

So that's you know, the combination of those three is what I'm tracking and then what I'll do is I have some rules to determine well, which of those 200 should I actually trade the next month. Um, which in itself is is really hard to do because you end up picking some that do bad and other ones that you left on the sidelines and then you see, oh man, that one would have done really well and there's a lot of uh, of uh, hindsight where you say oh, I should have done this and lot of second guessing of yourself and uh, you know that's just part of the territory unfortunately. So you actually also developed rules to pick the trading system to trade in live markets. Did I hear you? Yeah, there's so many to choose from and yeah, and that ends up becoming uh, almost as important or even as important as a Str IES themselves.

Uh, the the good thing for people starting out, they don't really have to worry about that yet. They have to focus on building the strategies and you're you're trading a few different strategies. That's a great start, but eventually if if you build a whole bunch, you're going to have that problem of which ones which ones should I trade. So how do you know when a trading system is no no longer working? That's a that's a great question and uh, it's funny that you asked that because uh, it's a question that comes up quite a bit now.

but I'll take you back I Want to say about 10 or 11 years ago I wrote an article for a magazine it was called SFO magazine. It was related to a brokerage in the US that eventually when out of business because the founder of The Brokerage brokerage was forging uh, the financial numbers and basically stealing all the customer funds and now he's in jail. but I wrote an article for them of when to quit trading a strategy, an Elgo strategy and and back then this just tells you how the times have changed I don't even think we were calling them Alo strategies that long ago but they were calling them systematic or mechanical systems but I wrote an article about that and at first the editors were like no, we don't want it I said why not this is a good topic and they said well, we want Happy articles uh you know showing great strategies of people making money. We don't want to talk about what happens when a strategy goes bad and you lose money that's awful I'm like yeah, but it's really important and I finally convinced them to to uh print it and the response I got was was pretty amazing I mean people were like wow, no one's ever talked about this and and so now here we are.

You know 11 years later and it's a pretty common question, how do you know, when a strategy is broken and so there's a couple? There's obviously a lot of different ways to look at it. One, just as an example, you could look at the uh, back tested draw down. You could, uh say if going live I ever have a draw down like that I'm G to exit. that could be your quitting point.

You could do things like hey, I I've looked at the past 300 trades for this system and it's never had more than four losing months in a row. Okay, that was its biggest draw down and now all of a sudden you go live and a little bit into it. you get five months in a row losing. Well, maybe that's time to put it on on pause because you know, maybe it's not working.

So there's a lot of different ways to do it one way. I I always used to use I don't use anymore but I would print on paper an equity curve of the back test. Okay, and then I would also include the live trading or the real time time trading of that system on that Equity curve and I'd post i' put it on a wall on the other side of my office and if I could look at that chart and without knowing anything else, if I could tell when that system went live because the performance fell off, then I'd know okay that system's probably broken. Uh, but if I couldn't tell if it looked about the same as the equity curve, I'm like, well you know the back test to equity curve hey looks pretty good.

it's probably okay. Simple eyeball test is is amazingly works amazingly well. But the biggest thing and the biggest rule I found is whatever approach you come up with with saying hey at this point I'll consider the strategy broken and I'll turn it off. write it down before you start trading live and put it somewhere where you will review it.

Or if you have a trading partner they will call you on it and say hey, you said if this ever happened, you'd quit trading. This system. Has this, ever, has this happened, because it it. You know they hold you accountable.

It's hard for you to say oh no, it's never happened. The point of all this is you have rules beforehand and you stick to it and you just you become as emotionless as you can. You know you're going to be upset that you're going to have to quit a system because it's losing your money. but that's what you do and it's really hard for people because what most people do is they start trading a system and they start thinking about the Lamborghini that they're going to buy.

Uh, you know they think about all the toys they're going to buy with all their trading winnings and things start going bad. Uh, you know they go into denial and oh, it's going to turn turn around and oh, one more trade I'll let it do one more then I'll turn it off and either they let it just wipe out their account or they're so strict that oh I lost a trade yesterday. uh, my system's no good I I've actually talked to people who run a back test and they say I'm going live with it and a week later I Che back in with them and and they'll say Well it had two losing days. so I don't think it works I'm like, well, your back test had losing days.

multiple losing days right? Yeah, but this wasn't what I was expecting. So I'm just turning it off so you know people sometimes turn them off too soon. Uh, but the big thing overall, uh or one of the best ways I would say is just looking at the draw down and if you get to a draw down that you never saw in back test uh, it's probably a good time to pause at least and just make sure that you want to move forward with that strategy. It could always recover and then when it does, maybe that's time to turn it back on.

but you really want to stop it from just bankrupting your account. I Heard of a saying right? Say that your deepest draw down. It's always in the future, not in the past. So I mean it's going to be a matter of time before whatever trading system the draw down will exit the previous draw down.

So do you have like, maybe a buffer, like maybe 1.5 times the maximum draw down? 1.2 times before you kind of say okay, time to reassess. Time to pause. Or you know, stop all together? Yep, Yep. I definitely used ones.

Uh I like 1.5 The the problem I've seen with some strategies is when you look at the dollar amount. Uh, just assuming you're trading even one contract. Uh, sometimes the dollar amount becomes the the bigger issue and then you think, well, wait I don't Yeah, that's one and a half times a draw down. but I don't want to lose that much.

Uh, the flip side so you can go bigger. you can also go smaller. You could use one/ half of the Max draw down. say at that point I'm turning it off and that just about guarantees you will turn off a system.

Uh, because it's half of what it was in the back test and you know reality is not going to be as good is the back dust. Uh, there's a pretty well-known author. Uh, and Trader Brent uh, penfold. He's written a couple great books and um, he mentioned that was his.

This was a few years ago so maybe he doesn't do it anymore. But that was his approach. and I said well, you're almost guaranteeing you're turning off your systems at some point. is that what you really want to do? And and his response was yes, because I have more fear of losing a lot of money from a broken system then you know which would happen if I didn't quit early enough.

So I'd rather quit too early than quit too late. So again, there's a lot of different variations you can do on it. But my advice to everybody is come up with a way that you feel comfortable with and then stick to it. and uh, that's the tough part.

And also earlier. if I recall, you mentioned that you might pause the system and then as it recovers the draw down, you might enable it again. So I'm guessing you're looking at things like maybe it recovers half the Dra down you might consider. You know, turning it on again, is that what do you mean? Yeah, uh, you know.

So I'll I'll still monitor strategies that have kind of underperformed for a while. I'll keep watching those to see if they come back and also too. It just helps the more realtime data you have. uh, really helps when you're developing systems of figuring out things you might have done wrong in development and improving your whole development process.

So it's good to track systems for a long time and sometimes uh yeah, they fall off and then they come back. But what I have found with those psychologically, those are really hard to come back to and start trading again. And and uh the example I always use it's imagine your spouse or your significant other cheats on you. okay you're going to be devastated and you they they said a little while time goes by and they say oh I'm I'm different now I want to come back and get back together you know How likely are you to give them that second chance and you're going to be kind of hesitant and you know it's going to be kind of scary.

same way with a trading system. It's a weird example, but this trading system has cost you money. You know it failed you, it cheated on you you could say and now now it's come back and it wants to get back together with your money and say oh it says oh now I'll make you money I promise you know you're Canna be a little hesitant. So the reality with coming back to any system that has lost you money is is uh very very difficult.

So I also like to hear your your thick right? so I know you trade uh specific uh trading system for a specific Market but at the same time there are other traders who actually trade like kind of like a basket of Market take for example a stock Traders they trade. let's say all the stocks in the S&P 500 or maybe a trend follower who trades all the different Futures Market You know, trading breakouts and you know riding. Trends So what's your what's your take on? You know, trading a specific instrument like let's say go versus someone who trades a basket of such instrument like stocks or a trend follow? who trades a basket of Futures Market Well, I I Do think trading a basket is better? Uh, because you know, let's just take that example. gold will be in an uptrend, but maybe crude oil is flat and not doing anything.

So the more markets you're in, uh, the more chance you have at profit. but at the same time, uh, there is a downside to that and it's you won't have as much upside potential. So back to that gold example. Let's say you're you're doing a trend following on gold and gold just skyrockets and you you're only trading that and you bump up your size and everything's going right.

You could have great returns where if I'm doing it and I'm trading gold, but I'm also trading crude oil I'm also trading the Euro currency. Uh, my, my returns probably won't be as high as yours because you're concentrated in something that just happens to be performing really well. The the other side to that coin, though, is what happens if that gold strategy starts to fail. Now you've got all your eggs in that basket and you're going to suffer.

You're more likely to get wiped out than somebody who has a diversified portfolio. Uh, so really, it's it's to me, it's all about risk. and trying to minimize the risk and diversification is one way as far as stocks go. I don't Algo trade stocks? I'll do stocks for long-term like retirement investing and that kind of stuff.

But I'm I'm usually like buying a hold for a lot of things. Uh, and the reason is, if even with a a basket of stocks, uh, a lot of times when the stock market goes down, a lot of stocks go down and there's a lot of correlation there. Where in the Futures Market you might not get that same correlation. so I tend to avoid that.

Building strategies for stocks is also a little tougher in ways because you know, Let's just say you wanted to start Algo trading a a stock a stock. What are you going to pick? Chances are most people I'll do Facebook I'll do Amazon I'll do Google Uh, I'll do Apple And what? Why did they pick those? Well, those are popular, but they've also gone up. So right there, there's a bias even before you've started testing where. hey, if you just do a simple uh, you know, long-term buy bias so you're on the long side, you're probably going to do okay with any of those stocks.

And it's because you already sort of knew the data. where something like coffee you go to develop an Algo for coffee. Chances are, you don't have any preconceived ideas or memory of. Oh, the coffee Market's been in a bull market for the last 10 years? You don't know that.

So um, that's why. like Diversified Futures to me is is just so much better. And yeah, if you can find a simple approach that works in multiple markets, that's always better better. But like I said before it to me, it's not a requirement I don't I don't really care if I find a strategy that works in Gold but really doesn't work in silver? Uh, there's different players a lot of times in those markets and that'll cause sometimes different strategies to perform differently.

So it's not like a musthave, but at the same time it is nice. And also, would you say that maybe that also affects the robustness of a trading strategy. Like strategy is meant to trade multiple markets compared to a strategy that solely trades. One Market The strategy that that trades multiple markets would that be more robust in terms of like, less likely to to break down compared to the ones that just trade an individual? Market Um, yeah, I mean to a degree I Think that's true where uh, you know if you had a strategy that worked in multiple markets, the one thing it would do is it would give you more confidence for sure so you'd feel well, hey, this works in a whole variety of markets.

Uh, but at the same time. I I have found. It's not like an onoff switch where as I said before, it's got to work in five different markets or else I'm throwing it out. Uh, but that's just what I've uncovered over the years where that doesn't really matter I mean I have some strategies that work in only one market, but they work and you know why doesn't it work on other markets? I don't know, but I just keep going with the one.

it works and so yeah, it's I think it the biggest thing at least for me with that, if it worked on multiple markets, it would give me confidence that it would work. The one thing people have to watch out for though, is they'll try something and they'll test it on 40 different markets and it works on three of them. Let's say so they'll say okay, I'm going to throw the other ones away and I'll just focus on those three. Well, you got to be careful about that too, because that doesn't necessarily mean it's a it's better, It just means it worked on three and you threw away all the bad ones.

That's just a form of optimization and so you got to watch out for that too. So there's a lot of little subtle things to it where it's not not always that clear on how to do that, how long, and based on experience, how long does a trading system work? Right before it, it it stops working. Do you have like an average lifespan that you kind of like realize, well, um, in a lot of the research I've done uh what I do is I will simulate running a strategy for three years of live real-time trading and I feel if it does good for a three-year period, that's a good life span and I've I've had systems that I still trade that have run fairly well for uh, probably up to like 10 years. I Also have some systems that work great for one or two years and then kind of fall apart I specifically recall a in a mini SMP system that worked great for I want to say five or six years? It was incredible and then at the start of 20 2022 it literally seemed like somebody somewhere flipped a switch and said this strategy is no longer going to work because if I showed you the equity curve it it's you know, almost not vertical, but it's you know, up and to the right and then all of a sudden it just fell off and that was after five years.

So my general rule what I like and the way I've uh built my process is I plan on three years and if it goes longer. great but um, you know uh I feel a three-year period is is a good one to get like a return on the time you put in and the effort you put in If you were building Alos that only work for a week. Um, you know, maybe some hedge funds can do it with big research departments where they say hey, as long as we have something that works for a week and we do a hundred of these things and just keep them rotating. Uh, you know, for a typical retail Trader that's not really an option.

So I look for longer term performance. Got it? And and speaking of, you know, trading strategies. how do you get new trading trading ideas? Great question. Uh, and that's that's a question most people who, uh, seek me out come up with.

they're like I can't come up with ideas, you know? I'm not that creative I don't know where to find them and my response is always ideas are everywhere. just search the internet for ideas. Uh, you know, type in free trading systems and they'll give you rules and there's all sorts of people offering all sorts of things and a lot of them are free and you can just hey, I'll code it up I'll test it. Oh, but I don't like that? I'm going to add a rule to it or change the rule.

That's what I usually end up doing I see something I put my own little spin on it and I go and test it. The tough part about that is you have to realize that 90 95, 99 things out of a hundred that you test are not going to work in. You