The strategy fits your lifestyle. You can live by the ocean in Europe and swim every day, or you can live in the American suburbs and take your kids to soccer practice. You can live life on your own terms, because you’ll be making passive income while you sleep.
No more reporting to bosses, no schedule that tells you where you need to be or what you should be doing. Instead of other people deciding how you should live, your life is up to you.
If you don’t want to work one day, you won’t work, because you have enough passive income coming in to cover your expenses, and then some. If you want a longer conversation with your wife or kids, you’ll have it. You have the maximum amount of joy and freedom possible, because every day, you create the most perfect day you can imagine.
You had to work hard, up front, of course, to build your automated trading strategy. But it has granted you lifelong financial independence, allowing you to live wherever you want and do whatever you want. You can work on passion projects, stay active, travel whenever you want, and spend uninterrupted quality time with family and friends.
That’s my life right now.
I’m really not trying to brag. The truth is, my editor had to wring that description out of me, because after having freedom for so long, it seems normal to me. It’s how life should be, for anyone who wants it. And there’s zero reason you can’t have it, too.
You’ll have to want it badly enough to work hard at first. Fortunately for you, I’ll lay out each step in this book, and once you’re done, it will only require thirty minutes of daily maintenance.
I have students who are successful, highly paid executives, but they still have to deal with nagging bosses, annoying bureaucracy, and management telling them what to do. They have pressure, deadlines, and targets to meet. It causes a lot of stress, and they’re uncomfortable.
For all of them, there comes a time when they say it’s not worth the money.
Are you in the same boat?
It’s your turn to create financial freedom without the obligations of a stressful job. Here are the basics.
Trade once a day—no intraday market monitoring required. You enter your trades and download the new updated historical data from your data provider, because that data will tell you what to do tomorrow. Then you open your trading software (your scanning and back-testing software), and you scan the previous day’s data. Your software tells you which new positions to enter, based on the proven rules you programmed into it long ago.
In five minutes, your computer will calculate what you should do. Do you need to adjust existing orders? Close out current positions? This would take you days to calculate—scanning the complete universe of approximately seven thousand US-listed stocks, and generating perfect trading decisions on when to buy and sell. The computer does that in minutes, emotion-, stress-, and error-free.
You will never have to monitor your positions during the day. The only thing that monitoring can do is provoke you to override your proven strategy. The same goes for TV and news. The Fed is making an announcement? Ignore it. Ignore it all, and live your life, while the strategy makes you money.
Most traders let their lives be guided by the news—by the latest profit warning, corporate action, or Fed announcement. It causes useless stress, and it’s nothing more than guessing.
Let’s say I’m trading for an investor, and something like Brexit happens. Of course, it was all over the news. Everyone said it was a disaster. I read the news after coming home from dinner at 1:00 a.m. one night, and I shrugged. It was interesting, but I wasn’t at all worried about my portfolio. In fact, I was excited to see what the day would bring, because my strategy was prepared.
I went into the office early to look at my positions, and I was market-neutral invested, meaning that I had both long and short positions, and was completely hedged.
For half of the day, I had to ease the concerns of unnecessarily anxious investors. I understood why they were worried, but they didn’t need to be. Our automated strategies were prepared for all market conditions, even extreme ones like Brexit. They couldn’t avoid the constant news message shouting fear and doom—analysts telling you exactly what would happen, based on nothing.
I had people calling me expressing concern, even though they knew nothing about my positions. Most people can’t ignore the fear and noise in media.
The markets went way down for a few days, then reacted sharply the other way, and nobody talks about it anymore. It was just noise.
Whenever there is news, I get calls. It’s amazing. Mostly when that happens, my mean-reversion strategies, which buy fear, work well. It doesn’t matter, though, because statistical strategies and automation mean that news is irrelevant. I don’t need to have any anxiety, and neither do the people you trade for.
You have clear rules on when to buy or sell, and your software tells you exactly what to do. You follow its instructions, because you put in the hard work beforehand to ensure you are following a proven formula to make money, long term. The agenda of the news and the whims of your emotions are completely absent.
I’ll take you through, step by step, but it’s simple. Trading doesn’t have to be hard—as long as you follow the rules, and as long as you create a strategy that suits your personality, your lifestyle, and your risk tolerance. The first step is rigorous self-analysis, which I’ll walk you through in the book. What are your beliefs of the markets? Do you like trend following? Mean reversion? Why? Do you want to trade both long and short, or just long? Do you want to enter orders daily, weekly, or monthly? Are you patient or impatient, and what does that mean for your potential strategy?
The clearer your objectives, the easier it is to define your exact strategy, as we’ll discuss in part 3.
There are many strategies that work, but only the one you pick has to fit your unique situation. The strategies use the same fundamental principles, but their execution is different, and if they don’t fit your personality, you will fail. It’s not that hard to consistently beat the markets, year after year, once you’ve determined your ideal strategy. But if you don’t take the time to analyze yourself, you’ll override your strategy.
Our emotions often unconsciously get the best of us, which is why I automate everything. Automation takes emotion completely out of the equation. It’s just a computer crunching numbers, and you blindly obey.
I advocate strategic trading, as opposed to discretionary trading.
Discretionary traders are trying to anticipate what the market will do, by perfectly analyzing information. The information is imperfect, though, and analyzing it perfectly takes Buffett-esque skill. It’s subjective. Discretionary traders follow loose rules, which make them vulnerable to emotional swings. They need to be “right” in picking stocks, so they often take losses personally. When they’re wrong, their ego is hurt. They’re very “flavor of the month,” using a variety of indicators based on the times. Some use macroeconomic indicators, chart patterns, or even news. It’s nonquantitative, and they generally have a tiny watch list of stocks and markets to trade, because they can’t possibly track the whole trading universe like computers.
Strategic traders are virtually the opposite. They aren’t anticipating what the market is doing; they’re participating in what the market is actually, currently doing. It’s a humble, realistic approach that takes ego out of the equation. They follow prices, rather than information. They have a few rules that are strict and well defined, to govern their entries, exits, risk management, and position sizing. Because their ego is absent, they’re unemotional when they underperform. All that means is the market wasn’t conducive to their strategy at that time, but they will win long term. They always use the same, technical indicators to determine entries and exits, and they are able to trade many markets and stocks. They don’t need to be experts on the fundamentals, like a Warren Buffett.
While discretionary traders are stressing about what the news means, strategic traders are reacting to current, actual market co
nditions. There is no opinion or prediction, just a predetermined, automated response from their proven strategies.
Clearly, the strategic approach is superior, but it’s not easy to follow. You’ll only follow your strategy if you believe in it deep down, psychologically.
Have you ever seen a day trader? They’re stressed out of their mind, and most of them lose. The biggest reason people fail in trading is because their emotions commandeer their decision making. They haven’t taken the time to define their beliefs and strategies and program them into an automatic process. They have some ideas, maybe some great ideas, but there’s no way they can overcome their emotions and act consistently, as the markets move up and down, and the pundits scream and shout.
This is why I ignore the news and let my computer do the work for me. Computers don’t feel stress; let them handle the grunt work.
You put in work up front. What do you get?
You no longer need a nine-to-five job. No more rat race—you’re set for life, financially. You can live and work where you want. You can travel wherever you want, whenever you want, and still make money every day, with just thirty minutes of daily maintenance.
You don’t have to open a newspaper, read expensive newsletters, or watch TV.
You spend time with family and friends, doing what you want.
It’s real, it’s what I do, and I’m going to show you how I do it.
I started trading in 2000 while helping manage my family’s large retirement account, which was completely invested in a fundamental trading approach. It was managed by a high-profile wealth management bank in the Netherlands, in a huge, wonderful, classic, expensive building.
I saw the fancy building and people and couldn’t help but think, Wow, they must be smart. I saw all the money behind it and met with the manager; they had so much knowledge, as well as massive research reports. In the beginning, I was overwhelmed and impressed, like most people. But I started monitoring that account right after the dot-com boom had ended, and in two or three months, these huge accounts had lost about 30 percent.
I started to second-guess these big and fancy wealth management companies. In my next meeting with the wealth managers, I challenged them: “We’re down 30 percent, et cetera, and it’s not good.” “Well, Laurens, the market is down, so you just need to wait it out, because the market will always go up in the long term.”
I asked a reasonable question. “What is that logic based on?” They didn’t have an answer. And then they told me to buy more stocks, because that would lower the average purchase price of the stocks we currently owned. They said, for example, we had purchased a stock at $100, and now it was down 30 percent, to $70. They said, buy the same amount, again, at $70, because your average price will be $85 and the stock only needs to move up 15 dollars to be back at even.
But every time we bought, they received more commissions!
These companies were trying to manipulate the market, telling all of their customers to buy, hoping to bring the market up, and taking their commissions regardless. But at the time, market sentiment was horrible. I didn’t believe in what they were doing, and it was clear they just wanted us to buy so they’d get commissions.
I spoke to my father, who owned the account. We had too much risk exposed. We couldn’t be invested completely in such bad times, I said. I recommended my father sell the entire account. We didn’t know what we were doing, and we were relying on people who didn’t care about how much money we made or lost, but rather the status of their commissions.
I convinced him, so we sold the entire portfolio. It had Enron and WorldCom in it, which both went bankrupt. We would’ve lost over 70 percent of our family’s retirement account if we had held on to our positions, and even more if we had doubled down like the “experts” had recommended.
That proved to me that wealth managers weren’t as smart as they preached, but I didn’t yet know what I was doing. I just knew not to trust them.
Convincing the banks to liquidate our positions was a huge step, but all it did was take us from losing money to being flat. Making zero money wasn’t good, either.
I started trading with a $30,000 account. I thought that by following the news I could guess exactly where the market was going. I had expensive software giving me up-to-date news, earning reports and Fed reports. I thought that the faster I had information, the faster I could take action and beat everyone else. I’d stare at my computer all day, nervously analyzing every piece of information as it was released. How would it affect my positions? I prayed for favorable news, glued to TV, radio, and the Internet. I needed every piece of information, or I’d be missing out.
I was constantly anxious. I smoked fifty cigarettes a day.
My account was swinging up and down, and it crushed me psychologically. I had health issues. I couldn’t sleep. I was nervous, kept to myself, and lost self-esteem. I couldn’t accept the fact that I was losing in the markets. I knew things were bad, but I didn’t know what to do.
Eventually, I accepted that bankruptcy was coming, and the long road of educating myself began. I’ve now read over five hundred trading books, after years of six to eight hours of daily study. Not a day passed that I wasn’t working on learning about the markets. I attended seminars and talked to any smart people I could find.
One day, I stumbled across a free book online which told the story of a group called the “turtles” who were taught to trade a simple, proven strategy from professionals. It turned out that the ones who followed the rules 100 percent made the most money. It had nothing to do with decision-making or analysis; the ones who followed the system closest made the most money. It was so simple, and made so much sense, but was so profound. That was my first breakthrough.
The second was that I found a style that really resonated with my personality: mean reversion. Basically, you buy a stock that is well oversold, which means it has a statistically larger likelihood than random to revert back to its mean (go back up in price). You have an edge when you trade like that consistently, long term. I hired a programmer and said, “Here are my ideas. Can you program this into an automated strategy?” Then I tested the strategy, and I had been correct. I was on to something. I had an edge. I started to trade and make money. Later, my beliefs evolved, and I currently trade both mean reversion and trend following, combined.
Once I started making money, I could buy more specific educational material. I learned about every indicator, statistic, and piece of quantified evidence I could. I eyeballed thousands of stocks, guessed good entry and exit points, wrote them down, and tried to create proven rules. It was insanely difficult—I had no programming or back-testing experience. I just knew to look for something that consistently made money long term, because then I’d have an edge.
Hiring my first programmer was that first big breakthrough, but it was difficult. I had ideas, but I needed to explain them to my programmer, and make sure they were doable. It was a long, expensive road before I figured something out. I paid people by the hour, to work on slow computers, from 2005 to 2007. I didn’t have millions of dollars for fancy computers—normal computers were slow to crunch numbers back then. Now, all you need is a decent laptop.
Back tests used to take twenty-four hours, if the computer didn’t crash. Now, they take ten minutes. I was so convinced this would be where my edge lay, though, that I never gave up. Eventually, I created codes and strategy and defined exact parameters. My opinions turned out to be right: There was a real edge in strategic trading.
I was busy at the time and had to trade everything myself. Eventually, though, I improved my software and made the process less time-consuming.
Everybody doubted me. My friends, colleagues, and the media told me I had to listen to the banks and experts. They told me I was full of crap, or a dreamer. It was tough to bear the criticism, but I believed in my philosophy. Even when 99 percent of my surroundings were laughing at me, I kept going.
I haven’t smoked a cigarette in ten ye
ars, and I haven’t had a losing year since 2007. My returns have been in the large double-digits.
My trading has evolved, and edges have decreased slightly over time as the market has gotten smarter, but I’ve also begun to combine strategies. For every strategy, there are market types for which the strategy won’t work. When you have a sideways market, trend following does not work. You buy and sell with a loss. You get whipsawed. But mean reversion works great in a sideways market, and at most times, more than 70 percent of the market is trading sideways.
If you trade those two concepts together, plus multiple others, you’ll always have a couple of strategies that work in current market conditions. Depending on one approach is risky, because no matter how smart you are, you can never predict which type of market is coming with perfect accuracy.
When markets are going down, you take the mirror of what I just wrote—you trade short trend following and short mean reversion, and you make money even when the markets are falling, because your long strategies are out of the market, and your short strategies are in, making money.
It all comes down to statistics and psychology; you have to understand your own unique psychology and risk management. My journey has taken me to many courses and seminars, resulting in serious psychological transformation and a feature in Van Tharp’s latest book, Trading Beyond the Matrix. I wrote a chapter on my trading experiences, and how I transformed from a loser, following the masses, to a long-term winner, following my well-programmed computers.
I currently run a small investment fund where I manage money for institutional traders from the United States and Switzerland. More importantly, I have additional time to do what I love—mentoring people to create their own automated trading strategies, which eventually lead to financial freedom. This book exists so you can do that, too.
As we’ll show in part 2, typical investment advisors use the crystal-ball technique called fundamental analysis, which is risky and suboptimal for long-term profit. My approach is quantified and automated—the complete opposite. My strategies completely ignore fundamental numbers.
The 30-Minute Stock Trader Page 2
