Video Transcript

Rayner (06:21.699)

Awesome, okay, let’s get to it…

Kevin, welcome to the show. For those of you who’re watching, that is the primary guest we have now on the podcast.

So welcome, Kevin!!!

Blissful to have you ever.

Kevin Davey (06:36.574)

Wow, I’m impressed I’m the primary guest, but thanks for having me on. I appreciate it.

Rayner (06:43.634)

One thing to share Kevin is that I appreciate you. I do know that you simply’re a World Cup trading champion within the futures market and it’s tough.

What’s remarkable that made me need to salute you is that you furthermore mght write multiple trading books on trading to assist retail traders.

Trust me, I’ve written books myself.

One book is sort of one thing in your life. And I think you may have written multiple such books helping retail traders on the market on the earth plus having your credentials of winning the World Cup of Trading.

Thanks in your effort in trying to teach us.

I appreciate you, Kevin.

Kevin Davey (07:18.794)

I appreciate the sort words. Thanks.

Rayner (07:22.578)

Great, so let’s kick things off.

I just need to hear a bit of bit about your life. I believe more often than not, people will ask…

How do you start in trading?

Why do you turn out to be a trader?

But let’s take things perhaps a bit of bit behind like your early years.

If I were to ask you to present me one word to explain your childhood, perhaps that will be between 5-12 years old.

What would that one word be?

Kevin Davey (07:47.522)

Wow, that’s an excellent query.

I might probably say “playful”

The rationale I might say that’s because back after I was that age, kids played outside on a regular basis.

We didn’t have phones and computers; we didn’t even have video games yet.

They were just starting to return out and so.

I’d find yourself spending lots of my time playing outside.

I wasn’t superb at things like baseball or football, but I enjoyed it.

I used to be spending lots of time outside, which lots of kids now just don’t get that. They’re so tied to their technology.

I believe that’s a bit of bit sad.

 

Rayner (08:41.246)

I can resonate with it.

At all times taking a look at their phone. Once I see people on the road, they give the impression of being at their phones as a substitute of embracing the current.

I believe it’s a waste.

Identical to you, I actually have kids and I try as much as possible to teach them.

At times, restrain the quantity of screen time that they’re watching.

Kevin Davey (08:59.838)

Yeah, that’s tough to do though, isn’t it?

It’s tough to carry them back.

Rayner (09:08.294)

Your teenage years are between 13 to 21 years old.

If I were to ask you one word to explain your teenage years, what would that one word be?

Kevin Davey (09:15.766)

I might say driven and what I mean by that’s just Highschool after which College, University.

I used to be driven to do well in class and check out to get good grades and a level out of the University.

All my focus was to do well with my studies.

Hoping it is going to prepare me further down the road.

What was interesting is in University, I went into engineering.

Specifically, it was “Aerospace Engineering”

It was like designing aircraft. I used to be in that field for probably 20 years, that goes a bit of bit later, but I ended up somewhere completely different, which was in trading.

But…

A number of the lessons I learned, persistence, and coping with frustration after I was studying in my teens sort of helped out in my later life.

Rayner (10:26.802)

I’m hearing the word “driven”.

I’m just pondering, is there anything that happened that made you driven?

At the least from the people around me, once we were teenagers.

Almost none of us are driven.

We just need to play, and rejoice.

The word driven is something rare for those who ask me.

Was there anything that happened that made you’re feeling like…

“Let me ace my studies and let’s do that”

Kevin Davey (10:54.062)

Yeah…

Quite a lot of it was probably just my family.

Mom and Dad were at all times pushing me hard. My dad was great. Dad was a firefighter and he also owned a pest control company he had two full-time jobs. So, he never pushed me.

But what he did was he set an example by just the best way he lived his life.

During those teenage years, he endured three open heart surgeries. He first had one after I was seven years and the opposite one was after I was in Highschool.

He had one other open-heart surgery in his thirties and he never complained.

He just kept pushing on.

I used to be driven just from watching him and seeing what he was doing and that sort of led to me being driven.

Rayner (12:14.15)

Wow…

I believe that sends a really powerful message.

As a parent myself, sometimes I ponder how can I best educate my kids.

But as you mentioned, sometimes actions are the thing that matters.

You may say all you wish, but in case your motion doesn’t tell. The youngsters will probably follow your actions. I believe leading by example is such a classic.

It really works…

Kevin Davey (12:37.696)

Yes.

Rayner (12:44.358)

Earlier you mentioned Aerospace Engineering.

I assume that’s your first job?

Kevin Davey (12:45.75)

Yes.

That might be my first real job out of university.

My first skilled job.

Obviously, before that, after I was in highschool, I worked at an area ice cream store.

I stocked canned goods at a convenience store.

I worked as a busboy.

I worked for an Aerospace company in California. That was my first career-type job.

Rayner (13:37.95)

What were you doing back then as an Aerospace Engineer?

Kevin Davey (13:42.178)

I can’t discuss a few of it because I had a secret clearance but it was defense-related projects of designing the following generation of air of military aircraft.

I also worked on a project that was sort of interesting. This was when people in business airliners were shot at with missiles, like surface-to-air missiles.

I used to be on a project where we developed an object that will be launched out of a business aircraft, and it might intercept a missile to guard the aircraft.

It was things like that…

That was my first job.

After a few years, I went more into the space a part of it.

I used to be working for a small company in California that made…

That is going to sound weird, inflatable balloons for outer space.

It was mainly like a Mylar balloon.

What you do is you fold it up and it becomes really small. You place some sort of material like crushed-up moth balls in it.

Rayner (14:55.523)

Wow…

Kevin Davey (15:12.03)

Then if you send it to outer space, since it’s a vacuum on the market, what’ll occur is that little container will expand and be huge.

What it might do is they might make shapes and it could resemble a missile warhead in outer space.

So other defense people would then see it and they might design their tracking system and their laser system or whatever to trace that incoming nuclear warhead.

We also did some experiments that flew on the space shuttle.

I used to be involved with a project that designed an enormous antenna that was inflatable and it was deployed in space.

There have been lots of projects I worked with.

Rayner (16:15.646)

You earlier mentioned the business airline where you may have something protruding to forestall missile effect.

I haven’t seen that yet.

Is it in existence now?

Kevin Davey (16:26.062)

No, it was an important idea. It just never got implemented.

The corporate I used to be working for. The firm being a big defense firm, what happened was there was lots of infighting between them.

A bunch in California and a gaggle in Georgia that made the components. Each group thought they needs to be in command of it.

Doing that, turned the Government off and so they said…

“You guys will not be serious”

The Government would have funded it ultimately so I ended up getting cancelled.

Never got built. We ran some tests.

That was about it.

This happens so much within the defense world, they might get a design and folks would go crazy. That is going to be an important idea. Then it might die and never get built.

That unfortunately was a part of the business.

Rayner (17:36.478)

What are a few of the biggest the reason why projects just fail?

Is it due to either funding issues, or there are other more pressing matters to pursue?

Kevin Davey (17:49.61)

Yeah…

What I used to be involved with was pure research and development.

We were at all times fighting with other projects, not only inside our company but inside the whole defense industry as a complete.

The federal government would pick and select which of them to fund, and which of them to not.

It began entering into lots of politics.

It will not be one of the best concept that goes forward but perhaps a politician has a district where an organization has an idea.

He’s going to push for it to get funded and things like that.

It was a survival of the fittest.

But lots of times, from what I saw, one of the best ideas didn’t at all times push to the front. They died lots of times.

It’s probably the identical for pharmaceutical corporations etc.

Rayner (19:16.55)

I hear the word best a couple of times. How do you define what’s the best feature?

Kevin Davey (19:23.562)

That’s a tricky one.

It’s very subjective. You recognize you would possibly think well…

“Hey protecting business airplanes”

That’s one of the best idea, but anyone else is perhaps coming up with some latest guidance systems for an aircraft.

That’s a greater idea and sometimes, it comes all the way down to money.

I don’t know why lots of times; various things get picked.

On the time, I used to be only a mid-level Engineer. I wasn’t one in every of the highest decision makers and people are the individuals who got to make the alternatives.

Rayner (20:07.07)

I’m curious, so that you studied Aerospace Engineering and also you helped develop such ideas.

If you find yourself working in such a firm, how often do you cope with math every day?

From my knowledge, you will probably be taking a look at the calculations and equations on a day-to-day basis.

Is there more to it than simply numbers and equations in the true world?

Kevin Davey (20:38.462)

Quite a lot of it was numbers and calculations, computer programs, and simulations.

You needed to do lots of that.

But the opposite thing I discovered with lots of engineering work was promotion and kind of self-marketing.

An example, it wasn’t necessarily that you simply got here up with an excellent idea, however it was…

“How you can rise up in front of individuals and present that concept and get them over to your side and make them understand what was occurring.”

I remember the primary time I ever needed to do it.

I think it was a 3 or four-star general who had come to go to our plant.

There have been a number of pretty high-level people at our plant and someway, I used to be chosen to speak on a certain topic.

You may imagine I used to be scared to death.

That taught me the importance of putting yourself on the market and attempting to get your ideas across.

Those guys didn’t care in regards to the math.

They assumed the maths and all of the programming and the whole lot was right.

They wanted just to listen to the ideas and envision it sort of thing.

The same thing was, that a part of that program to develop the business airline for the missiles was I worked with anyone in one other department to create a computer-based simulation.

It was a graphic one, which nowadays you can do it. It could appear to be any sort of video game.

But back then, that was a giant deal.

I helped create the simulation where I could run cases of…

“Hey, the plane’s flying like this, after which anyone shoots a missile at it, and then you definately see the missile coming at you”

In case you take a look at different camera views, simulated camera views.

I’d be running those, and folks would see it on this computer area, and higher-ops would see it, and that’s what got them fascinated.

Again, there was math behind all of the ideas, but what brought it out was the presentation of it and the promotion of it.

Talking about our youngsters earlier, that’s one in every of the things I’m big on teaching my kids.

I actually have a daughter who desires to be a author. I said…

“Well, realize being a author, hey, that’s great”

But in the long run, if you need to write books probably 80% of your time goes to be promoting the book, not writing the book.

That’s what it finally ends up becoming.

Promoting yourself and putting yourself on the market and that’s true in lots of things in life.

Rayner (23:50.53)

Yep. How one can sell yourself in essence.

Kevin Davey (23:52.754)

Yeah, absolutely. Which I never, did as an Engineer.

I took one class that I remember within the University for presentations.

You probably did one stand-up presentation and that was it in 4 years.

I look back on it now and I’m like…

“Wow, they simply didn’t prepare me enough for doing that kind of thing”

There must have been so much more.

As I’ve gotten older, I’ve realized that promoting yourself, and what you do, regardless of what your profession is, it’s an enormous a part of being successful.

Rayner (24:51.75)

Well said…

I couldn’t agree more.

Not only in trading or business, but whilst an worker.

If you need to sell your ideas to your uppers to get certain things moving, you may have to sell.

Sell the opposite ideas and yourself. That also helps with promotion inside the company, for those who can sell yourself higher than your peers.

At the same time as much as we hate to confess it, sometimes your work quality will not be nearly as good as your peers, for those who can sell yourself higher, you may have the next likelihood of that promotion.

Kevin Davey (25:19.806)

Quite a lot of people are inclined to think that it’s not real if you try this.

They feel bad about promoting themselves, but ultimately, like we were just talking about, one of the best ideas don’t at all times turn out to be reality.

It’s those which are promoted one of the best which are good ideas. That’s what people have to appreciate.

Rayner (25:47.454)

Great.

You said you had 20 years in Aerospace Engineering before you bought a second profession in trading.

So how did that transition occur?

Kevin Davey (25:57.846)

Well, it took an extended time and it began after I was working as an Engineer.

I used to be in California and I received something within the mail.

This wasn’t an email; this was like paper mail and it was like a 15–20-page booklet that talked about trading.

It read…

“In case you had bought sugar here and sold it here”

You’d have been a millionaire.

I saw that and I used to be like…

“Wow, that is neat”

I didn’t even know what futures or commodities were but that began it.

I began digging into it and trying stuff and losing money after which trying other stuff and losing money.

It was hard to get good information or any information.

There have been a couple of books and that sort of thing, but there was no web.

You recognize, there was no trading software where you can just pull up a chart and throw a moving average on it.

Back then you definately’d get, for those who wanted future data, it was either the day by day newspaper.

It could offer you the costs for the day gone by.

There have been some subscription services that after every week would physically mail you a replica of the charts.

You may add to them and draw your lines on them.

That sort of thing and that’s what it was back then and in order that began my obsession I assume with the markets.

From that time on I just kept trying stuff.

I might try in the true world and lose money so I’d be like…

“Oh, you may’t try this and I move on to something else”

For the longest time, I believed…

“I used to be going to create the final word money machine where it might be some sort of indicator or pattern or whatever that will just make a ton of cash and I could just sit back and just wait for the cash to flow in”

In fact, everybody thinks that and it just doesn’t occur.

Eventually, I began getting a bit of bit higher at it.

Had some huge setbacks along the best way, but I used to be doing all that part-time so it was my part-time hobby.

It was the one thing I did outside of labor and this was before kids and so they took up time.

Eventually, I got to the purpose where I used to be pretty decent part-time trading.

That led me to enter the World Cup Trading Contest and I used to be in a position to finish second a few years.

In the primary 12 months, after that, I began to feel like…

“Perhaps I can do that full time and the best way it worked with my job”

I used to be in command of quality assurance and engineering in an organization that had about 500 hundred individuals who made fuel pumps for aircraft.

Which was a reasonably high-stress job.

it, if the fuel pump fails on a jet engine, the jet engine stops and that’s not an excellent thing.

We had super strict tolerance.

We were at all times nervous about bad products.

Eventually, our company got sold to a giant company and I had the chance to walk out of there with mainly an additional 12 months’s salary. Because I stayed on through the transition.

That just turned out to be the proper time. I said…

“I’ve at all times loved trading. It’s been my hobby. I believe I’m decent enough at it, perhaps I should just do that full-time”

Give me a 12 months and if it doesn’t work out, I’ll return, and get one other job in aerospace.

But when it does work out, I’ll stay in trading.

That was like in 2008, about 15 years ago.

Turned out it worked out and here I’m today, still trading full time.

Rayner (30:41.618)

Correct me if I’m fallacious.

From what I’m hearing, you took part within the World Cup of Trading, you got here in the primary place while doing it part-time.

Did I hear that right?

Kevin Davey (30:51.262)

Yes.

That was 2005, 2006 and 2007. I used to be working full time and it wasn’t just an engineering job.

It was an upper-level management at this company. I used to be probably one in every of the highest three at this company.

It was good and bad.

It was good because what I did was, I created trading systems that will only trade perhaps on the market open and so they didn’t do much throughout the day.

I wasn’t doing energetic trading throughout the day because I couldn’t, I had a full-time job.

So, I could check during lunch and perhaps one or two other times in between meetings or something, I could sneak a take a look at the markets.

I didn’t trade that much throughout the day. That helped me because I didn’t attempt to overdo things.

Most individuals who start trading are inclined to overdo it and trade an excessive amount of having much risk.

I believe having a full-time job helped me in that regard.

Rayner (32:12.658)

It is best to put it somewhere in your bio.

“World Cup trading champion doing it part-time”

Laughs

You may share with us and the audience, what’s your trading methodology today.

I comprehend it’s algo trading, but I believe most of them won’t be accustomed to it.

So perhaps you may expand on that.

Kevin Davey (32:17.72)

Hahaha…

So algo trading. What it means is you trade in response to established rules.

These rules might be anything. It might be when the worth crosses a moving average that’s a buy signal.

It might be if you see a doji candlestick and something else, that’s a sell-short signal. It might be anything.

The purpose is, with an algo, you write down those rules and also you program them right into a trading platform.

 I take advantage of Trade Station, but there are lots of other pieces of software on the market that’ll do it.

You program the foundations.

Let’s just take an example of a moving average crossover.

If the close yesterday was below the moving average and the close today is above the moving average then buy the following bar on the market.

That might be an algo rule.

You would have the precise opposite for a sell short, you can put a stop loss in there, all types of variations.

You provide you with that concept, and then you definately program it and run what’s called a backtest on it.

You return 10-20 years.

You let the trading platform apply those rules to a chart of crude oil or a chart of Amazon or whatever you need to test, and it is going to quickly do it.

You’ll come out and say…

 “If I had done that and followed those rules, I might have made this much money”

That’s what algo trading is and it’s different with how lots of people trade.

Quite a lot of people use charts and so they’ll stare at charts all day and so they’ll draw their support and resistance lines and trend lines.

They’ll say watching it in real-time…

“If the worth breaks a trend line, I’m going to go short”

They’ll take a look at order flow and say…

 “Oh, there appears to be a buying imbalance. I’ll buy or sell”

Those people trade so much in another way.

They’re more focused on what’s happening straight away and check out to react to it.

But they don’t necessarily do the historical testing to prove that what they’re doing ever worked.

The large thing is that algo trading means that you can back-test it and show that something has worked.

The large drawback to algo trading is simply because something worked for the last 10-15 years doesn’t mean it’s going to maintain working for the following month to a 12 months.

It might be nonsense or random luck, where it just happened to work the last 10 years.

But going forward it won’t work in any respect.

That’s where people get tripped up.

They think…

“Well, I had an important backtest, due to this fact it should work going forward”

That’s not the case in any respect.

You recognize that the disclaimer the US government at all times has…

“That the past performance is just not necessarily indicative of future results”

That’s 100% true.

But what I’ve found is if you backtest a certain way you backtest appropriately and do things such as you don’t over-optimize.

Which is to place too many rules in your strategy and check out to overcomplicate it.

If you don’t do things like that, there’s a bent for the backtest to proceed and do good.

It’s not a guarantee.

But the best way I at all times describe it’s…

“You’re shifting the percentages in your favor a bit of bit”

Quite a lot of times that’s all you would like.

In case you take into consideration gambling and casinos.

They’ve a small edge if you’re playing roulette.

They don’t have an enormous advantage, but they’ve a small one and it’s at all times there and it really works all through time and there’s no way around it.

All they need are people to play it and eventually, they’ll be winners in the long term.

What I discovered in trading is lots of times you don’t need an enormous advantage to do fairly well.

You simply need some advantage that’s in a nutshell what algo trading is and the way it really works.

Rayner (38:14.398)

Speaking of backtest…

This jogs my memory of a quote by Jim Simmons.

The one who runs some of the successful hedge funds on the earth.

He said that…

“Past performance is one of the best predictor of success”

 I believe I got here across one in every of his quotes, and I agree with that.

With what you may have said, if done appropriately, that’s among the best ways to have it work or not.

However the context is that it must be done in the precise way.

Kevin Davey (32:17.72)

One option to give it some thought is, for those who run a backtest and it shows it lost money every 12 months for the last 10 years, would you even consider trading it?

Probably not, since you’d be like…

“Well, this has never made money, why abruptly would it not earn cash?”

There’s that a part of it.

The flip side to it’s simply because it did earn cash previously 10 years doesn’t guarantee it is going to earn cash going forward.

But when I had my selection between the 2 or three selections.

Alternative one backtest is negative all through the history. Alternative two backtests are positive through the history selection. Alternative three you may have no idea you didn’t do any testing.

From a logical viewpoint, which one are you going to take?

You’re going to take the one which was profitable previously.

You’re going eliminate the one which didn’t earn cash and the one that you simply didn’t test.

How much confidence would you may have trading that?

I see that so much where people just say…

“Well, I believe this can work”

 Then they simply go and do it without doing any testing.

Which is crazy…

But I assume it explains why lots of people lose money in trading.

Rayner (40:07.162)

Also, I think that one in every of the explanations so many individuals don’t do backtesting is that they need programming knowledge tools, and resources to do it, which adds to the obstacles to beat.

Perhaps afterward we will discuss a few of the tools and resources to assist overcome those obstacles.

But for now, I’d wish to hear your thoughts.

As you’ve mentioned, there are alternative ways to trade the markets, algo trading, discretionary trading, order flow, etc.

What made you select to go down with this approach?

Kevin Davey (40:37.87)

Probably because I failed so miserably at discretionary trading, which requires you to take a look at the screen and check out to make your mind up in real-time.

I appear to be good at making the fallacious decisions.

I’d be watching the chart because the day goes on and I’d be like…

“Oh, now’s an excellent time to purchase”

 As soon as I purchase the worth falls and eventually, I attempt to get smart perhaps whatever I’m pondering, I should do the alternative.

I attempted that…

However it didn’t work.

It was discretionary trading and was just attempting to trade to some principles quite than rules like…

“Oh, when an uptrend, you mostly need to look for purchasing opportunities”

That sort of thing.

It just didn’t work for me.

What I discovered was writing down rules and testing them.

Looked as if it would fit my personality more.

I find that’s true for lots of people who find themselves technically numbers-based.

I’m referring to engineers and medical doctors.

What I don’t get are people who find themselves like social staff or philosophers. I do get a couple of musicians sometimes they don’t are inclined to do algo trading.

But logic people fit for algo trading.

That’s what I’m, that’s algo trading.

Rayner (42:51.578)

Nice…

Perhaps, you may give us an example of a trading system so the audience can understand this higher.

In fact, it doesn’t must be a trading system that you simply currently trade.

Don’t need to take your secrets, but perhaps only a sample trading system in order that they can understand like…

“Oh, that is what Kevin is talking about and the way it really works”

Kevin Davey (43:09.006)

A straightforward breakout system is an important example that lots of people will say…

“Oh, breakouts don’t work”

“But to catch long-term trends, which is an excellent option to earn cash, breakouts work great”

What you’d say, the rule can be…

“Hey, if today’s close, let’s say you’re working with day by day bars, today’s close is the best close of the last 20 bars”

Which is roughly a month.

If today’s close is the best close within the last month, I would like to purchase the following bar on the market.

Conversely, for those who’re trading futures, it’s easy to go short.

You would say…

“If the close is the bottom close of the last 20 bars, sell short the following bar on the market”

That’s your entry rule.

You would put a stop loss. You say…

“If I lose $1,000, I’m just going to exit”

You would do a profit goal.

There are all forms of things you can do.

With that sort of system, you’re guaranteed to catch all of the long-term trends because a long-term uptrend goes to have higher closes.

In spite of everything, that defines a trend.

In that respect, if the trends are long enough, you’ll make quite a little bit of money.

It’s just those periods where the market goes backwards and forwards, where you’ll get lots of false signals, and that may often result in periods of drawdown, which each trading system has drawdown.

I see lots of people on the market claiming…

“Oh, hey, this approach has no drawdown, and a drawdown is only a loss out of your peak equity”

Every trading system has drawdowns.

So long as you may withstand the drawdowns you’ll enjoy those profits.

But for those who can’t handle the drawdowns, in the event that they’re too severe or simply too long in duration, then you definately might resolve…

“Hey, the profit that I’ll get from this strategy isn’t price those drawdowns”

Since the drawdowns ultimately, the down periods, that’s what kills people lots of times in trading.

Quite a lot of people like to see latest equity highs day by day. I definitely do.

But

“Hey, there are occasions when you may go for months and be in a drawdown”

I recall years of my trading where the primary 10 months of the 12 months, I used to be either flat or losing money.

Then abruptly, within the last couple months of the 12 months, things just turned around and skyrocketed and it made like a 12 months’s price of profit in two months.

But, I needed to endure 10 months of drawdown.

That’s hard for most individuals.

It’s those drawdowns that suck the arrogance out of you and so they make you doubt the whole lot.

But…

In case you can withstand them, you may get somewhere and in order that breakout system, I just mentioned is an excellent example of 1 that might earn cash but would even have some could have some significant drawdowns.

Rayner (47:22.898)

Perhaps I’d similar to you to do a little bit of clarification.

In algo trading, some people use the terms systems trading, systematic trading, and quantitative trading.

Would you say that all of them seek advice from the identical thing?

Is it just a special way of calling it?

Kevin Davey (47:39.046)

Yeah,

I mean there are lots of different variations on it.

Some people will consider algo trading using statistical rules.

They research past prices and so they discover,

“Hey, Monday is an excellent day to purchase and Wednesday is an excellent day to sell in a selected market”

But again, regardless of how they got the concept, it at all times goes all the way down to rules.

It’s rules you may program, and pure algo trading is just rules.

It doesn’t have any discretion where you say…

“Well, normally I’d take this trade, however the Fed has an announcement today, so I’m not going to take it”

That results in lots of issues.

Pure algo trading is just creating those rules after which just follow them and you may automate them that’s the great thing and you only allow them to run and it is just not easy.

Rayner (49:39.618)

From my understanding, your algo trading is for specific markets, just like the futures markets, commodities, etc.

Kevin Davey (49:48.522)

Yes…

I mainly do futures markets and there are a couple of different reasons for that.

One with futures, you may get great leverage so far as, you may control lots of coffee, crude oil, mini–S&P futures.

You may control so much with a bit of little bit of money.

You may get some outsized returns.

The downside to that’s that “leverage”

When it goes against you may get hurt so you may have to watch out with that, I also prefer it for the diversification.

Within the US futures markets, you may have six to seven unique sectors. Just like the egg, wheat, corn, and soya beans, and you may have metals.

Quite a lot of times don’t act the identical, they’re under different fundamentals

You may create a gold algo.

You would also create a special soybean algo and so they could balance one another out.

When one’s up, the opposite one is perhaps down, but you mix them and also you get a pleasant equity curve.

That’s it.

For people in america, futures trading has an enormous tax advantage with the best way they treat short-term gains and long-term gains.

For instance, for those who were to purchase a stock within the US, for those who hold it, I think it’s lower than a 12 months, it’s considered a short-term gain and it’s taxed at the next rate than for those who held it greater than a 12 months.

They’re attempting to encourage people to carry it for longer periods.

But with futures, I could hold a futures contract for literally one second.

Let’s say I earn cash in that one second and I exit.

For tax purposes, that’s not considered a short-term gain. There’s an excellent percentage of it.

I believe it’s a 60-40 split between long and short-term.

Where lots of it’s considered a long-term gain taxed at a lower rate.

That’s an enormous advantage to trading futures.

Also, a related thing is bookkeeping, it’s so much easier.

Anyone who’s ever done stock trading within the USA knows at the tip of the 12 months, you may have to list all of your buys and sells.

You would possibly have a number of pages for that for those who are energetic.

But with futures, it’s one number you get out of your broker.

You may have to transfer one number to your tax form. It’s your mark to market gain or loss for the 12 months in that account.

It makes record-keeping a lot quicker and easier.

All those reasons you add them up and that’s why I trade futures

Rayner (53:08.566)

I hear you saying algo for soybean and gold.  

I’m guessing you trade multiple trading systems.

What number of systems do you currently trade?

Kevin Davey (53:19.234)

I actively trade about 30 to 35 strategies in various markets.

I actually have a stable of about 200 strategies.

Every month I do some review and take a look at which of them I needs to be trading.

That’s based on not only their performance, it’s also based on things like their volatility and the market sector.

For instance simply because last month I had all my crude oil strategies do great doesn’t mean I’m going to only trade crude oil strategies the following month.

I would like to be diversified since you never know when a trading strategy goes to either permanently or temporarily stop

I’ve had cases where I’ve had strategies that for a few years they’ll just go flat and so they’ll just sort of be up and down not doing much.

Then abruptly, they take off again and begin performing well.

You may’t predict what’s going to work in the long run.

What I do is I attempt to have a balanced portfolio of some eggs and metals, energies, and currencies and check out to be in a bunch of various markets at the identical time.

Rayner (54:53.266)

I believe an issue that’s going to be within the audience’s head is that…

“Man, Davy, how do you manage 35-200 trading systems?”

What’s your tackle that?

Kevin Davey (55:04.154)

Well…

It doesn’t occur overnight.

I remember this was probably 20 years ago.

I remember constructing systems and at the tip of the 12 months, I’d say…

“What am I going to trade next 12 months?”

I actually have 4 strategies that I could use. So, I want more.

So, you may have to continuously do the research and development to construct latest strategies then over time I’ve gotten a bit of bit higher at it.

The tools have gotten a ton higher.

Now I can use some tools.

One tool I take advantage of, a student of mine wrote, he took a few of my principles and made it so he automated lots of things in development.

It makes developing strategies so much faster, but you may have to only keep developing.

You furthermore mght must have some sort of organization for the way you’re going to trace 50-100 strategies, and the way you’re going to pick which of them you’re going to trade.

There’s so much more to it than simply developing the strategies themselves, but that’s where it starts.

I mean, for those who can’t develop strategies that earn cash in real-time, it doesn’t matter if you may have 100- 200 of them for those who can’t do that you simply’re not going to get anywhere.

That very same thing holds for position sizing because some people say…

“Oh well It’s all about money management and position sizing”

That’s very essential, but for those who don’t have good strategies to begin with, money management isn’t going to avoid wasting you.

It isn’t going to show an unprofitable system right into a profitable one.

There’s so much to it, however the option to do it’s just to begin doing it small.

In the following six months, for those who can develop one or two strategies, I’ll be okay.

In case you try this every six months, well a few years from now you would possibly have five systems and methods you can trade and you might be well in your option to constructing more.

Rayner (57:37.97)

Let’s say…

You may have like 200 trading systems at your disposal.

And you might be trading about 30-35 straight away.

Also, you said, you are attempting to show yourself to the several market sectors just like the currencies, commodities, etc.

Because you only have no idea which market will shine.

My query can be…

How do you identify this method will probably be trading commodities?

Let’s go along with the system ABCD to trade commodities, and system XYZ to trade currencies.

How do you choose the systems to trade that specific sector?

Kevin Davey (58:08.514)

Well.

The best way I often develop strategies is already market-specific.

Let’s return to that breakout system example.

I’ll test that on different markets and discover…

“Oh, it only works well with crude oil”

That’s now a crude oil strategy that will probably be a part of my 200 strategies. Then I’ll never apply it to some other market…

It has to work first on whatever goal market and likewise goal bar size. I’ve had strategies, I actually have loads of strategies that work great with 30-minute bars.

But you give them day by day bars and the system falls apart.

There are lots of people on the market that will say…

“Well, it’s set to work”

My strategies must work on every market or every bar size or it’s set to work in no less than 10 markets.

If that’s your criteria, more power to you.

But my experience is that is hard to do.

It’s hard enough to seek out strategies that work in a single market.

Now you’re saying…

“It’s set to work in 10 different markets”

The truth is those are only a few and much between.

I’ve found more success being very market-specific.

Once I start taking a look at those 200 strategies to trade every month, I already know the market the bar size, and the strategy itself.

The mixture of those three is what I’m tracking.

What I’ll do is have some rules that will determine which of those 200 should I trade the following month.

It’s really hard to do. Because you would possibly select those that will do bad.

There’s lots of hindsight.

Rayner (01:00:40.946)

You furthermore mght develop rules to choose the trading system to trade in live markets.

Did I hear you right?

Because there’s so many to select from.

Kevin Davey (01:00:45.45)

Yeah, yeah…

That finally ends up becoming almost as essential or whilst essential because the strategies themselves.

The nice thing for people starting, they don’t must worry about that yet.

They simply must deal with constructing the strategies and also you’re trading a couple of different strategies. That’s an important start,

But eventually if…

In case you construct a complete bunch, you’re going to have that problem of which of them should I trade.

Rayner (01:01:22.13)

How do when a trading system isn’t any longer working?

Kevin Davey (01:01:30.538)

That’s an important query…

It’s funny that you simply asked that since it’s an issue that comes up quite a bit now.

But I’ll take you back.

I would like to say about 10-11 years ago.

I wrote an article for a magazine.

It was called SFO magazine.

It was related to a brokerage within the US that eventually went out of business since the founding father of the brokerage was forging the financial numbers and mainly stealing all the shopper funds and now, he’s in jail.

But I wrote an article for them on when to quit trading a technique, an algo strategy.

Back then, this just tells you ways the times have modified. I don’t even think we were calling them algo strategies then.

They were calling them systematic or mechanical systems.

But I wrote an article about that.

At first, the editors were like…

“No, we don’t want it. I said, why not?”

That is an excellent topic. They usually said…

“Well, we would like glad articles, showing great strategies of individuals creating wealth.”

We don’t need to discuss what happens when a technique goes bad and also you lose money.

That’s awful. I’m like…

“Yeah, however it’s really essential”

I finally convinced them to print it.

The response I got was pretty amazing. I mean, people were like, wow…

“Nobody’s ever talked about this”

Here we’re 11 years later it’s a reasonably common query.

How do when a technique is broken?

There’s lots of alternative ways to take a look at it.

You would take a look at the back-tested drawdown.

You would say…

“If going live, I ever have a drawdown like that, I’m going to exit”

That might be your quitting point.

You would do things like…

“Hey, I’ve checked out the past 300 trades for this method, and it’s never had greater than 4 losing months in a row”

That was its biggest drawdown.

Now abruptly you go live and a bit of bit into it, you get five months in a row losing.

Well, perhaps that’s time to place it on pause because perhaps it’s not working.

There are lots of alternative ways to do it.

A technique I at all times used to make use of, I don’t use it anymore, but I might print on paper an equity curve of the backtest.

Then I might also include the live trading or the real-time trading of that system on that equity curve.

I’d put it on a wall on the opposite side of my office. And if I could take a look at that chart without knowing anything, if I could tell when that system went live since the performance fell off, then I’d know that the system’s probably broken.

But when I couldn’t tell if it looked in regards to the same because the equity curve, I’m like…

“The back-tested equity curve looks pretty good”

A straightforward eyeball test is sweet.

The largest rule I actually have found is

“Whatever approach you provide you with saying at this point I’ll consider this approach broken and I’ll turn it off”

Write it down before you begin trading live and put it somewhere where you’ll review it or if you may have a trading partner, they are going to call you on it and say…

“Hey, you said if this ever happened, you’d quit trading this method”

Has this happened?

Because in the event that they hold you accountable. It’s hard so that you can say…

“Oh no, it’s never happened”

The purpose is that if you may have rules beforehand and also you keep on with them you turn out to be as emotionless as you going to be upset that you’re going to must quit a system since it’s losing your money.

It’s really hard.

What most individuals do is they begin a trading system and so they start eager about the Lamborghini that they will buy.

They consider all of the toys they’re going to purchase with all their trading winnings and things start going bad.

You recognize they go into denial.

 “Oh, it’s going to show around, I’ll let it do yet another then I’ll turn it off”

They let it just wipe out their account.

Or they’re so strict and go like…

“I lost it yesterday, my system’s no good”

I’ve talked to individuals who run a backtest and so they say…

“I’m going live with it”

Per week later, I check in with them and so they’ll say…

“Well, it had two losing days, so I don’t think it really works.”

I’m like…

“Well, your backtest had multiple losing days?”

Yeah…

“But this wasn’t what I used to be expecting, so I’m just turning it off”

People sometimes turn them off too soon.

Among the best ways I might say is just taking a look at the drawdown.

In case you get to a drawdown that you simply never saw within the backtest, it’s probably an excellent time to pause no less than and just make sure that that you need to move forward with that strategy.

It could at all times recuperate.

Then when it does, perhaps that’s time to show it back on, but you need to stop it from just bankrupting your account.

Rayner (01:08:02.218)

I heard a saying…

“Your deepest drawdown is at all times in the long run, not previously”

I mean, it’s going to be a matter of time before whatever trading system, the drawdown will exceed the previous drawdown.

Do you may have a buffer, like perhaps 1.5 times the utmost drawdown or 1.2 times before you say…

Time to reassess, time to pause, or stop altogether?

Kevin Davey (01:08:23.894)

Yes…

I used one.

I like 1.5.

The issue I’ve seen with some strategies is if you take a look at the dollar amount, just assuming you’re trading even one contract, sometimes the dollar amount becomes the larger issue and then you definately think…

“Well, wait, it’s one and a half times the drawdown, but I don’t need to lose that much”

 On The flip side, so you may go greater, you too can go smaller.

You would use one-half of the max drawdown; say at that time I’m turning it off.

That virtually guarantees you’ll turn off a system since it’s half of what it was within the backtest.

You recognize reality is just not going to be nearly as good because the backtest.

There’s a widely known creator, Trader Brent Penfold.

He’s written a few great books he mentioned that was his approach. This was a couple of years ago.

Perhaps 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 in some unspecified time in the future.

Is that what you need to do? And his response was…

“Yes, because I actually have more fear of losing lots of money from a broken system than what would occur if I didn’t quit early enough”

I’d quite quit too early than quit too late.

There are lots of different variations you may do on it, but my advice to everybody is to provide you with a way that you’re feeling comfortable with after which keep on with it.

That’s the tough part.

Rayner (01:10:14.242)

If I recall you mentioned that you simply might pause the system after which because it recovers the drawdown you would possibly enable it again.

I’m guessing you’re taking a look at things like perhaps if it recovers half the drawdown, you would possibly consider turning it on again.

Is that what you mean?

Kevin Davey (01:10:27.55)

Yeah…

I’ll still monitor strategies which have underperformed for some time.

I’ll keep watching those to see in the event that they come back. It just helps.

The more real-time data you may have helps if you’re developing systems of determining things you would possibly have done fallacious in development and improving your whole development process.

It’s good to trace systems for a very long time.

Sometimes, they fall off after which they arrive back.

But what I actually have found with those, psychologically, those are hard to return back to and begin trading again.

The instance I at all times use is to assume your spouse or your better half cheating on you.

You’re going to be devastated.

They are saying a bit of while, time goes by and so they say…

“Oh, I’m different now, I would like to return back and get together”

How likely are you to present them that second likelihood?

You’re going to be sort of hesitant…

It’s going to be sort of scary.

That’s the identical way with a trading system that costs you money and it failed you.

Now it wants a comeback along with your money and say…

“Now I’ll make you money, I promise”

You’re going to be a bit of hesitant.

The truth with coming back to any system that has lost you money may be very difficult.

Rayner (01:12:24.636)

I do know you trade a particular trading system for a particular market, but at the identical time, other traders trade like a basket of markets.

Example.

Stock traders, trade, all of the stocks within the S&P 500 or perhaps a trend follower who trades all the several futures markets, trading breakouts and riding trends.

What’s your tackle trading a particular instrument, like let’s say gold versus someone who trades a basket of such instruments as stocks or a trend follower who trades a basket of futures markets?

Kevin Davey (01:13:02.934)

I do think trading a basket is healthier because if Gold will probably be in an uptrend, but perhaps crude oil is flat and never doing anything.

The more markets you’re in, the more likelihood you may have at profit.

At the identical time, there’s a downside to that and it’s you won’t have as much upside potential.

Back to that gold example, let’s say you’re doing a trend following on gold, and gold just skyrockets and also you’re only trading that and also you bump up your size and the whole lot’s going right.

You would have great returns if I’m doing it and I’m trading gold.

But I’m also trading crude oil. I’m also trading the currency my returns probably won’t be as high as yours since you’re targeting something that just happens to be performing well.

The opposite side to that coin though is what happens if that gold strategy starts to fail.

Now you’ve got all of your eggs in that basket and also you’re going to suffer.

You’re more prone to get worn out than anyone who has a diversified portfolio.

To me, it’s all about risk.

Trying to attenuate the chance and diversification is a technique.

So far as stocks go, I don’t algo trade stocks.

I’ll do stocks for the long run, like retirement investing and that sort of stuff.

But I purchase and hold for lots of things.

The rationale is, even with a basket of stocks, lots of times when the stock market goes down, lots of stocks go down and there’s lots of correlation.

Within the futures market, you would possibly not get that very same correlation.

I are inclined to avoid that.

Constructing strategies for stocks can also be a bit of tougher in ways.

Let’s just say you wish them to begin algo trading a stock.

What are you going to choose?

Chances are high most individuals will do Facebook, Amazon, Google Apple, etc.

Why did they pick those?

Well, those are popular, but they’ve also gone up.

There’s a bias even before you’ve began testing.

That’s why diversifying futures is significantly better.

Rayner (01:16:55.094)

Would you say that perhaps…That also affects the robustness of a trading strategy.

A technique is supposed to trade multiple markets in comparison with a technique that solely trades one market.

The strategy that trades multiple markets, can be more robust when it comes to like, less prone to break down in comparison with those that just trade a person market.

Kevin Davey (01:17:18.886)

Yeah…

I mean to a level I believe that’s true where for those who had a technique that worked in multiple markets.

The one thing it might do is it might offer you more confidence needless to say so that you’d feel…

“Well, this works in a complete number of markets”

But at the identical time, I actually have found it’s not like an on-off switch where as I said before…

“It’s set to work in five different markets or else I’m throwing it out”

But that’s just what I’ve uncovered over time where that doesn’t matter.

I actually have some strategies that work in just one market

Do why it doesn’t work in other markets?

I don’t know, but I just keep going with the one it really works in.

So yeah, it’s, I believe it.

The largest thing no less than for me with that if it worked in multiple markets, it might give me confidence that it might work.

The one thing people have to look at out for though is that they’ll try something and so they’ll test it on 40 different markets and it really works on three of them.

Let’s say they’ll say…

“Well, I’m going to throw the opposite ones away, and I’ll just deal with those three”

You may have to watch out about those three because that doesn’t necessarily mean it’s higher.

It just means it worked on three and also you threw away all of the bad ones that’s only a type of optimization so you may have to look at out for that too.

There’s lots of little subtle things to it where it’s not at all times that clear on the right way to try this

Rayner (01:19:07.826)

How long, based on experience?

How long does a trading system work before it stops working?

Do you may have like a median lifespan?

Kevin Davey (01:19:20.618)

Well, in lots of the research I’ve done.

What I do is I’ll simulate running a technique for 3 years of live real-time trading.

If it does good for 3 years, that’s an excellent lifespan.

I’ve had systems that I still trade which have run fairly well for 10 years.

I even have some systems that work great for one or two years after which sort of disintegrate.

I specifically recall a mini-S&P system that worked great for about five to 6 years.

It was incredible after which at first of 2022, it gave the look of anyone somewhere flipped a switch and said…

“This strategy is just not going to work”

Because, If I showed you the equity curve it’s almost not vertical however it’s up and to the precise, after which abruptly it just fell off.

That was after five years so my general rule what I like in the best way I’ve built my process is I plan on three years and if it goes longer, great.

But I feel a three-year period is an excellent one to get a return on the time you place in and the hassle you place in for those who were constructing algos that only work for every week.

Some hedge funds can do it with big research departments where they are saying…

“Hey, we have now something that works for every week and we do 100 of these items and just keep them rotating”

For a typical retailer trader, that’s not an option. So, I search for longer-term performance.

Rayner (01:21:27.774)

Got it.

Speaking of trading strategies, how do you get latest trading ideas?

Kevin Davey (01:21:36.482)

Great query.

That’s an issue most individuals who seek me out provide you with. They’re like…

“I can’t provide you with ideas, I’m not that creative. I don’t know where to seek out them”

 And my response is at all times, ideas are in every single place.

Just search the web for ideas.

Type in free trading systems and so they’ll offer you rules.

There are all forms of people offering all forms of things.

Quite a lot of them are free and you may just…

“Hey, I’ll code it up, I’ll test it. Oh, but I don’t like that. I’m going so as to add a rule to it or change the rule”

That’s what I ended up doing.

I see something, I put my little spin on it, and I am going and test it.

The tough part about that’s you may have to appreciate that 90 things out of 100 that you simply test will not be going to work.

They’re not going to be profitable either in backtest or they’re going to have an excessive amount of drawdown.

Most ideas fail.

It’s sort of disheartening in a way, however it’s also good since it just says…

“Hey, finding good algos is just not something that’s necessarily super easy”

If it was super easy, everybody’d be doing it after which there’d be no money in it.

Give it some thought like a restaurant, like a McDonald’s.

If McDonald’s was making $5 off every hamburger they sold and so they were wildly profitable, anyone would come around and say…

“You recognize what, I’ll make a hamburger and I’ll only make $4 profit”

 I’ll find a way to charge less.

Then customers will flock to him after which anyone says three dollars and abruptly, all of the competition lowers the profits and that’s what happens in trading is that everyone’s fighting with one another.

Most ideas and methods just don’t work long run especially if you include slippage and commission.

You recognize if you include real trading costs most ideas fail.

That being said, ideas are on the market in every single place.

You may go to Amazon and just take a look at some books and there are books with tons of trading ideas.

You simply go and test things and see what might work and what won’t work.

That’s the option to do it.

Rayner (01:24:28.398)

From what I’ve heard, Andrea Unger is one in every of the World Cup Training Champions.

From the best way he does it, if I’m not fallacious, he tends to discover the market behavior that he’s trading.

I believe he does it through a straightforward test like buying when the worth breaks above the previous week’s high.

If he knows a selected market has a trending behavior, then he’ll probably adopt a trend-following system for that market.

Do you do something similar for yourself?

Kevin Davey (01:25:02.226)

No…

That doesn’t mean I’m right and Andrea’s fallacious.

He’s an excellent friend and once we get together, we at all times argue and discuss all forms of trading-related things.

We’ve different philosophies on lots of things.

One thing I at all times worry about with doing that.

Let’s just say you’d call up a chart of crude oil for the last 10 years and also you’d say…

“Oh, hey This looks more like a trending market”

Then you definitely go and also you say…

“I’m going to create a trend system for that and test that very same data to it”

Well, now you’ve run two tests on that very same data.

You ran that first test to find out what to do and it said…

“Oh, the trend will probably be higher”

Then you definitely go and do it. I don’t like doing that.

I like testing something on all the information once, like a one-time test, it either fails or passes.

Because I’m just definitely afraid of all of the biases that may occur if you see the information after which make a call based on that.

You recognize an excellent example can be…

Let’s say you’re constructing a system today for a currency and at the back of your mind, that specific currency has been very flat.

It hasn’t had much volatility within the last 12 months.

But you say…

“I’m just going to construct a currency system”

Perhaps a few of the rules you provide you with, do something with that volatility. And what has happened, though you didn’t do it intentionally, you’ve sort of let your knowledge of the markets influence what you’re going to be testing.

You’re biasing your test results a bit of bit.

So, what it does, is it just makes your back test a bit of bit more unrealistic so far as what’s going to occur in real time.

Because in real-time, the currency market could go crazy with volatility. How’s your system going to perform to that?

That’s the sort of thing you may have to look at out for.

But ultimately, Andrea does things a technique, I do things one other way, Larry Williams does things one other way, and also you do things your way.

Everybody has their way, and ultimately, it’s if whatever you do works in real-time, that’s the final word judge.

I’ve had people tell me that I’m an idiot for doing certain things that I do.

However it works. 

You may call me whatever name you wish; I actually have data to back up what I’m doing.

That’s the best way I might tell people to treat whatever they do, whatever you’re thinking that and nevertheless you’re thinking that things needs to be done, make sure that you prove it and confirm it with real-time results.

Rayner (01:28:23.518)

Got it.

From what I’m hearing…

You are attempting to not have any bias toward a certain market.

If you may have any idea, you only simply take the concept, convert it right into a set of fixed rules, after which just test those rules outright and see the way it perform.

Kevin Davey (01:28:34.846)

Yeah…

I’ll admit the one area where I fall off on that’s with some mini-S&P futures, mini-NASDAQ futures, and any stock index futures.

Quite a lot of times I’m biased to the long side.

That’s partly because I do know stocks have gone up over time, but partly because I believe over an extended period into the long run stocks are going to go up.

But so far as other markets, I wish to find a way to go long and short with mainly what I call symmetric rules.

If it’s a 10-bar high breakout, you go long. If it’s a 10-bar short breakout, you go short.

I attempt to be balanced that way and I attempt to do away with as many biases as I can.

Whether that’s at all times an excellent thing.

It’d make some development so much harder, but I believe it helps with the real-time performance.

Rayner (01:29:45.838)

I can see where you’re coming from.

By the best way, Kevin, it’s almost one and a half hours and I’m undecided for those who still need to go further.  Or would you wish to wrap it up?

Because I comprehend it’s late in your end, so I’ll leave it to you.

Kevin Davey (01:29:57.738)

If you may have questions and you’re thinking that it’s worthwhile talking, I can keep going.

Rayner (01:30:03.07)

Great…

As I discussed sometimes after I start with podcasts, I ask questions, things often exceed the stipulated timing.

Thanks for being so accommodating.

I appreciate it

Earlier we talked a bit about algo trading.

People is perhaps watching this and wondering…

“Man, Kevin, , I don’t have any experience with algo trading. How do I start?”

There are such a lot of tools and resources on the market. So, what would you say to such an individual?

Kevin Davey (01:30:30.922)

Well, it’s hard for several reasons.

The primary is even understanding that it’s something you may do.

Just for instance, what it’s best to do is take stock of who you might be and do you want rules.

Are you able to follow the foundations?

It’s s that sort of mindset the objectiveness of doing things the identical way on a regular basis.

Quite a lot of people can’t try this, and that’s effective.

They shouldn’t be algo trading. They shouldn’t even take a look at it.

You’ve got to take a look at your personality and see if this suits.

There will probably be lots of individuals who say…

“Well, I wish to provide you with the foundations on the fly and what I’m feeling”

I wish to incorporate news events into my decision-making.

Well, then you definately’re probably not going to be good at algo trading or it’s not going to give you the results you want.

 Perhaps a special style of trading will work well. That’s the very first thing to do is to take inventory of your likes and dislikes and likewise then your skills.

In case you are bad with computers, now algo trading goes to be tough.

You may write down rules on paper and you may manually calculate things, but computers make your life a lot easier in that regard.

It’s an excellent option to go programming. Quite a lot of people just hear the word programming and so they just freak out.

You recognize…

“I can’t program”

Well, lots of the programming languages now are pretty easy.

Some are even visual you could connect blocks and try this kind of thing.

For instance, lots of people use MetaTrader and I can’t program in MetaTrader to avoid wasting my life, but I discovered a tool with an organization out of Australia that you simply drag and drop boxes of a moving average box and that sort of thing and also you connect it.

You’d make your algo visually, and then you definately’d hit generate, and it might generate the code for you. Then you definitely’d just paste it in MT4, and it might work, which is cool.

One other thing you may do is, there’s a trading magazine I write a monthly column.

It’s called technical evaluation of stocks and commodities.

What they’ll have in every issue is either an indicator, a system, or something, that’s been programmed in perhaps a dozen different trading platforms.

So, it’ll be in Trade Station Easy language. It’ll be in Ninja Trader or Ninja Script.

It’s either within the magazine or you may go surfing and take a look at it.

What I encourage people to do in the event that they’re scared about programming and so they don’t know what language is one of the best, is pick up a problem of that magazine after which go and take a look at the code, read the article, after which go and take a look at the code that creates whatever they’re talking about.

Chances are high, a few of them, you’re going to take a look at them and also you’re like…

“I don’t understand this computer code in any respect”

You’re going to be like…

“I can’t program in that.”

But then there’ll be that one language where you’ll be like…

“Oh, okay. I can understand that”

That’s probably the one it’s best to then pursue.

That results in the following point.

You may have to get a trading platform.

Whether it’s Ninja Trader. I take advantage of Trade Station, there’s multi-charge, there’s lots of TradingView, there’s a ton of stuff on the market.

But you need to get a platform that may do all of the testing that you might want to do.

You need to do forward testing a few of these terms will just go over people’s heads but it’s best to investigate the right way to do algo trading, after which search for a platform that may support you in that.

Then you definitely pick a platform and begin learning it and see the right way to do things.

It’ll take some time to go from newbie to…

“Hey, I’m comfortable with the trading platform, writing some trading strategies”

But when you get there, then the massive thing becomes.

How do I develop trading strategies?

Unfortunately, just about all the trading platforms on the market, they’ll encourage you…

“Oh yeah, program your rules”

Then if you go to place it on a chart to see the way it does, they’ll pop up a box where you’re given the prospect to optimize a moving average length.

What most individuals think is…

“Well, hey, that’s got to be an excellent thing. I’ll discover, I’ll tune the system to what works best”

I’ll get an important looking-back test, that’s what people do.

The trading software encourages it because if you’re done, you’ll see a pleasant backtest and also you’ll think…

“Oh, that is great. This will probably be really easy. I’ll just go live with this”

That’s the fallacious option to develop a technique.

When you get the fundamentals of…

“Hey, I got a platform. I do know a language. I’ve written some strategies, some easy strategies simply to test things out”

Then you may have to deal with constructing strategies properly.

Then there’s so much to that. When you try this, you may have to learn the right way to automate it, which lots of platforms are pretty easy, and begin trading it.

You’ll find yourself working in your psychology more for things like…

“Oh, should I turn this algo off?”

You recognize, last week it lost money and things like that.

I’ve sort of taken you thru a bunch of steps there.

They’re not necessarily super easy, and they’re going to take you a while, however it’s a commitment and it.

Unfortunately, with trading and I’m sure this Rayner, It’s really easy for anybody to say I’m going to begin trading.

I saw a YouTube ad.

“I’m going to begin trading”

They go surfing open an account, and do a wire transfer of a thousand dollars into an account.

The account gets funded.

“Hey, now I should purchase and sell, I can start trading”

Well, after all, they make it seem easy, but that’s how people view it.

“Oh, it’ll be easy to earn cash”

They make that leap from, it being really easy to open an account, it needs to be easy to earn cash…

Whereas becoming a trader and being successful at it’s the toughest option to make easy money.

To me, trading is so much harder than what I used to be doing after I was within the aerospace world and just to present people an example, I used to be in command of quality assurance for an organization so we made components for a fuel pump.

One dimension, if it was off one-thirtieth of the thickness of a sheet of paper.

Take a sheet of paper and someway cut it into 30 slices of width.

I mean, you’re talking about such small values. If it was off by even a ten-thousandth of an inch we needed to scrap that specific part.

If one escaped with that, could cause a failure.

It was like high stress.

On daily basis I’m pondering…

 “Are we doing one of the best we will to make sure that nothing bad gets out?”

In order stressful as that job was and as tough as that job was, trading is harder.

I tell those who, and so they’re like…

“Oh, he’s stuffed with it, he’s lying”

I wish trading was easy.

Even after doing this for 30 years, I wish I could say…

“Oh, well now it’s easy”

 Man, I’ll just be on the beach most days sipping a margarita.

It’s not that easy.

There are at all times latest people coming in with latest ideas and latest tools, and so they’re continuously pushing everybody else.

It’s an actual dog-eat-dog world.

Keep a few of that in mind that it’s going to be a journey and it’s going to take significant effort to reach it.

That’s true with all trading.

I’m not trying to choose on algo trading or anything.

You need to be an excellent discretionary trader. You’ve set to work at it.

Rayner (01:40:45.158)

I believe that’s true.

It’s true for trading, business, life, and anything price succeeding at.

It requires effort and time because if not, everybody will do the identical thing.

Then your so-called advantage, your edge is eroded and , you’re going to be similar to everyone else.

The commitment and the hassle must be there.

You may have given a superb realistic picture of what trading entails.

I don’t think most magazines are glad to publish what’s just said.

Scare away all of the audience.

Nobody’s going to subscribe to the magazine.

Only one thing so as to add, because I can’t program.

What I do, in case the listeners have an interest, is I work with the programmer very closely.

We’ve a really close relationship.

Every time I actually have ideas, I just feed him the foundations.

Because I actually have the ideas. I want to translate it right into a algorithm.

Then he executes the programming part.

I just fact-check to make sure that all is well.

That’s another choice for people who find themselves concerned with happening that route.

But when not…

Hey, learning a latest programming language, like what Kevin has mentioned, sometimes you only take a look at the code. You sort of like, intuitively, you can be like…

“Oh, that is talking in regards to the moving average”

I assume you may have to seek out the precise language that suits the person.

Kevin Davey (01:41:57.13)

I used to be just going to say, working with a programmer is an option.

It’s the one thing people have to look at out for.

Like I said before, most ideas fail.

Your programmer goes to generate lots of stuff for you that’s going to be garbage and it’s not his fault.

It’s just the best way it’s.

Rayner (01:42:22.49)

It’s my fault, yeah, it’s my fault.

Kevin Davey (01:42:29.338)

Quite a lot of times when people say…

“I’m the concept guy, I’m just going to present it to a programmer”

Quite a lot of people unfortunately get it of their heads that whatever idea they provide you with and I assume this is applicable to individuals who use programmers and who program themselves.

They’ve of their mind that their idea must work after which they turn out to be kind of emotionally attached to it.

I’ve got this theory of when this pattern happens with these indicators, this has set to work.

What they’ll do is that they’ll make that a reality by just changing rules, adding filters, and continuously tweaking it until they get something that works and it only works in backtest.

People have to look at out for that too.

You’ve got to treat any idea you provide you with as just…

“Hey, that is an idea. May or may not work. If it doesn’t work, I’ll just move on to the following idea”

That’s the way you got to do it.

Rayner (01:43:36.038)

The emotional detachment, right?

I think that’s what you’re referring to.

It’s only a loss let’s move on to the following trade.

“Oh, it’s just an idea. Let’s move on to something else”

Kevin, chatting with you, you may have lots of passion and love for trading.

Let me just bring you to the opposite end of the spectrum.

What do you dislike about trading?

Kevin Davey (01:43:38.227)

I dislike the frustration of just not with the ability to develop a system or a latest strategy at will.

Some markets are hard to develop strategies for and that gets frustrating.

Drawdowns are killers.

Last 12 months I had what was an important performance 12 months.

Was almost a triple-digit return percentage-wise.

I went back and checked out it, and after I checked out the month-by-month results, I had 4 losing months, and really, I used to be in drawdown six months of the 12 months.

Meaning at the tip of each month, I’d take a look at my equity in comparison with wherever the height equity was, and at the tip of six of those 12 months…

I said…

“Hey, in some unspecified time in the future earlier within the 12 months, I had more equity in my account than I do now”

That’s demoralizing.

Regardless that I had an excellent 12 months, I still had a number of losses and a number of days where I lost money in weeks and months and it gets to you.

Everybody’s so used to…

“Okay, well I’ll go and work wherever. I get a paycheck; I’m paid day by day”

But trading, hey, I am going to work, and I work eight to 10 hours and I lose money.

I pay the boss as a substitute of the boss paying me.

How does that work?

That becomes a part of just the downside of trading.

The very fact, no less than for me, it never gets super easy, where it’s just, oh man, now I can sit back.

It’s hard now. It was hard 20 years ago. Regardless that I wish to think, I do know so much greater than I did 20 years ago, yet…

It’s not like I do know five times as much.

So, hey…

“I higher be five times nearly as good of a trader”

Doesn’t work like that.

That’s a few of the downsides to it, but those are, apart from the drawdown part, those are fairly minor.

The drawdown part is just something that you simply just must learn to live with and it’s frustrating.

Anytime you lose money. It’s not a glad day, but you may have to appreciate that’s just a part of the sport.

 In case you can’t do it then perhaps take a look at something else.

Rayner (01:47:01.982)

That’s why I think that somebody might be trading full time however it helps immensely if trading isn’t their only source of income.

This manner, psychologically, I feel that they’re more prepared to handle the drop-down knowing that…

“Hey, if this month’s trading doesn’t do well, guess what? I still can put food on the table”

I actually have one other source of income coming in to assist me tide through whatever I’m going through.

That’s sort of my philosophy.

Quite a lot of traders that I come across, don’t imagine it.

Having multiple sources of income helps with trading psychology immensely.

Kevin Davey (01:47:40.19)

Yeah…

Along those lines, I did an in-person event a couple of years ago, and as a part of it.

I desired to do a roundtable with anybody who identified as a full-time trader.

I said everybody desires to aspire to be a full-time trader.

There have been like 5 or 6 individuals who got here up and said…

“Okay, ask me questions”

I used to be one in every of them. The one thing they’d in common, five of the six people had other income streams.

Identical to you said.

For me, I trade full-time, but I also teach so I earn cash from teaching.

There was one other guy who sold signals on a web site there was one other guy who was a commodity trading advisor so he’d invest other people’s money.

Of the six people, five of them had another source and it was trading-related.

One guy was an ex-Enron trader.

For those of you who remember Enron the massive energy firm he’s only a full-time trader and he does thoroughly.

But he was the one one in every of those six, so what you’re saying agrees with what I’ve seen on the market

Rayner (01:48:59.39)

Alright, Kevin…

Also, I believe throughout the conversation at first, I heard you mentioned some setbacks and challenges you faced.

Are you able to share with us what are a few of the challenges that stick out to you want a sore thumb?

What do you may have to do to beat it?

Kevin Davey (01:49:15.662)

Probably the most important challenge, especially starting, was just starting with not enough capital to resist drawdowns.

I assume a related a part of that will be not expecting the drawdowns that happened.

Way back within the day, I might get $5,000 together to open an account or fund the account.

I never expected to lose 30-40% of that before making some money.

That turned out to be just an enormous setback.

The truth is for those who take a look at professionally managed futures, funds, and skilled traders who publish results there are some databases on the market for commodity trading advisors.

You’ll see lots of them have had 40, 50, 60% max drawdowns.

That was something when it occurred, I never expected in order that was an enormous setback.

An enormous deflator because you’re thinking that…

“Hey, I’m going to earn cash on the markets”

Swiftly, you’ve lost half your money.

That was probably the hardest thing to beat is to appreciate this might be going to occur.

My rule of thumb is whatever drawdown you’re thinking that you may handle; the truth is you may probably handle about half of it before you begin going crazy.

Let’s just say, I can handle a 50% drawdown.

What’ll occur is you’ll be trading, and this happened with me. I’d get to about 25% drawdown. I’d begin to wonder…

“Oh, are these algos still good? Are they broken? Should I stop trading?”

Then it goes as much as 30, 35%.

What do I do?

Should I in the reduction of?

Should I turn something off?

Should I just stop after which by the point I got to 45%?

I can’t handle it I’m done and you’ll never even get to your 50%.

That’s what happens with lots of people and it definitely happened with me so learning to handle drawdowns was the most important setback. The largest challenge was learning to beat those.

Rayner (01:52:10.134)

Speaking of drawdown, I believe one thing that isn’t mentioned is how much of your net price are you attempting to put in your trading account.

In case you’re going to place 100% of your leverage, then the little little bit of drawdown goes to make you may have sleepless nights.

But when, let’s say, your trading account is a fraction of your net price, perhaps 10%, 20%, 30%, depending on how experienced you might be, that helps the drawdown at a certain level as well, since not all of your eggs are in a single basket.

Kevin Davey (01:52:35.934)

Yeah.

I actually have some students I’ve worked with who said…

“Yeah, I’m going to place the whole lot on my retirement into trading”

I at all times caution them. I’m like…

“I don’t”

They’re like…

“You don’t?”

I discussed it earlier, I actually have stocks in my retirement funds, I actually have real estate, stuff outside of just trading funds.

It’s all a diversification method.

If I used to be 100% confident for sure that I could double my money every 12 months in trading with none drawdowns.

Well, then I put the whole lot in trading because that will be a no brainer, but the truth is no one knows that needless to say.

You may have to look at out for it.

I see this so much with individuals who attempt to go…

“I lost my job; I’m going to go full-time trading”

But I actually have an account of $100,000.

I’ve also got to get my living expenses out of it.

I at all times caution people on that and say…

“Well, just remember if you may have a down month, after which you may have to take living expenses out of it, now you’re in worse shape”

Now the pressure’s on.

Are you going to find a way to handle that?

Quite a lot of people can’t.

You may put a percentage, whether it’s 10%, 30%, whatever it’s, but I don’t think I’d put all my money into anything because you only don’t know the long run.

You would say…

“Oh, hey, I’m buying Gold. Well, let’s just say tomorrow somewhere in South America they find this gold mine where there’s a lot Gold”

That gold goes to be worthless because there’s a lot of it on the market and it’s not going to be a precious metal anymore.

You don’t know. It’s a possibility.

You may have to watch out.

Don’t put all of your eggs in a single basket because the saying goes.

Rayner (01:54:57.974)

The fun fact is there’s lots of gold actually in space.

If humans discover a option to extract that gold in space, I’m undecided which planet back to Earth I assume the worth of gold we’ll see It’s going to be interesting

Kevin Davey (01:55:09.086)

Yeah…

I’ve heard that about asteroids, there are corporations on the market who try to determine the right way to snatch asteroids mine them, and convey them back. Due to the valuable metals

It’s sort of interesting

Rayner (01:55:29.426)

Allow us to move on to the closing section because , as I promised, I’m going to maintain these two hours there.

What does your day by day routine appear to be straight away?

Kevin Davey (01:55:34.612)

My day by day routine since I also teach a course.

I get up, I help get the youngsters ready for varsity or no less than wake them up.

They’re all teenagers so I don’t must get them ready but I actually have to bang on the door sometimes to rise up.

But the very first thing I’ll at all times do is check my positions for my automated systems and just make sure that things are in sync.

You recognize people have this mistaken concept that…

“Hey once I automate something the whole lot will work effective”

There are all forms of things that go fallacious, orders get missed because there’s a web disconnect.

You recognize things get recalculated sometimes there’s all forms of stuff.

You may have to envision your positions.

If I am going out somewhere, I either have a laptop with me or a tablet or my phone where I can get into my trading and I can see.

Am I synced up with my positions and all of that?

As I said, since I’m teaching a course, I’m often answering student emails, doing things along those lines, or creating latest course material or research.

I’m in a singular position because I can do research each for my trading after which the true good things I can share with students.

Like back a couple of months ago, I finished up a study where I ran 50 million backtest. It took months to run, but I got some really neat results out of it.

Then I used that in my trading.

I used to be in a position to also share it with students.

Ongoing research and strategy development, that’s a giant a part of my day too.

But the opposite nice thing, doing it full time, I do it from home.

My office is at all times here, that’s good and bad because my time it’s almost 11 p.m., and here I’m still working.

But…That’s what happens.

I get up in the course of the night, I’d work on a trading system at three o’clock within the morning.

Quite a lot of times my schedule becomes sort of chaotic because I just work every time I feel prefer it.

At the identical time, I actually have the liberty that…

“Hey, I don’t must do anything today aside from monitor my positions”

I can go have lunch with a friend and make it an extended lunch.

I could make a health care provider’s appointment, and never must worry about things.

There’s lots of flexibility in being a full-time trader together with the responsibility, but , if I needed to boil it down, I might say roughly half the time I’m working throughout the day is working on my trading either through monitoring positions.

Which usually doesn’t take that long or simply attempting to determine latest ways to do things.

Which incorporates approaches, and latest strategies that I’m testing.

Rayner (01:59:08.63)

I find it irresistible.

On top of that since your kids, they’re all teenagers, they don’t need your attention in comparison with after they were young right?

Kevin Davey (01:59:16.114)

Right.

Which is sweet and bad.

Because you’re keen on the times after they needed you for the whole lot and so they’d see you come home from school.

They arrive running to you.

Now it’s like I actually have to search out in the home.

Where are you?

“Oh, you didn’t even say hi to me today”

I assume there’s a balance between that and a part of getting old with the youngsters.

Rayner (01:59:47.866)

My time will come soon.

One other query I actually have for you, it’s a reasonably fun query, I wish to ask this. What has been something that you simply’ve purchased for below $100 that has made a giant difference to your life?

Kevin Davey (02:00:03.426)

Hmm, something that I’ve purchased below $100.

Well, this was right around $100, and this was a recent purchase.

I got it during Amazon Prime days.

It was an ice maker and sounds weird because everybody has one. But this creates a bit of chewy nugget.

If throughout the video you see me drinking.

I’m drinking some iced tea with those little ice nuggets and so they’re chewable.

It’s just something I’ve at all times chewed ice my whole life, you get that arduous ice and it almost breaks your teeth.

But that is like chewy ice.

I remember telling my wife, I used to be like…

“Hey, do you care if I purchase this? It’s around $100”

She just sort of checked out me like…

“You’re buying an ice maker?”

I’m like…

Yeah, however it’s…

Seriously, but now my kids are sort of like…

“What are you doing?”

I said, try it and so they’re like…

“Oh yeah, it’s chewy ice”

It’s like one in every of those purchases that’s just so bizarre, however it’s like really good. I’m like making cups of ice day by day just so I can chew on it.

It probably helps me keep the calories down from eating food.

Perhaps as a substitute of eating food, I’ll just chew ice and I get the identical effect. I don’t know.

Rayner (02:01:37.402)

Be an important investment. I can see the enjoyment in your face already as you’re telling me about this ice maker.

Kevin Davey (02:01:42.689)

Yeah, it’s a reasonably neat little thing.

Rayner (02:01:47.478)

Before you go, Kevin, where can the audience find you in the event that they need to learn more about algo trading, to learn more about what you do, where can they find you?

Kevin Davey (02:01:55.278)

Sure, you may go to my website.

It’s:

www.kjtradingsystems.com

In case you go to YouTube, you may just type in my name,

“Kevin Davey”

My channel will pop up.

It’s called “Algo Trading with Kevin Davey”.

You can too find me on Twitter.

My handle is “KJTrading”

But those are all easy ways to get ahold of me.

Probably the preferred with you viewers will probably be the YouTube channel.

As I said, for those who just type “Kevin Davey”

I needs to be like right up at the highest.

There are a few other Kevin Davies on the market.

One’s a brewer, he brews beer, and one’s an actor.

But I believe I do know I’m the one “Kevin Davey trader”.

So even for those who did “Kevin Davey trader”, I’ll pop up.

Rayner (02:02:51.494)

Yep, I think it needs to be quite easy because I attempted that myself.

“Kevin Davey trading”

You might be at the highest of the list.

It shouldn’t be difficult to seek out you.

So, Kevin, thanks a lot in your time. I appreciate it. I comprehend it’s late at night.

I mean, near midnight for you and also you’re still sharing such deep techniques and methods.

On the way you run algo trading.

Once more, Kevin, I appreciate your time.

Thanks a lot for being on the show.

The primary guest, I appreciate you and , being so quick to reply.

Thanks a lot once more, Kevin.

Kevin Davey (02:03:11.351)

Like I said, Rayner, thanks for having me on, and thanks for me being the primary.

I mean I’ve been following your YouTube channel for some time.

I actually have lots of my students who mention you and also you’re a reasonably popular guy.

It’s just great to be a component of this.

I appreciate it.

Rayner (02:03:41.938)

Pleasure is mine, Kevin.

Have an important evening.

We’ll be in contact and I’ll talk over with you soon.

Bye, my friend. Take care.

Kevin Davey (02:03:46.507)

All right, thanks.

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