It is like to go in a bakery and ask if the owner of the business will teach you on how to produce good bread. He will never reveal his secrets. Managing some millions of euro as a system developer in charge for a managed accounts line in London, trading half a million of my own money, I am really not interested in giving advisory services to people that are doing my own business, provided they are not big players focused on selling the products more than on the production side. But this time it was different.
He is a real estate developer in a big European capital and he tries to put in place a trading line hiring 10 trading systems developers, 20 young traders supposed to care even during night on the trading system implementation, and a lot of third parties advisors like myself. He is trading with 10 millions euro and he is willing to accept from me some recommendations about what he need to do in order to make money.
Maybe to you this is an interesting story, but for an old fox like me it is something I have listened at least 100 times in my life, so there is nothing exciting. His phones calls ended up in a not reply from me and when he called directly I said immediately “I am not interested, no time to lose”. Then something changed: he told me “let’s put the story in a different perspective, you come as a guest in my villa, with swimming pool and personal disco, nice company and wonderful vine and food” … I said I am not interested, really busy, but then he mentioned a name that changed everything. There are places that are unknown to God but known to military topography and that name recalls one of the fiercest battle in Europe during the second world war, something that immediately evokes the passion that only history knows how to convey. “I will come – I told him – provided you will bring me to visit Bloody Ridge”. He was shocked to realize that I knew by heart all the hills surrounding his villa but … if I was so crazy to go there for free just in exchange for a quick trip to one of the most famous battlefield in Europe … ok … the deal is done.
It is unbelievable and impressive how globalization has produces instances like this one: in a gracious villa hidden in the countryside, among olive trees and under a warm spring sun, 2000 km far away from the first serious financial center, 10 people with a degree in math, physics, programming, engineering, meet every morning for a 10 hours working day in order to detect the best trading methodologies to beat the markets. But there is a problem, money is far to come and expenses very high.
Where is the hole by which the water is going away so that nothing is left in the pot ? This is the question I was asked to reply. I will not write here all the missing points, but the most common missing points where the following:
- they where trading 50 systems but 40 were based on Dax and Eurodollar, no commodities, no exchange rates, no stocks. If Euro and Dax go nowhere the trading is dead.
- the average trade was too low, you cannot trade systems on Eurodollar with just 100 euro per trade.
- there was no clue about portfolio construction, that is which market to trade in relationship with which system and how many contracts
- there was no plan about periodic re-optimization so that systems were traded up to the death
All these drawbacks are common to un-experienced retail traders that have no sight beyond the national market, in this case, being Europeans, the Dax futures, which is one of the easiest contract in the world. But if you trade 50 systems on Dax without worrying about other markets, what will happen when some day in the future the Dax will not be as profitable as today ?
In conclusion I had what I wanted: a trip to Bloody Ridge. In the dark when evening was falling covering with long shadows the landscape you could easily listen the US Sherman tanks engines start to roll along the highway, the attack was almost under way. You could see the smoke of the artillery barrage hitting Phantom hill and the infantry men running against the Bloody Ridge.
Imagination is vital in trading since it tells you how will be the future if you take into account the least favorable aspects. For sure if you have not the skill to imagine how will be the future in your trading systems portfolio success will be always a mirage. Better to see US Sherman tanks where there are not than not to see drawdown where it is hidden.