MartinKronicle - How to Trade Like a Professional Trader


"Michael is a gifted trading mentor. Over the course of several initial conversations he was able to assess my situation and recommend trading strategies that were harmonious with my personality; while at the same time attending to my family’s financial needs. I cannot stress enough how life changing this was for me." --JC, Kansas


Study with the best to become a successful trader.


"This is a great book for novice and experienced traders. Soaking up its wisdom distilled from experience and introspection will help you become more successful. And that's true even if it doesn't make you a penny." --Aaron Brown, AQR

The financial impact of slippage is greatest on smaller accounts, largely because the dollar value is also larger in percentage terms.

It’s also killing the day traders who are trying to scalp for $200 / day and not doing it.

Not only are they not making the $200 / day, but those frequent losses are increased by 25% when you add in the slippage.

If the duration of the losing streak is several weeks, the trader could be down $2,000 on his trading P&L, but down $2,500 on his account.

The feeling of not wanting to stop the carnage and bull through it would be an excellent choice for an entry point during one’s Trading Tribe meeting. :)

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In today’s trading environment, you need more going for you than just a set of rules to make it as a trader. There’s compliance, clearing and execution, legal, accounting, and creating a track record.

Most traders don’t like the sales and marketing end, so they bury their heads and create trading models. Unfortunately, that is not the path to getting discovered by a seeder or allocator.

An aspiring PM or trader needs to begin the thought and planning processes at the same time they are developing their models.

If you don’t know what you’re doing, take a course in sales and marketing.

Michael Martin ends this podcast by reiterating why you need to have your own model that you yourself have developed.

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Andreas is the author of two of the best written books on Trend Following and Momentum Trading Systems.

Download the Andreas Clenow podcast from iTunes.

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Peter Brandt is the author of Diary of a Professional Commodity Trader and is the brains behind Factor Research.

Follow Peter on Twitter

Podcast Transcript

Michael Martin: Hey, everybody. It’s Mike Martin. Thanks for joining me today. Today I have another guest whose visit is long overdue. His name is Peter Brandt. He is the author, of course, of a great book called Diary of a Professional Commodity Trader: Lessons from 21 Weeks of Real Trading. It’s a great book. He’s also the brain power and the head honcho behind Factor Research. Right now he likes the yen, he likes the kiwi-yen cross, crude oil, and AVGO, and we’re going to talk to him about pattern recognition and what his job really is. Enjoy the show.

Announcer: You’re listening to the Michael Martin show. Michael Martin is the author of “The Inner Voice of Trading” and the founder of, an educational website where you can learn about trading and investing from world-renowned instructors such as Peter Borish and Scott Kaminski. Now here’s Michael Martin and today’s guest.

Michael Martin: So, Peter, I want to thank you for taking the time out and coming to the show. I think it’s long overdue. I’ve been a fan of your work for the longest time. Thanks for being here today.

Peter Brandt: Well thank you, Michael. Thanks for having me on. I love talking about the markets, trading have been my life for, well, another few years I’ll be able to say I’ve traded during the course of 6 different decades and I don’t think there’s a whole lot of folks out there that can make that claim. It’s probably longer than any one mortal should be allowed to trade the markets but they’ve given me a good ride over the years and I like being able to share when I can, what I can, and hope that it can be of some use to some of the folks out there.

Michael Martin: I’ll say. I mean just your book alone, I think it’s like you, Jim Rogers, and Soros, you’ve been trading the longest. That’s pretty good company to be in, Peter.

Peter Brandt: Yeah. I don’t consider myself in their company, necessarily. I mean those guys have managed an awful lot of money, but they trade, I think a little bit different size than I do, but it’s been great. I’ve met them both. Met them back in the days when I traded for Commodities Corp. They weren’t commodity corp traders but there were some awfully good people that traded for Commodities Corp back in the 80s: Paul Tudor Jones, Bruce Kovner, Michael Marcus, Ed Seykota, and actually Jack Schwager was back at Commodities Corp before me, as a matter of fact. So I’ve met a lot of very interesting people that are along for this roller coaster ride with me.

Michael Martin: Yeah and those are some … you know, you mentioned those names. A lot of those guys mentored me, which was a God send coming from where I’m coming from. I like how you post things going all the way back to your book “Diary,” and you said, “Speculation is mostly about managing risks.” That flies in the face of what a lot of folks in the media think speculation is and I thought that put it really in perspective that even as a speculator, your job is to manage risks. I’ve said speculation is really coming down to playing superior defense because if your winners work out they’ll take care of everything else.

Peter Brandt: That’s for sure. I’ve just found that if you can just stay in the game … how many times do you watch a football game or basketball game or whatever sport the it is? In a football game some team might be getting beat but still in the 4th quarter with 5 minutes to go they’re in the game. A lot can happen. A lot can happen if you stay in the game and that’s one of the things we really focus on in our proprietary trading firm and that’s what we do, we trade our own money, we don’t trade outside money, but it’s keeping our losses well managed. The guy that mentored me the most in the business was a trader at Cargill back when I was at the Board of Trade. He used to tell me, and I learned so much from him, he’s deceased now, but he would always say that his job as a trader was to take losses. That was his role. His job was to take losses and if he would do that and ignore his winners he’d be okay at the end of the year.

That was a great lesson to learn and he taught me that you give a market 2 days. If it can’t be in the black in 2 days, you’re out. You don’t take a loss on a weekend. You look at what your positions are Friday afternoon and you clean out anything that’s got red ink on it and you’re just constantly, constantly cleaning up your portfolio getting rid of your losses and things have a tendency to work out. That’s not true every week, every month and actually it’s not even true every year. I’ve had a few losing years along the way. 5, as a matter of fact, since 1979, so there are good times, there are bad times but if you really take care of managing losses and cutting your risks quickly that goes a long way toward eventually putting in a bottom line that can compound over time.

People come in and want to do these obscene, unachievable numbers in their performance and you see, sometimes, people promoting performance that quite frankly just cannot be sustained. The key is to get acceptable performance and let it compound itself over years. If you look at trading not as a sprint but really look at it as a marathon. I tell people, “You trade in such a way that you can be around in 30 years.” At least the younger guys, trade in a way that’ll keep you in the game for 30 years and you’ll do just fine.

Michael Martin: It’s amazing how, like I’ve heard Ace Greenberg say, “If we’re showing a loss on Friday it trades,” and they don’t take it home with them and in my teaching, too, every once in a while someone will come by and say, “I’ve been trying to trade the NASDAQ 100” or something and they have limited capital and so immediately I start thinking, “This is a person who is afraid to really take a loss,” and I don’t mean a big 5% loss, but I mean enough of a loss where you give your system or your rules a chance to win. I just think more guys waste so much time trying to day trade because they’re afraid to really trade that they’re trying to outsmart the market. I always say “You shouldn’t even do it. You should not even trade because you’re going to get frustrated. You’re going to lose money. You’re going to take your hundred grand down to 80. You’re going to be angry and bitter and no one can tell you what to do, but I haven’t seen anyone do what you want to do and take that hundred grand up to 200 by the end of the year just by thinking that they can scalp 200 bucks at a clip.” It doesn’t work that way. It’s too hard.

Peter Brandt: Oh, no, it doesn’t. I think that’s particularly true with people that hear about trading and they hear it’s so glamorous and they hear the success stories, and of course that’s what appeals to them. I can’t quite believe the number of people who want to be day traders. I’ve never really understood that. I did when I was on the floor because that’s what floor traders did. Floor traders would day trade their … they minute traded. They just constantly made a market and that’s how they made their living but for the most part I think to get an edge day trading I think is just a very, very difficult job to do. Day in and day out. My edge comes from a couple of things that’s not day trading. For one thing I think I gain an edge by my ability or willingness to sit with a trade for 3 weeks, 4 weeks. I think last year I had a trade that lasted 7 months. It was a currency trade. That’s one of the ways that I think I gain an edge over the market is my willingness to stay with winners to the point where it drives me crazy that I still have a trade on but nevertheless as long as it wants to continue to go my way to be willing to ride it.

So a lot of little losses and a few big winners. That’s one of the metrics we look at, Michael, is where our bottom line comes from as a trading firm. We generally will do somewhere in the area of maybe 100 to 120 trades a year. Now that’s globally, that’s all futures markets, globally that’s all Forex, major Forex pairs as well as some exotics. That’ll cover maybe 50 different themes, so we may have a short dollar theme or we may have a long metals theme and so we’re trading 40 to 50 themes a year but our net bottom line only comes from maybe 7 or 8 of those themes. That’s been pretty consistent over the years is we can get 15% of our themes to produce our bottom line and then we let the other 85% of our trades cancel each other out. You’ve got a lot of little losers and you’ve got a few minor winners, a bunch of trades that scratch, and then at the end you can have 15% of your trades as a position trader which puts in your bottom line. I think that’s the goal, so losing doesn’t bother us. We don’t mind losing on trades. Taking small losses on trades is, I think, part of the way to last in the game.

Michael Martin: Yeah, when you’re a professional trader losses is part of the business. We used to call it systematic attrition of capital until you hook the big one, and you don’t know when that’s coming. It might be after 4 losers, might be after 12, but it goes along the lines of what you were saying in your recent newsletters. My job as a trader is primarily that of managing the placement of orders. It’s a glorified order enterer. I think that puts into sharp relief just how much work you have to do to manage the risks. It’s really managing your stops, or at least in my mind’s eye. I trade with stops, so it’s a question of always managing those stops.

Peter Brandt: That’s right. We view our job as something that takes place when markets aren’t open. It’s the final 5 minutes of the day when we put in orders or execute orders and it’s usually the time between when markets close and then reopen, there’s a brief window of time for the 24 hour markets. That’s when our work takes place. We’re coming, actually, into our trading day right now. It’s usually between quarter to 4 mountain time and 4:30 is when we do our heavy lifting because that’s when we change orders and then most of the time during the day we get busy and we do other things, but we don’t sit and watch the market. We have a general policy that if you watch the market long enough you’ll find a way to lose money.

The idea is you do your work before that. Thinking about an Olympic athlete who’s going to be performing in the Olympic games in Brazil coming up, let’s say they’re going to be the sprinter or they’re going to be a marathon runner, their work all takes place before the race. They’ve done their homework, they’ve done their preparation and they’re set to go. We just simply, we enter orders. That’s what we do. We enter orders and we change orders and we try to always carry orders which, based on the way we trade, makes sense. We have no idea in advance whether a trade is going to be a winner or a loser. The only thing that we can control is the orders that we place into the market. We have no control over what a market’s going to do. We have no control over whether a trade’s going to be a winner or a loser. That is outside of our ability to have any influence on those types of things.

What we do have control over is based on the way we trade, which is classical charting principles, is the orders that we’re putting in now for overnight and the orders that we’ll put in tomorrow morning. Do they make sense? Will we be able to look at the charts a year from now and say, “that was a good trade?” It’s possible in our minds to have good trades that are losses and it’s possible to have stupid trades that make money. Well, I’m more interested in finding good trades and hopefully if you commit yourself to excellence in the trades, in the orders that you place, your hope is that over a period of time that the markets will reward you for doing so.

Michael Martin: I think so. I think they do if you have the discipline and the diligence. I work a lot with Peter Borish and Scott Kaminski, two guys of Tudor, and they used to say, one of Paul’s favorite sayings was that trading takes place between 5PM and 10PM. After the close.

Peter Brandt: Yeah well, it’s so true. Those are good names that you mentioned, those are excellent traders.

Michael Martin: Well they think highly of you, as well. I wanted to talk about, also, factor research. I know there’s a few names that you like out there but before we do I want to put the research itself into context for folks. I know you have, especially at the front half of Diary, you have a lot of work on patterns. I’m just wondering, you rely on, it looks like, about 18 or so different patterns that you mention, that you write about in the book. Do you ever see a certain group of patterns that work well together? Like if one shows up after the other and then yet a 3rd has shown up, like a sequence of patterns that tend to be really bullish or really, really bearish in terms of your set ups?

Peter Brandt: I guess I wouldn’t put it quite that way, Michael. I guess what I’d say is that we’ve found that certain patterns tend to provide less frustration than other patterns and so rather than focus on what patterns are going to produce the profits, although ultimately that’s what you have to do, is what patterns will actually give you a chance that provide the less frustration, have the greatest chance to succeed? For us those would be the head and shoulders, the rectangle, and the right angle triangles, which would be an ascending or a descending triangle. For us those are the patterns that I think pay the bills. Sure, there are a lot of patterns out there but those are the patterns we like and I think, more specifically, we like patterns where markets break out of a horizontal boundary.

We do not like trend lines. We don’t use indicators. We don’t believe in indicators, quite frankly. We think they’re a crutch to a certain degree, and so we do not like symmetrical triangles although we do trade them from time to time, and we like patterns that generally take 10 to 12 weeks or longer to build. We’re trading a couple things right now on patterns that have taken more than a year to build, but generally speaking I would say a 12 to 20 week head and shoulders or a 12 to 20 week rectangle or right angle triangle, those are the patterns that we like the best.

Michael Martin: When I think of head and shoulders I think of like a reversal on some level and a lot of money could be moved at those reversals. You have to wait, though. You know, waiting a year for the thing to show up and to complete means you have to have patience and a lot of folks don’t like to have patience. They want the action. They want to be in there. They think, “Hey if the E-Mini is moving 30 points I’ve missed an opportunity,” and the way I look at classical charting, which I think is a form of discretionary trading, it’s your job for those of you listening to disqualify charts and to disqualify names. You can’t look and try to find opportunity in every security that’s out there and being a fan-boy of Apple, for example, can often time get you killed and blow up your equity. What do you think about that, Peter?

Peter Brandt: I just don’t think you can get married to a particular idea. You’ve got to, as a chartist, you bring your biases into a chart it usually will not work out in your favor. You’ve got to be willing, if you’re a technician, to go where your signals take you. The reality is sometimes people just get so locked up on the need to trade one market. I think in particular the Mini S&P, that’s probably the favorite market overall of people to trade. We’ve only traded the S&P 3, 4, maybe 3 times in the last 12 months. Well if I had to trade the S&P every day I’d be under water, although we’ve had some nice trades in the S&Ps but I can’t depend on the S&Ps to pay my bills this week or this month. If I had to think, “Well you know I’ve got a car payment coming due or health insurance or a mortgage payment therefore I need to find a trade in a particular market or a small group of markets,” that would be a point of desperation for me.

So it really doesn’t matter to us whether we take money out of the S&Ps or Robusta Coffee in London or the KOSPI Index in Korea or the Hang Seng or the Nifty Fifty or whatever the case may be. We need to go where the strongest signals are for us and I think it’s a real advantage to us that we’re not locked into a given market. We look at probably 50 to 60 markets on a weekend to determine our candidate trades and from that we may only trade once or twice in a week. So all of our preparation is toward that. So we don’t know week in or week out where our signals are going to come from. We have an idea that they will come from a certain small group of markets but that changes over time and so I’m sure glad that we’re not locked into just 1 or 2 markets, that we have the flexibility to move to, really, the markets that give us the best opportunity.

Michael Martin: Yeah I like how when you’re going through, you were listing the names before, you’re not trading just domestic securities nor are you … you have to go to other places often times to get access to those exchanges where you’re trading those instruments so I like how you’re looking beyond just what’s readily available to you. I think it opens up an investment horizon and universe that gives you more to choose from and if we’re taking a longer term approach, most things aren’t trending or working out most of the time. So you really need to see a more diverse list of potential vehicles to trade.

Peter Brandt: You know, it’s always interesting for us when we look back at a year as to where our profits came from because sometimes it can come from very surprising places. I know right now if we look at our stock portfolio side of our trading, we own more stocks in foreign exchanges than we do in the US. We own some stocks in Poland, we own some stocks in Australia. We’re looking for opportunities. We’re not really biased that it has to be in this market or that market. That, to us, really doesn’t matter. We’re constantly rotating our book around to try to find the markets that are moving on the time-frame that we want to be trading, which is a position trade that’s going to last anywhere from 4 weeks to 4 or 5 months, so that’s the focus of our attention. We don’t necessarily place a name to it. The name at the top of the chart doesn’t matter to us. It’s the price scale that comes on the right hand side of the chart, that’s the focus of our attention.

Michael Martin: As it should be. Now when you’re in a position and volatility changes, does that affect … like do you trim the hedges or, how do you handle that?

Peter Brandt: Well we want volatility, we just want volatility … I mean we make money off of volatility. So when somebody says, “Wow the markets have got a lot of volatility,” that’s not necessarily a bad thing. We just want to see volatility that goes in the direction of our trade. When we see an expansion of volatility that is what we actually want. When we see volatility that moves in both directions that just doesn’t make sense to us then that’s a good sign for us to be not pursuing a trade in a particular market. So we like to see volatility that’s thrusting volatility and not chopping volatility, but an expansion of trading ranges, oh yes. We love to see an expansion of trading ranges, but we want to see those trading ranges on a directional basis and not in a trading range. So absolutely the biggest profits that we have during the year are markets that greatly expand trading ranges and if we were an indicator trader and worried about a market being overbought, for instance, we love being long overbought markets because bull markets not only become overbought, they become grossly overbought.

Michael Martin: Yeah.

Peter Brandt: When a market is grossly overbought is when it really offers the best opportunity. Markets can remain grossly overbought, depending on the measure you’re looking at for a considerable period of time. Markets cannot be grossly oversold for a considerable period of time. Grossly oversold markets have the tendency for mean reversion more than grossly overbought markets. That’s why we generally are not oriented toward indicators, thinking that indicators are basically a derivative of price.

Michael Martin: Right.

Peter Brandt: So why in the world would we want to study a derivative of price when we can study price, itself?

Michael Martin: Yeah, I’ve said something like that many, many times, too. It’s like what’s the point of MACD when you can just look at the price? I mean you can probably make an argument for relative strength if you’re a big equity player and volatility is just for risk management, but other than that I usually refer to indicators and chart overlays as emotional band-aids because it helps you try to find a trade when there’s not one there, and life’s just really good if you keep things simple. If there’s no chart pattern that makes sense then there’s no business to be in the trade because, I think it was Gordon Gekko said “a fool and their money are lucky to get together in the first place.” That defines me, pretty much, so I don’t want to be …

Peter Brandt: Well and I don’t want to be away from my money very long when it comes to these markets, as well. Yeah, and that for us is really the key to the idea that for the most part we do not actually study markets. We don’t study charts. I’ll hear periodically people talking about, “Well I need to take this chart and study it.” As if there’s an answer to be had. As if, if you only study a chart long enough you will unlock some secret. I think that’s the biggest fault that I can find in Elliott Wave Theory, is the belief that you can always identify the wave count. There’s a wave count that is always predictive, where in classical charting, I think using classical charting principles most markets most of the time don’t make any sense. It’s noise. Really classical charting is only valuable in a market in brief windows of time.

Now if somebody can feel like they can find a way to study a market where they can have an appraisal over the market, well I welcome them to that pursuit and wish them luck but that is not the philosophy that we use in our trading. We use a philosophy that really there’s only going to be 2 or 3, maybe 4 days in the course of an entire year in the course of a single market when action needs to be taken and the rest of the time we can sit and study charts all we want. Our general rule is if we have to spend any more than 2 or 3 seconds on a chart, looking at a chart for the first time, without having a trade find us, then we’re not going to find a trade. Good trades will have a way of finding a patient trader. Impatient traders will spend a lot of time looking for trades and generally won’t find very many good ones.

Michael Martin: Yeah. I agree wholeheartedly. I think, just to give some folks some context, if I have to look through, say, 4 dozen charts it would take me 15 minutes and of those 48 there may be 2 charts where there’s actually a trade. There might be 2 or 3 others where it looks like there could be something soon but it depends how it works out. So there’s not a lot of work to be done, you can just look at a chart and say “there’s nothing here” or “it’s not my trade.” That in and of itself sounds like discretion but it’s systematized because of the discipline involved and folks like Peter have the discipline and the sense of personal trust in themselves to replicate that day after day after day and you don’t have his type of track record without being able to do that. So, again, when you start thinking about system verses discretion there’s some folks out there who think discretion’s a bad word and I don’t.

A lot of the traders that I know, even at Commodities Corporation, they were discretionary chart readers. I don’t know why anyone would think that that wasn’t a valid way to trade because those guys made history. They made a lot of money, but they made history.

Peter Brandt: Well that was interesting because you know Commodities Corp started as a systematic house. That was the entire concept of the firm when it started out, was that it could computerize the markets. The futures and the Forex markets and trade them with systematic approaches and they had some success with it, although I think the traders that made the biggest mark on Commodities Corp were discretionary guys. I think the argument goes that systematic trading has an advantage over discretionary trading and I think for some people that may be the case. I think there are some traders that really have no business being discretionary traders. They’d be far better off being systems traders, but I think that for us being discretionary traders allow us the opportunity to be very heavy in some trades and not in others.

The key that I look at is to try to find trades that have extremely lopsided a-symmetrical reward to risk profiles. It takes a long time to get a sense for what those trades are but when you can find them, that’s an edge. If I’m going to bet 1% of my capital on 1 trade and I do the same 1% trade after trade after trade, that will give me one output, but if I’m willing to, let’s say, only risk a half of 1% on one trade but there may be 4 or 5 or 6 trades that come along during the course of the year where I’m willing to risk 2% of my capital on the trade, well if I’m wrong on those 2% it’s going to hurt me but I believe that my edge comes from an ability to be able to sniff out those trades that can give me that ability to take an over-leveraged position. One examples for us here in recent months had been the Japanese yen. It’s been an outstanding trade for us.

The Canadian dollar earlier in the year was probably the biggest trade that we’ve had all year and it was a trade in which because of our discretionary orientation we were able to take a position of almost 3 futures contracts for $100,000 of capital where a typical position size for us is only maybe 8 contracts per million. In the Canadian dollar we were at almost 22, 23 contracts per million, so really almost 3 times the leverage. If you can be right on just a few of those a year at the same time cutting your losses when you’re wrong on them, that to me is really where the payoff in discretionary trading comes, is not necessarily the discretion to be able to determine in trade, but the discretion to determine when it’s time to “bet the farm.” I don’t mean that in seriousness, we never bet the farm, but we may bet 2% plus, up to 3% plus on very rare occasions of our capital on an individual trade. I think as a discretionary trader that’s really where an edge can be gained.

Michael Martin: I agree and I’m glad that you said it because I talk about Michael Marcus quite a bit, he had a big influence on me, and at the end of the day they were discretionary traders. They were not systematized trend followers or what have you. That was just their style. It doesn’t make them good or bad, I mean they happened to have really great results, but there really were no simulators back then. There were a couple of guys who were trying to … I know Morry Markovitz was working on some stuff, I know Ed Seykota had something, and I think Frank Vannerson was working on something and they were all kind of sharing notes. There’s nothing wrong with what you’re talking about. When you speak about having different degrees of leverage, in my humble opinion I think it’s almost sometimes easier to read the crowd trading a certain instrument than to figure out the instrument itself. A lot of systems, is you will, like the computerized mechanized systems, don’t pick that up. You need to know, especially if it comes down to mucking your cards, protecting capital, that in and of itself can give you a great edge.

Peter Brandt: Yeah well I think that’s well said, Michael.

Michael Martin: What I also like about what you do, Peter, is that you’re looking at … like one of the things you have in your recent research note that you were nice enough to send me is that you got a kiwi-yen cross. I think that, again, opens up your minds. If you’re trading currency futures contracts, everything is diffused by the US dollar. If you look at crosses it really opens up your horizons as well and takes you out of dollar denominated long or short trades, right? Because if you’re long the loon then you’re short the dollar. Everything is either long or short the dollar by virtue of what you’re doing in the futures market but when you go inter-bank you can create these crosses that don’t necessarily have to be exotic but they come up with things that you wouldn’t otherwise see. Otherwise you wouldn’t see them. I like how you look at those, as well. I think it’s very erudite.

Peter Brandt: I mean, you can be wrong on some but some of the best trades we’ve had in the last 12 months have been non-US dollar denominated trades. We had a very nice trade on the Aussie New Zealand dollar. We had a very excellent trade in being long euro and short the British pound and those are trades that we don’t have a dollar risk in. Which is an interesting thing, is people say, “Well they don’t want to be short,” but the reality is anybody who trades stock takes a short dollar position. If you own Apple, that is a trade that basically is long Apple, short dollar.

Michael Martin: Right.

Peter Brandt: So you’re always … people say, “Well I don’t want to trade currencies.” Well anyone who trades the stock market is trading currencies.

Michael Martin: Yeah, I know.

Peter Brandt: We think there are some very good opportunities in non-dollar denominated Forex crosses that people overlook, but to do that, of course, you need to enter the Forex market which can be a dangerous world for people who don’t really know what they’re doing.

Michael Martin: Yeah, I mean it’s dangerous because of the entities that are clearing and it’s also dangerous because if you don’t have a absolute healthy respect for leverage and the conjugation of your feelings about making money and what leverage can do to you, you can find yourself without a trading account because in about 3 second those markets can move quickly and consume your deposit faster than you could blink an eye, and I’m not even kidding.

Peter Brandt: Well yeah. When you’re trading a market where your leverage is 20 to 1, which often is the case. Each Forex dealer is a little bit different and as larger traders we tend to get better lever than sometimes smaller traders, but even small traders can lever at 10 to 1 or 20 to 1 in a Forex trade and that doesn’t equal size. That just equals cash management. For us we love leveraged markets because it gives us such a fabulous opportunity to manage our cash. Seldom do we have any more than 15% of our trading account placed into the form of margin commitment. I think there’s probably a number of novice traders that would say, “What a waste of your money that you only have 15% that you’re using, that you broker, to cover positions. Why aren’t you using 80% of your money or 90% of your money?” Well that’s a great way to get skinned real quickly, when you put that kind of leverage on.

We always want to be conservative in our leverage, so rarely will we reach a point where our margin to equity ration in futures and Forex exceed 15 to 20% of our capital, which for us is the reason we trade stock market. We don’t necessarily trade the stock market because we think that we can make great gains in the stock market. When you can get a stock where you can make a nice profit, that’s wonderful, but for us if we think that we’ve got 85% of our capital in cash sitting idle at any given time, the question for us is we can either make 40 or 50 basis points in treasury bills, which is a non-risk position, or we can try to make 3 or 4 or 5% of our money with that 85% in trading equities, particularly equities that might pay a dividend. If we can find equities that pay a dividend and be able to trade them in such way where we’re not going to take a loss on share price all of a sudden we’ve used the 85% of our capital that’s sitting idle to a very, very good degree. That’s really our motivation to trade stocks is to see if we can find a better way for the bulk of our cash that’s sitting idle to be used as opposed to just parking it in cash or in T-bills.

Michael Martin: Love it. Although it’s taxed differently when you can get something with an average … if you get 80% of 4% you’re adding another 300 basis points to your bottom line. That’s just smart business, right? That’s smart business.

Peter Brandt: Well it is and for us it’s a reason why in Forex if we have the option between trading a spot Forex position in cash verses futures, we will trade it usually in futures because futures markets for US citizens are treated 60% long term and 40% short term, is the way the 1256 tax code is written.

Michael Martin: Right.

Peter Brandt: Although as a trading firm we can ask for the same application in spot Forex but it’s a little bit more complicated to do.

Michael Martin: Yes. I understand. Now I’m not calling you on this, I just want to, again, put it in some context. For the younger guys out there who are looking for allocations or you’re going to 3rd party marketers, once your margin-to-equity ratio goes over 12% you’re probably in a realm that’s considered aggressive even though margin-to-equity is not necessarily a risk management tool. So, again, it depends who you’re speaking with and it also … look, if you’re coming in with 50, 60 years of trading experience, no one’s going to say anything, but for the newer folks out there trying to build a track record or going to Fund Seeder you want to be mindful of how much leverage you’re using. When George Soros and Jim Rogers were trading Quantum they would find new ideas and they’d have to offset existing positions to find the cash to put those trades on. They were highly levered to the point where there was no cash left and even Jim said to me in an interview that that was insane. That was insane amount of leverage.

They were very, very good at what they did and they proved it. They did it for at least 10 years. So you want to be careful when you’re using leverage because those markets move good. They move very, very quickly. In my humble opinion, when a currency starts to trend they’re based on these macro economic factors of the country and they can often times trend for long periods of time. That’s what I’m doing it for, is I’d rather have my money and my leverage working for me. When you can do that with the confluence of time, well now I’ve taken trading from a blue collar despair job to one where I can kind of sit back and do what Peter’s doing which is effectively managing my orders. Managing my protective stops and investing my gains into my stops and going about life that way. Life gets really easy if you just let the market do the work.

Peter Brandt: You also, you mentioned something Michael. We could have a margin-to-equity ratio at 15% that would have one level of risk or another portfolio at 15% margin-to-equity that had 3 times the risk. It depends on the correlation of positions. If we’re short the NASDAQ and then we short the S&Ps, that’s just like the same short.

Michael Martin: Right.

Peter Brandt: So we’re always cognizant of correlation and that’s particularly true when you move into the currency markets, is correlation. For us being long the dollar index and short the euro is basically the same position and we may get signals of both. We always are looking at correlated basis point risk. We are always focused on basis points. We take positions based on basis points and we think of it in that way. Right now we have a position on in silver, which is a 64 basis point risk, and that’s how we size trades and that’s how we think of trades, is “What is our basis point risk in silver?” Well all of a sudden if we put on a 60 basis point risk trade in gold we’re up to 124 basis point correlated risk. We always need to be thinking about that.

That’s where Ray Dalio and Bridgewater has been so good over the years. They find global trading themes that don’t have correlation. Extremely, extremely … probably nobody better in the world than Bridgewater at finding massive trading themes in which they can employ billions of dollars into different trading themes that don’t have correlation. That’s a real skill and I think that if one is a position trader, and particularly, you just always have to be aware of the fact at how correlated are the positions you’re carrying?

Michael Martin: Especially when you’re trading billions because very quickly you could find out that you’re a beached whale and it’s impossible to unwind a losing position in that regard. I wanted to talk about, bringing it back here as we kind of wind down, something that you wrote about in the book that I thought was very wise and I think it was originated by a wise man named Richard Donchian. It was what he called his weekend rule.

Peter Brandt: Yep.

Michael Martin: If you read “Diary” very, very quickly you might have missed it because there was so much other really good stuff in there, but Donchian and Amos Hostetter have a profound effect on what I do and how I trade, and I just thought that that was such a gem in the book. I hope everyone got it.

Peter Brandt: Yeah, well, Amos of course is one of the founding names in Commodities Corp, he was one of the pioneers of Commodities Corp, but Donchian was really the original – I would say – the original trend power and probably the original money manager in commodity futures back when commodities were not really included much in consideration of the hedge fund world. It goes along, the concept, Michael, that during the course of the day you have a lot of noise. There’s tons of noise that takes place. Markets are up and down and it’s pretty undependable whether you get a market thrust or a market break. More often than not they don’t hold, but the most important price of the day is the closing price because that’s the price at which all the day traders have gone home and all the high frequency trading operations have gone home, and it represents the price at which people like me have to put up margin with exchange clearing firms.

So I particularly have a commitment if I’m having to live overnight with this soybean order in the middle of the summer when it might rain or it might have conditions in the fall where you freeze out a crop. For me to hold the position overnight has more risk than for me to hold the position for 2 minutes. So it’s particularly true that the most important, along the same lines of thinking, the most important single price of the week is the Friday closing price because that’s the price at which people who are holding positions are willing to take a 2 day risk. They’re willing to hold a position for an entire weekend and that takes a certain amount of conviction. So you get rid of all of the squirmish money and you have the ability to condense that down to the people who really are willing to [inaudible 00:50:15] themselves to a position.

I think the Donchian weekend rule is most appropriate is when you have a 3-day weekend in the US. Where Friday is a holiday or Monday is a holiday, we often have that around Thanksgiving or during the Christmas season. Easter we have that. Memorial day, Labor day, we run into 3-day weekends and when you find a market that has a very strong move and can make, let’s say, a 6 or a 12 month new high, breaking out of the congestion zone, and that happens on a Friday going into a 3-day weekend or on a Thursday going into a 3-day weekend where Friday is a holiday, that is a very significant 1-day price move. It’s something that we always pay attention to, is are we getting a breakout on a Friday? We look at candlestick charts. Are we getting a big, wide bodied chart that’s making a significant new high or low on a Friday, particularly on a Friday or a Thursday going into a 3-day weekend. That, for us, is always worth an additional 50 basis points of risk.

Michael Martin: The one thing I love about taking stuff home over the weekend in strong trending markets is that if it is going to gap, it’s going to gap with you not against you. That’s the kind of risk that it makes a lot of sense to get paid for, is that when you take it home you’re dealing with people who have really strong hands and probably strong stomach linings too, but let the market do the work. You’ve already gotten yourself in the trade. You may have unrealized gains. Stay with it. There’s no sense in taking it off over the weekend. If it’s working out for you then let it continue to work out. The market will tell you when the move is done. You just have to listen.

Peter Brandt: Yep, that’s very true. One thing we’ve found particularly in the S&P and as well in some currency markets is what’s a market going to do on the weekend coming into a new year? Often times you get a holiday on New Year’s day. This last year I think New Year’s day was a Monday, and so the markets didn’t open until Tuesday for most people in the world but yet you had the electronic markets opening on Sunday. On the 31st. So sometimes some of the biggest trends began on the very first trading day of the year, so we’re particularly and keenly alert to what markets do during times like that because it often sets the tone. There’s a trade that we look for every year which we call the January effect, and it affects the euro currency, is that in I think the last 18 out of 21 or 22 years the euro currency has made its annual high or low in January in like 18 out of the last 22 years. So we’re particularly looking at what the price action of the euro currency is in January because it may set the tone for how we’re going to trade that currency the entire rest of the year.

Michael Martin: That’s good stuff. I appreciate your wisdom and your insight. It’s obviously great having you. I’d like to have you back.

Peter Brandt: Yeah, thank you for having me on Michael. Have a good day. Have a good trading year ahead of you.

Michael Martin: Want to support this podcast and at the same time learn some awesome trading techniques from my mentors and some of the guests on this show? Go to and join my trading insight list. Each week we’ll send you key insights and tips that we’ve accumulated over the 200 plus years of experience that we have. See you next time.

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