Market Wizard Peter Brandt Interview

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Peter Brandt: Strong Opinions, Weakly Held IT is remarkable how many of the Market Wizards that I have interviewed failed in their initial trading endeavor—some multiple times. In this respect, Peter Brandt fits the bill. What is unusual about Brandt, though, is that after well over a decade of spectacular success following his initial failed attempts, he lost his edge, went cold turkey on trading for 11 years, and then resumed trading for a second lengthy span of outstanding performance. Brandt is definitely old school. His trading is based on classical chart analysis that traces its origins to Richard Schabacker’s book, Technical Analysis and Stock Market Profits, published in 1932, and later popularized by Edwards and Magee’s, Technical Analysis of Stock Trends, published in 1948. He started his financial career as a commodities broker in the early 1970s, just when spiking inflation and soaring commodity prices transformed commodities from a financial backwater to the hot new market. Back then, the futures markets were called commodities because all the futures markets were indeed just commodities. This period was the threshold of the introduction of financial futures in currencies, interest rates, and stock indexes, which would become the dominant futures markets, making commodities a misnomer for this market sector. Brandt started his trading career in the commodity trading pits in the quaint old days when futures market transactions were executed in the bedlam of a ring of screaming brokers, in stark contrast to the quiet efficiency of currentday electronic trading. Brandt’s trading career encompasses 27 years—an initial 14-year span and the current ongoing 13-year span—with the two trading segments separated by an 11-year hiatus. The reasons for this lengthy interruption in his trading career are discussed in the interview. Brandt does not have his performance records prior to late 1981. Over the entire 27 years he traded since then, Brandt achieved an impressive average annual compounded return of 58%. Brandt, though, is quick to explain that this return is inflated because he traded his account very aggressively—a point borne out by his very high average annualized volatility (53%). Brandt provides the perfect example of a trader for whom the ubiquitous Sharpe ratio greatly understates the quality of the performance. One major flaw inherent in the Sharpe ratio is that the risk component of the measure (volatility) does not distinguish between upside and downside volatility. In regards to the risk measure, large gains are viewed as equally bad as large losses, a characteristic that completely contradicts most people’s intuitive notion of risk. A trader such as Brandt, who experiences sporadic large gains, is penalized by the Sharpe ratio, even though his losses are well contained. The adjusted Sortino ratio is an alternative return/risk metric that utilizes losses instead of volatility as the risk measure, thereby eliminating penalization for large gains. The adjusted Sortino ratio is directly comparable to the Sharpe ratio (the same is not true for the conventionally calculated Sortino ratio). 1 A higher adjusted Sortino ratio (as compared with the Sharpe ratio) implies that the distribution of returns is positively skewed (a greater tendency for large gains than large losses). And, similarly, a lower adjusted Sortino ratio implies returns are negatively skewed (a greater propensity for large losses than large gains). For most traders, the Sharpe ratio and the adjusted Sortino ratio will be roughly in the same general vicinity. In Brandt’s case, however, because his largest gains are much greater than his largest losses, his adjusted Sortino ratio (3.00) is nearly triple his Sharpe ratio (1.11)! As another reflection of the strength of Brandt’s return/risk performance, his monthly Gain to Pain ratio 2 is very high at 2.81—a particularly impressive level in light of the length of his track record. Brandt is the one trader in this book for whom the title adjective “unknown” is not entirely apropos. Although through the vast majority of his career he was indeed unknown, and he is still not widely known in the broader financial community, in recent years, through his Factor market letter and a rapidly growing Twitter following, he has gained recognition and respect from a segment of the trader community. Indeed, several of the traders I interviewed for this book cited Brandt as an important influence. But I had strong motivations for including Brandt in this book that overrode my preference for maintaining the purity of the title. In a way, Brandt was the catalyst for moving me from writing this book “someday” to beginning the preliminary steps for the project. I knew that if I wrote another Market Wizards book, I wanted Brandt to be in it. Brandt and I are friends. I was familiar with his views about trading, which I thought were spot on, and I felt I would always regret it if I failed to capture his perspective in a book. At the time, Brandt lived in Colorado Springs and mentioned to me that he was moving to Arizona in a few months. Since I lived only about 100 miles away in Boulder, Colorado, I thought it would be more efficient to interview him before he moved and that doing so would provide the ancillary benefit of getting the book started. Ironically, by the time I got around to scheduling the interview, Brandt had already moved to Tucson. When I arrived at the airport, Brandt was waiting for me at the bottom of the exit escalator. I was glad to see him again. Although it had only been a little over a year since we last met, his walking posture had noticeably changed, with his back bent slightly forward. Thirty-five years earlier, Brandt suffered a terrible accident. He had gotten up in the middle of the night to go to the bathroom. He recalls wondering in annoyance, “Who left this chair in the middle of the hall?” Brandt was sleepwalking. The “chair” was actually the railing of the upper deck. He clambered past the obstacle, and the next thing he knew, he was flat on his back, unable to move. Brandt had fallen nearly twenty feet. He suddenly realized what had happened. So did his wife, Mona, who, upon hearing the crash of the fall, immediately dialed 911. Brandt spent over 40 days in the hospital, wearing a body cast and sandwiched between two mattresses that could be rotated regularly to change his position. Since the accident, Brandt has had a half-dozen surgeries on his back, and now with age, his back is visibly bothering him more. He lives with constant pain— something I know only because I have asked him about it. He is a bit of a stoic and never complains about the pain, nor does he take any pain medication because he doesn’t like how it makes him feel. Brandt drove me to his home, which is situated in a gated community on the outskirts of Tucson. We conducted the interview sitting in Brandt’s backyard patio overlooking the Sonora desert, which is surprisingly verdant, having more plant species than any other desert in the world, some of which grow nowhere else, such as the iconic saguaro cactus. A double-peaked mountain loomed over the distant horizon. It was a beautiful spring day. The steady breeze generated a constant clattering of wind chimes. “Are those going to be a problem for your recorder?” Brandt asked. “No, it will be fine,” I assured him. Little did I think about the many hours I would spend playing and replaying the recordings having to listen to those damn wind chimes. When you were young, did you have any idea what you wanted to do with your life? I grew up dirt poor, raised by a single mom. It was really up to me to make my own money. Even back then, I was extremely entrepreneurial. I had two large paper routes. I’d wake up 5 a.m. on Sunday to deliver 150 newspapers on my wagon or my sled if there was snow. I collected bottles. I’d hand out shopper bills for the local grocery store. How old were you then? Oh, I started working when I was about 10. What was your major in college? I majored in advertising, and I really loved it. How did you go from advertising to trading? Two things introduced me to the idea of trading. I had a brother who was buying bags of silver coins. Back then, in the late 1960s and early 1970s, US citizens were not allowed to own gold, but you could own silver coins. At that time, my brother was buying these bags of silver coins at a premium of 20% over face value. It was a perfect example of an asymmetric risk trade: you could lose a maximum of 20%, but if metal prices went higher, the upside was unlimited. Did you buy silver coins yourself as well? No, I couldn’t. I had no money. But I was intrigued. I bought The Wall Street Journal to follow the price of silver. My brother had started buying silver coins when the price of silver was $1.50 per ounce. By 1974, the price of silver had more than tripled, soaring above $4.50. My brother was driving around in a Mercedes-Benz. You said two things influenced you to get into trading. What was the second one? At the time, I was living in Chicago, and I met a fellow who traded in the soybean pits. Both of our sons played hockey, and I got to know him pretty well. He said, “Peter, come on down and see what I do. I’ll buy you lunch.” So I met my friend for lunch at the Board of Trade. The restaurant had these huge windows overlooking the pits. As I watched the traders below, my reaction was, “Whoa!” I was fascinated. It sparked something inside of me that said, “I want to do this.” I peppered my friend with questions about being a trader. I picked up all the brochures at the Board of Trade. Were you working in advertising at the time? I was. Were you satisfied with your job? I was on a fast track with the fifth largest advertising agency in the world. I had lots of responsibility, and my accounts included Campbell and McDonald’s. Were you involved in any of the commercials? Yes, the McDonald’s grab-a-bucket-and-mop commercial. You can check it out on YouTube. I also was there when they created Ronald McDonald. So you liked what you were doing? I liked what I was doing. The only thing I didn’t like was the politics in the corporate world. Also, there was something about what the guys on the floor were doing that captivated me. I liked the idea that they knew how they did at the end of each day. And they only worked from 9:30 to 1:15! Also, part of the attraction was that I found out what these guys were making. That’s because you didn’t know about the 95% plus of people who try to become traders and go broke. You had what the statisticians call a biased sample. Oh, I found that out later. But, at the time, what I noticed was that the parking lot next to the Board of Trade was filled with Mercedes and Porsches. Having grown up poor, was the wealth angle a significant part of your attraction to trading? Yes, that was a big thing. How did you go from that desire to actually getting involved in trading? I came to the decision that I wanted to be in this business. Even then, the price of floor membership was very high. There was no way I could afford it. Around this time, my brother introduced me to the broker he was using to buy silver coins. His broker was in Minneapolis and worked for Continental Grain, which at the time was the second most prominent name on the Chicago Board of Trade, next to Cargill. My brother’s broker told me Continental Grain was hiring people. Before 1972, there was very little public speculation in the grain markets, but that changed with the big bull market in commodities during the early 1970s. Continental was the first mainline Board of Trade firm to put a major effort into bringing in hedging and speculative clients. They set up Conti Commodities as a subsidiary to do brokerage business. Didn’t you have any apprehension about taking a job as a broker, which is essentially a sales job? No, because it was a way into the business. I was in Conti’s first training program for commodity brokers. They accepted eight people into the program, which lasted three months. Did you get any salary, or were you totally dependent on commissions? They gave you a draw for six months. I don’t remember the exact amount, but it was approximately $1,300 a month, give or take. I do remember that my salary at the advertising firm was $28,000 per year when I left. So I was definitely taking a pay cut. Once you finished the training program and started your job as a broker, how did you get clients? The first thing I did was to head back to New Jersey to visit Campbell and then out to Oak Brook to visit McDonald’s. Oh, because you had the connections through your advertising job. Yes, I had the connections, and they were high-level connections. They knew me well, and it so happened that all these major food processors had not hedged during the big bull market in commodities we had just seen. They got caught with their pants down. They were hurt real bad as all their ingredients—meats, soybean oil, sugar, cocoa, etc.—shot up, and they were unhedged. Back then, the IRS didn’t even know how to handle hedging profits and losses. This is late 1974, right after the bull markets in 1973 and 1974. I’m in the business one to two years after the start of the modern futures industry, as we know it today. The deal I offered Campbell was that if they sent out one of their purchasing agents to Chicago for two months, I would make sure he got trained in futures. The person they sent out ended up becoming the senior purchasing agent for Campbell, and I had that account. I also got the McDonald’s account and some other hedgers. So I was doing pretty well for a young broker. Were you allowed to trade your own speculative account? Oh, totally. So when did you start trading? I started trading around 1976, by which time I had saved a little money. I knew that what I really wanted to do was trade. Do you remember your first trade? [He thinks a while and then remembers.] It was actually a little bit earlier— around late 1975. I was doing enough brokerage business so that Conti assigned me a badge so I could go down on the trading floor. My friend, John, who had gotten me interested in trading, was a soybean trader. One day I see him, and he tells me, “Peter, I’m really bullish the soybean market.” So I bought a contract. I had no idea what I was doing. The market went up five or six cents and then came right down. I ended up getting out with about a 12-cent loss [a $600 loss for a one-contract position]. I remember seeing John shortly afterward, and he greets me by saying, “Wasn’t that a fabulous price move!” What I subsequently found out was that for John, who traded against order flow in the pit, a 1- to 2- cent gain was a really good trade, and a six-cent gain was a “fabulous” trade. The big lesson for me was that the terms “bullish” or “bearish” don’t mean anything. What is the person’s time horizon? What kind of move are they looking for? What price or events would tell them that they were wrong? Where did your trading career go from there? I blew out three or four accounts over the next three years. The old joke was that you knew your account was in trouble when you are trading oats. [Oats are typically a low volatility market, and the contract size is small (in dollar value terms), so the margins are lower than they are for other grain markets.] How did you make your trading decisions? At first, I would listen to the Conti fundamental guys who’d come on the firm’s speaker system every morning before the markets would open and talk about what they were seeing. They would talk about stuff like grain shipments, planting progress, and so on. They would also give their trading recommendations. The first account I blew out was following their recommendations. There was also a technical analyst in the Conti Memphis office that would come on the broadcast every morning. He used point-andfigure charting [a style of price charting where intervals depend on price moves rather than time]. He made a great call in the soybean market in 1976. So I bought a book on point-and-figure charting and started playing around with that approach. There went the second account. Then I took a fling using seasonal patterns. After that, I tried spread trading [trading the price difference between two futures contracts in the same market by buying a contract expiring in one month and selling a contract expiring in another month]. You were trying to find a methodology that worked for you. I was trying to find something, and I was getting frustrated. But, at the same time, I consider myself lucky. I look at guys today who start trading something like crypto, max out their student loan money, and end up living in their mom’s basement. I had an income source to fall back on. It wasn’t killing me that I was losing. I wanted to learn how to trade and become a profitable trader. What finally broke the cycle of opening an account, trying some different methodology, losing your money over time, stopping trading, and then repeating the process all over again? There were probably two things that turned the process around. First, I learned that you have to use stops because you can’t afford to take significant losses. Second, one day, a colleague who was a chartist came over to my desk and said, “Come with me.” We went downstairs, walked across the street and into the bookstore. He bought me the Edwards and Magee book [Technical Analysis of Stock Trends]. I just gobbled this book up. Now, someone else might read Edwards and Magee and not get anything out of it. But for me, it put a lot of square pegs in square holes and round pegs in round holes. It gave me a framework for understanding price. It gave me an idea of where to get into a market. Before I read Edwards and Magee, I had no idea what I was doing. Where do you get into a trade? I didn’t have a clue. It also gave me a way to establish where to protect myself on a trade and an idea of where the market might go. That book is what brought me into charting. I saw the light at the end of the tunnel. I saw there was a chance that I could develop myself as a trader, and the account I opened to trade charts did well. So was that the point of demarcation between trading failure and trading success? Yes. In 1979 I had an account that was gaining traction. When I look back now, the account had a lot more volatility than it should have. I still hadn’t worked out proper position sizing, but for the first time since I started trading, my account was moving steadily north. Was the broker who bought you the book a successful trader? He never gained success. He is a dear friend, but he never made it as a trader. It’s ironic that he was instrumental in your trading success, but was never successful himself. I guess that the book he bought you was the best present you ever got. Oh yes! Let me show you something. [He leaves and comes back a minute later with a book.] I was looking for a first edition of Edwards and Magee for years and had queries out to several rare book dealers. I finally found a copy that Magee himself had inscribed and given to a friend in Boston. I assume you were still managing your commercial hedging accounts at the time. When did you make the transition from broker to full-time trader? About a year later. Couldn’t you continue to broker those accounts and still trade your own account? I could have, but I didn’t want to. Why not? I just wanted to trade. But weren’t you walking away from a large amount of brokerage income by giving up those accounts? I would have, but I sold the accounts. I didn’t know you could do that. You could; I received a trail of the commissions on the accounts I turned over. Since these were prize commercial accounts, how did you pick the broker you could entrust the accounts to? I gave it to a guy who was my biggest mentor. His name was Dan Markey, and he was probably one of the best traders I ever met. How did he trade? He used to say, “I look at the markets through the lens of History 101, Economics 101, and Psychology 101.” He was a boy wonder at Conti. He was a real position trader who would hold big grain positions for months at a time. He had a great sense of when markets were at a major turning point. He would say, “Corn is bottoming right now. This is the season low.” And he would be right. Was that just intuitive? Yes, intuitive. He couldn’t tell you why. So he was actually going short into strength and long into weakness. He was. So, ironically, he was doing exactly the opposite of what you were doing. Yes, the total opposite. But you said he was a mentor. So what did you learn from him? Risk management. While he was buying into weakness, he wouldn’t just put on a full position and hold it. He would probe the market for a low. He would get out of any trade that had a loss at the end of the week and then try again the next time he thought the timing was right. He kept probing, probing, probing. That’s interesting because one of the things I’ve heard you say is that anytime you have a loss in a trade at the end of the week, you get out. I take it that watching Dan trade 40 years ago is where this idea comes from. So you’ve used this idea for virtually all of your trading life. Oh, I have. Dan used to say, “There are two parts to a trade: direction and timing. And, if you’re wrong about either one, you’re wrong on the trade.” Anything else that you learned from Dan? Yes, I saw that he took much smaller positions than he could. The lesson I learned from Dan was that if you could protect your capital, you would always have another shot. But you had to protect your pile of chips. And you had lost your pile of chips several times. I had. I had. It’s interesting that all of Dan’s advice deals with risk management, and none of it has anything to do with trade entry, which is what most people want to focus on. Were there any other significant mentors? Dan was by far the most significant. The most crucial other advice I had was from a trader who was a chartist. He said, “Peter, you have to have an edge to make money, and a chart pattern does not give you an edge.” That was a sobering comment at the time, and it didn’t make complete sense to me then, but it did about five years later. I guess what he was saying is that anyone else can see the same chart patterns. Yes, and also chart patterns are subject to failure. I know that one thing both you and I agree on is that when a chart pattern fails, that is a more reliable signal than the chart pattern itself. [I not only agree, but I titled the chapter in my book on futures market analysis discussing this exact concept, “The Most Important Rule in Chart Analysis.” 3 ] Also, chart patterns morph. You think you have a handle on the chart pattern, and then it changes into another pattern. A morphing chart is nothing more than a bunch of patterns that fail and don’t do what they’re supposed to do. So what happened after you turned over your accounts to Dan to focus solely on trading? In 1980, I incorporated Factor Research and Trading and rented an office. Why did you pick the name Factor? That was my own inside joke. From 1975 through 1978, I did a really good job providing Campbell with fundamental information and helping them with their hedging decisions. By 1979, I had gotten the hang of chart analysis, and I started seeing some significant potential price movements in the grain markets. I couldn’t exactly go to Campbell and tell them that I thought they should be hedging because I saw a head-and-shoulders bottom forming in the market. So, I would go to Dan Markey or some of the other fundamental guys when soybeans were at $6, and say, “I think soybeans are going to $9. What do you see in the markets?” And they would give me some sort of fundamental narrative of how such a move could happen. The guys at the CBOT would hear me talking to Campbell and saying stuff like, “We could be seeing some anchovy problems off the coast.” [Anchovies are used to produce fishmeal, which is a substitute for soybean meal.] I was really speaking my charts, but I was giving them my opinion in terms of fundamentals. So they started calling it the “Brandt bullshit factor.” What were you planning to do with the company? Were you planning to manage money? No, just trade my own account. But you didn’t need to have a company to trade your account. I know, but I just liked the feel of having my own trading company. Has your methodology changed from what you were doing when you started as a full-time trader? There are some substantial differences. What are they? Back then, I would have popcorn trades. Popcorn trades? You know how a kernel of corn pops, goes up to the top of the canister, and then falls all way back down to the bottom? A popcorn trade is what I call a trade that you have a profit on and then ride it all way back down to where you got in. I try to avoid popcorn trades now. What else has changed? The charts have become much less reliable. It was much easier to trade on charts in the 1970s and 1980s. The patterns were nice and neat. There were fewer whipsaw markets. [A whipsaw market is a market in which prices swing widely back and forth, causing trend-following traders to be positioned wrong right before the market abruptly reverses direction.] Back then, if you saw a chart pattern, you could take the money to the bank. The patterns were so dependable. I have my own theory why that may be the case. How do you explain it? I think high-frequency trading operations have created volatility around chart breakout points. [A breakout is a price movement above or below a prior trading range (sideways movement in prices) or consolidation pattern (e.g., triangle, flag, etc.). The underlying concept is that the ability of prices to move beyond a prior trading range or consolidation pattern indicates a potential trend in the direction of the breakout.] But they trade so short term. Why would they impact volatility? Because they create volatility at the breakout points. It is very short-term volatility, but it can knock a trader like me out of a position. I also think that the markets are more mature now with bigger players. What’s your view about why the markets have changed? My perception is that once too many people are doing the same thing, by definition, it becomes impossible for that technique to continue working as before. I think that’s true. Back then, there weren’t a lot of people looking at charts. What else has changed in your approach from the early days? I used to trade one- to four-week patterns, now I trade 8- to 26-week patterns. Because they are more reliable? Yes. Any other changes in the types of signals you take? I used to trade any pattern I could see. I would trade 30 to 35 patterns a month. Now, I am much more selective. I used to trade patterns like symmetrical triangles and trendlines, which I no longer do. I only trade patterns where the breakout is through a horizontal boundary. Why is that? With horizontal boundaries, you can find out much more quickly whether you are right or wrong. Was there a catalyst for that change? No, it was just a gradual process of realizing that I was getting my best results trading rectangles, ascending triangles, and descending triangles. Give me a 10- week rectangle with a well-defined boundary that ends with a wide daily bar breakout out of that pattern, and now we’re cooking. But you still have to deal with the issue of the market dipping back even on valid breakouts. What happens if you buy a breakout, and the market reacts enough to trigger your stop but then holds, and the longer-term pattern still looks good? I will take a second chance but never more than a second chance. And I won’t take the second chance on the same day. I remember guys on the Board of Trade complaining, “I’ve lost 30 cents in a 10-cent range.” I don’t want to lose 30 cents in a ten-cent range, and I know it’s possible to do. If you get stopped out a second time, and that pattern ends up being a major price base before a long-term trend, does that mean you miss the entire move? Not necessarily. I might still get back in if the market forms a continuation pattern [a consolidation within the trend]. But I would look at it as an entirely new trade. So it wouldn’t bother you going long at $1.50 after getting stopped out twice at $1.20? No, that has never bothered me. I think that type of thinking is a trap that people fall into. I trade price change; I don’t trade price level. Is there anything else that you have changed over the years? Yes, the risk I take on a trade is much lower now. Whenever I take a trade, I limit my risk to about 1/2% of my equity from the point of entry. I want to have my stops at breakeven or better within two or three days of entry. My average loss last year was 23 basis points. Protective stops are integral to your trading methodology. I’m curious, do you leave stops in place during the overnight session? [With the advent of electronic trading, futures markets trade through the night. The inherent dilemma is that if a protective stop order is not left in place for the night session, a large overnight price move could result in a trade losing significantly more than intended by the stop-risk point. On the other hand, leaving a stop in place for the night session runs the risk of the stop being activated by a meaningless price move on thin volume.] It depends on the market. I wouldn’t use an overnight stop for the Mexican peso, but I would use one for the euro because it is so liquid. Similarly, I wouldn’t use an overnight stop in copper, but I would in gold. What was the first bad year you had as a full-time trader? 1988. So you had nine good years before that losing year. What went wrong in 1988? I got sloppy. I would enter chart patterns too early. I would chase markets. I didn’t have orders in when I should have. Why, to use your own term, did your trading get “sloppy” in 1988? I think because 1987 was such a good year. I was up 600% in 1987. It was my best year ever. I’ll never be there again. I think I came out of that year a bit complacent. How much did you lose in 1988? Oh, about 5%. When did you get back on track? 1989. Having a losing year made me realize that I had to get back to the basics. What do you know now that you wish you knew when you started out as a trader? I think the big one is to forgive myself. I am going to make mistakes. What else? I have learned that you can believe you know where the market is going, but you really don’t have a clue. I now know that I am my own worst enemy and that my natural instincts will often lead me astray. I am an impulsive person. If I didn’t have a process and instead just looked at my screen for where to enter orders, I would self-destruct. It’s only when I override my instincts through the process of disciplined order entry that I put myself in the position where what I do with charts can work for me. I have to be so intentional in the way I trade. My edge comes from the process. I am a glorified order enterer; I am not a trader. Some of the orders I place go against my natural inclination in a market. They are hard orders to enter. Why? Copper has been in a 40-cent trading range for nearly a year, and just today, I bought copper near a new recent high. That’s hard to do. [As it turned out, Brandt had bought copper on the high day of the upmove and was stopped out the next day. This trade was actually quite typical for Brandt. The majority of his trades will result in a quick loss. He succeeds, nonetheless, because his average gain is much larger than his average loss.] I think that most of my big profits have come from trades that were counterintuitive. How I feel about a trade is not a good indicator of how the trade will end up. I think that if I made my biggest bets on those trades I felt best about, it would substantially degrade my performance. A current example is that I’ve wanted to be a bull on grains for a year now. Why? Because grains are at very low price levels. They are scraping at the bottom. I think my first trade in corn, which was over 40 years ago, was at a higher price than we are at right now. So given the inflation we have had since then, prices are extraordinarily low. Yes, and I have tried buying grains multiple times this year with these trades resulting in a net loss. My best trade in grains this year was actually on the short side of Kansas City wheat. In fact, it was my third best trade of the year. And I made that trade only because I couldn’t deny the chart. I felt that if I was not going to short Kansas City wheat on that chart pattern, why was I even bothering to look at the chart? I had to go against my instincts that grains were forming a major bottom. So, ironically, your best trade in that sector during the year was precisely opposite to what you were expecting. It’s like you have to bring yourself to bet against the team you’re rooting for. You do. Has that been true over the years—that is, have your best trades tended to be the ones you least expected to work? I think that’s true. If anything, I think there may be an inverse correlation between how I feel about a trade and how it turns out. Why do you think that is? Because it is easy to believe in a trade that conforms to conventional wisdom. It used to bother me to be wrong on a trade. I would take it personally. Whereas now, I take pride in the fact that I can be wrong 10 times in a row. I understand that my edge comes from the fact that I have become so good at taking losses. So instead of being bothered by losing on a trade, you’re proud that you can take these small losses that prevent a large loss from accumulating. In that light, taking a loss on a trade is not a sign of a defect but rather a reflection of a personal strength that explains why you have been successful in the long run. A trader’s job is to take losses. A losing trade doesn’t imply you did anything wrong. The hard part about trading is that you can do the right thing and still lose money. There is not a direct feedback loop that tells you, “good job.” I only have control over the orders I place. I don’t have control over the outcome of trades. Whenever I place a trade, I think, “A year from now when I look back at the chart, will I be able to see in the chart the day and the price at which I took a position?” If the answer is yes, then it is a good trade, regardless of whether it wins or loses. What else would have been helpful to know when you started out as a trader? Actually, if I had been as risk-averse in my early years as I am now, I would never have had that string of giant winning years in the 1980s. What level of risk were you taking? Oh, I could take as much as a 10% risk on a single trade. Not every trade, of course, but it would sometimes be that high. So as much as twentyfold the risk you take per trade now! Yes. Ironically, it sounds like the fact that you were operating under misconceptions of appropriate risk in those earlier years was beneficial to you. I have always believed that successful people may be successful because of some innate skill, talent or drive, but that there is also usually some significant luck involved. You can have people with all the potential in the world, and nothing ever happens. Your story is an illustration of that. You did the wrong thing in the beginning by trading much too large, but it all worked out exceptionally well. You could just as easily have blown out your account again. Oh, Jack, totally. It’s only been in the last 10 years that I have reflected on the fact that my success as a trader is mainly due to what I am going to call “cosmic sovereignty.” I started in the business when I did. I had certain people that mentored me when they did. I was with the right firm when I started out. I had the right accounts because of my previous job in advertising. I started trading at a time when the markets were perfectly attuned to my style of chart trading. I bet 10%–15% of my account on long Swiss franc and Deutsche mark positions, and it turned into a giant profit instead of killing me. I can’t take credit for any of that. None of that is due to my own intelligence or abilities. None of that is due to who I am. That’s cosmic sovereignty. How did you get to manage money for Commodities Corporation? [Commodities Corporation was a proprietary trading firm in Princeton, New Jersey. The firm gained legendary status because some of the traders it seeded would go on to become among the world’s best traders, probably first and foremost being Michael Marcus and Bruce Kovner who were featured in the original Market Wizards book. 4 ] I don’t recall how it started, but they reached out to me. I think somebody at the Board of Trade may have recommended me. I flew down to Newark for the interview and was picked up by a limousine that drove me to the castle. [Commodities Corporation was not literally in a castle, but Brandt is using the term “castle” to emphasize how elaborate the firm’s offices were.] Yes, their offices were really attractive; it was like walking through a beautiful gallery. [I worked for Commodities Corporation as a research analyst.] Oh, it was fabulous! Do you remember anything about the interview process? The traders were all quirky. They were academic types—a big contrast from the kinds of traders I was used to on the Board of Trade. How much money did they give you to manage? They gave me $100,000 to start, but they raised it to $1 million and eventually to more than $5 million. What was your experience trading for Commodities Corporation? My major problem was that I was never very good at trading size. It made me nervous to trade more than 100 bonds at a time. I remember the first time I entered a 100-contract order. I was shaking. It freaked me out. I don’t think I ever got over that. How many years into managing the Commodities Corporation account was it before you started trading position sizes as large as 100 bonds? About three years. Did trading larger size impact your performance? It did. In what way? It made me more timid. If you have a 100-contract position, and the market goes against you by a full point, that’s $100,000. I started thinking in terms of dollars. I stopped trading the market and started trading my equity. It had a definite impact on my trading, and my performance drastically deteriorated, beginning around 1991. I see this all so much more clearly today. I don’t think I was as aware of what was happening at the time, but when I look back at it today, I understand what happened. How did the Commodities Corporation relationship end? By 1992, my trading was trailing off, and I was not meeting their benchmarks. But hadn’t you done very well for Commodities Corporation overall? I had. And it wasn’t like I had any substantial losses. It was more a matter of my performance dropping to near breakeven, give or take a few percent. I also had cut down my trading size, and I wasn’t using most of my allocation. Their attitude was, “What, you have a $10 million account, and you’re trading only 20- lot positions?” Did Commodities Corporation terminate your trading account, or did you leave on your own volition? It was more of a mutual decision. I didn’t have the sharp edge I had in previous years. Did you still continue trading your account? Yes, for another two years. Did you feel better once you didn’t have the burden of managing the Commodities Corporation account? No, I wasn’t feeling good about myself as a trader. The fun of trading had left me at that point. Trading had become drudgery. I was feeling the discrepancy between how I was performing and how I knew I could perform. That gap was emotionally difficult for me to live with. Why was that gap there? Oh, I think it was because I had become gun-shy. I felt like I had lost my edge, and I didn’t know how to get it back. But wasn’t there some sense of relief in not having to trade the Commodities Corporation account? The more significant relief was in not having to trade my own account. Besides relief, how did you feel the day you closed your own account? There were lots of feelings. Part of it was, “Thank God this is done.” Part of it was, “I’m admitting failure.” At the end of the day, I was tapping out. How was I different from any other guy tapping out on the Board of Trade? When did you get back into trading? Eleven years later, in 2006. I remember the exact time and place. I was sitting at my desk, my wife, Mona, was standing on my left side, and the thought of trading fluttered back into my mind. I turned to Mona and said, “What do you think about me getting back into commodity trading?” She did not like the idea. I guess because the last few years of trading had been so miserable for you. She remembered those years. She said, “Really, you want to do that again?” I said, “I have to do it.” I opened an account shortly afterward. You stopped trading in 1995 and restarted in 2006. In all those intervening years, did you pay any attention to the markets? I didn’t have a futures account. You didn’t even look at a chart? I didn’t even have any charting software. So for 11 years, you didn’t even look at a chart. Then you abruptly decided to start trading again. Was there a catalyst? I think I missed it. Also, part of it was that trading had ended badly. The way it ended started to stick in my craw. I thought, “Peter, you can’t let the way it ended be the last word.” What happened after you started trading again? I had been away from trading so long, I wasn’t aware that the world had transitioned to electronic trading. I even remember getting my time stamp machine out of the closet and printing a bunch of order tickets. [He laughs at how archaic these actions were.] I didn’t know whether what I used to do, chart analysis, was even going to work anymore. I had a few good trades when I started trading, and it seemed that the charts were still working. I liked that. I had two really, really good years. Psychologically, were you back to where you were? Yes, I was really enjoying it. Your second trading career has gone very well, but you had one losing year, which stands in extreme contrast to all the other years since you resumed trading. [In 2013, Brandt was down 13% compared with an average annual return of 49% in the other years during the 2007–2019 period. His secondworst year during this period was a gain of 16%.] Was there something different about 2013? Yes, there was. There were two factors that reinforced each other. First, it is probably no coincidence that 2013 was the year I decided to accept other people’s money. After so many years trading just your own account, what prompted you to expand to accept investor money as well? People I knew kept asking me to manage their money. I was reluctant to do it, but, after a while, the multiple requests wore me down, and I thought, “Yeah, I’ll give it a try.” I look back at that decision today and wonder, “Why in the world did I do that?” There was no reason for me to do it. Why did managing other people’s money cause you to have your only losing year since you resumed trading in 2007, as well as your worst drawdown since then? The drawdown would have happened anyway, but I don’t think it would have been as deep, nor lasted as long. The perspective I have on it now is that when I was trading my own account, it was like trading monopoly money. My trading capital was just something I kept score with. I detached myself emotionally from it. For most people, the money in their account is very real; it certainly is not like monopoly money. How long have you been able to have a detached view regarding the money in your account? Oh, I think that was something I was able to develop within my first few years of trading—sometime back in the 1980s. I take it that your perspective on trading capital changed when you were managing other people’s money? It absolutely did. Once I found myself trading money for friends, all of a sudden, it was real money. It messed with my head. How long did you manage investor money? I started trading the first client account in January 2013, and by June 2014, I had returned all the investor money. How close was June 2014 to the bottom of your drawdown? It was the bottom of my drawdown. And I don’t believe that was coincidental. I think it was the bottom because I gave all the investor money back. That seems to imply that you wouldn’t have experienced the subsequent large rebound in your own account if you hadn’t given the money back. I think it more than implies that; I think it’s true. I believe if I hadn’t returned investor money, I would have just dug the hole deeper. What was the trigger for your finally deciding to return investor money? I am fortunate that I have trading peers I can speak to who will be honest with me. They knew what I was going through, and they understood that managing other people’s money was messing up my trading. Their advice was that I needed to return investor money and go back to trading just my own account the way I used to. By that point, weren’t you already aware that managing other people’s money was messing with your mental trading state? On some level, I knew what the problem was, but I had trouble admitting it to myself. I was avoiding having to go back to investors when their accounts were down and tell them that I was returning their money because I couldn’t make money for them. What was the percentage loss in your investor accounts by the time they closed? I think the worst account loss was around 10%. But your own percentage loss during that period was larger. That was because I traded my own account more aggressively than the investor accounts. Earlier, you said two factors were different in 2013. Managing investor money was the first. What was the second? I tend to be rule-based once I get into a trade, but my trade entry decisions are discretionary. There are periods when there are lots of false breakouts and whipsaw price moves, and the markets don’t care what the charts say. That is an example of my approach being out of sync with the markets. But there can also be periods where I am out of sync with my approach. I am not being disciplined. I’m not being patient. I’m jumping the gun on trades. I’m taking positions before the market confirms them. I’m taking trades on inferior patterns. And, of course, you can have periods where both conditions exist: My methodology is out of sync with the markets, and I am out of sync with my methodology. That was 2013 through mid-2014. At the time, CTAs were all tanking. [CTAs stand for Commodity Trading Advisors, the legal term for registered managers in the futures markets. 5 ] There was lots of talk suggesting market behavior had changed and that to survive as a trader, you had to change. And I drank the Kool-Aid. I started tweaking what I do. In what way? I added indicators. I tried mean reversion trades. [Mean reversion trades are trades in which you sell on strength and buy on weakness.] But mean reversion is the exact opposite of what you do. Exactly. [He says this in a drawn-out singsong fashion.] Out of desperation, because nothing was working, I kept on trying different things. It became a vicious cycle. So what might have been a standard three- or four-month drawdown with a loss of 5% turned into an 18-month drawdown of 17%. The losing period lasted much longer than it should have because I went down the rabbit trail. Would you have started changing the way you trade if you hadn’t been managing investor money during this drawdown? Not a chance. We talked about your account rebounding after you returned investor money. Was there anything else behind this performance turnaround? I had bought into the lie that I had to change because the old ways no longer worked. I finally realized I had to get back to basics. My thought process went something like this: “I’m jumping from one approach to another. I’m grasping at straws. I don’t even know where I am. If I’m going down, I’m going down doing what I know how to do.” What happened after you went back to trading your standard methodology? I had a great year, but I had favorable markets. Did the 2013–14 drawdown experience change anything for you besides knowing you never wanted to manage outside money and cementing your conviction to sticking with your methodology? After the 2013–14 drawdown, I started looking at my equity in a different way. Before then, I looked at the total equity in my account, including open trades. That is the conventional way of looking at equity and, of course, the way the IRS looks at equity. But now, I don’t want to know my open trade equity. So I graph my equity based on closed trades only. What difference does that make to you psychologically? In reality, open trade profits aren’t mine. They don’t belong to me. So it doesn’t matter if I lose it. Therefore, it makes it easier for me to allow a market to come back against me somewhat. So even though your initial stop points are very close, once you are ahead, you give the market more latitude. Much more latitude. Also, once the profits of the trade equal 1% of my equity, I take half the position off. Then I can give the other half much more room. Will you still raise the stop on the remaining half of the position? I will, but much less aggressively. However, once I get to more than 70% of my target objective, I will jam my stop. That part of my trading methodology goes back to my days of popcorn trades. If I have an open profit of $1800 per contract on a trade with a target of $2000, why would I risk giving it all back to make the extra $200? So when the trade gets close to the target, I will raise the stop. When you get to within 30% of your target, how do you decide where to raise the stop to? Once it gets to that point, I will use a mechanical three-day stop rule. Exactly what is that rule? Assuming a long position, the first day would be the high day of the move. The second day would be the day the market closed below the low of the high day. The third day would be the day the market closed below the low of the second day. I would get out on the close of the third day. I assume those three days would not have to be consecutive. That’s correct. The third day could be two weeks after the first day. I developed the three-day stop rule not because I thought it was the best rule—in fact, I’m sure it’s not—but rather because, as a discretionary trader, I hate indecision. I hate regret. I hate second-guessing. So I wanted to develop a rule that was automatic and would protect against my giving back most of my open profits. Your initial risk on the trade is about 1/2% of your equity. How far away is your target? A point equivalent to about 2% of my equity. And if it reaches that point, will you just take profits on the entire position? Usually, I will just take the profits. There may be occasional exceptions where I will use a very close stop instead, especially for short positions, because markets can collapse much more quickly than they rise. At what point would you look to re-enter the trade after you take profits? I don’t look to re-enter. It has to be a brand-new trade. What about markets that just keep on trending? I will miss most of those trends. I feel more comfortable playing between the 30- yard lines than trying to run a kickoff from the 10-yard line to the end zone. I will miss some huge moves. Well, your methodology precludes you from remotely catching the major portion of those trends. It does. Do you trade stocks the same way you trade futures? I trade them exactly the same. Don’t you think there is any difference between the chart behavior of stocks and futures? No. I’m surprised because my impression has always been that stocks are subject to much more erratic price behavior than futures. I think that’s true, but when stocks get on a run, they act the same. I have seen you refer to an “ice line” in one of your letters. What exactly is an ice line? When I lived in Minnesota, we lived on a lake, and the lake would freeze over. The ice would support you, but if you ever fell through, the ice would act as resistance. The analogy for price charts is that the ice line is that price area that is difficult to get through, but once you do, it should provide support. If I can find a market with a price breakout where at least half of that day’s range is below the ice line, then that low can serve as a significant risk point. What if less than half of the day’s price range is below the ice line—could you use the low of the previous day? That’s what I do. It seems like it would be so common for the low of the entry day price bar to be taken out without any consequence on the long-term chart picture. I totally get the concept that keeping your risk very low is an essential component of your success, but have you ever done the research to see whether your risk is actually too low? For example, might you be better off risking the low of a few bars rather than just a single one? Yes, I have done that research. I found that if I gave the market a little more breathing room in the early days of a trade, over time, I would make more profits. So, if my goal were to make the highest return, I would use a wider stop. However, my goal is not to maximize my return but rather to maximize my profit factor. [The profit factor is a return/risk measure that is defined as the sum of all winning trades divided by the sum of all losing trades.] Do you ever use a trailing stop? [A trailing stop is an order to exit the position whenever the market moves a fixed amount below the high of a price upmove (or above the low of a price downmove).] Never. When I hear people say something like, “I’m going to use a $500 trailing stop,” I think, “What sense does that make! You mean you want to be selling when you should be buying more?” That never made any sense to me. Nor does it make any sense to me that some people use their open profits on the trade to add more contracts. That, to me, is the most asinine trading idea I ever heard. If you do that, you can be right on the trade and still lose money. In my own trading, my positions only get smaller. My biggest position is the day I put a trade on. What is the weekend rule I’ve seen you refer to? The weekend rule goes back to Richard Donchian in the 1970s and basically says that if the market closes in new high or low ground on a Friday, then it is likely to extend that move on Monday and early Tuesday. The significance for me is that if a market breaks out on a Friday, then I have a completed pattern and the Donchian rule working in favor of the trade. Have you ever checked out the validity of the weekend rule? I have never statistically analyzed it, but I can tell you that many of my most profitable trades came from Friday breakouts, especially if it is a three-day weekend. I can also tell you that the trades that I stayed in despite showing a net loss as of the Friday close probably cost me more money than any other type of trade. I have learned that it is best to liquidate any trade that shows an open loss as of the Friday close. Why do you think that rule works? The Friday close is the most critical price of the week because it is the price at which people commit to accepting the risk of holding a position over the weekend. Do you now unfailingly adhere to the Friday rule? I sometimes violate it, but when I do, the market usually slaps me in the face. The one thing I regret is not keeping data on different types of trading decisions. The way you trade with such tight risk control from the point of entry seems like you wouldn’t be exposed to any substantial losing trades, but were there any particularly painful trades in your career? Oh yeah. I was long crude oil in January 1991 when the US began its attack against Iraq in the First Gulf War. Before the news of the attack came out, crude oil closed around $29 in New York. Although this was before 24-hour markets, crude did trade on the Kerb [an after-hours market in London] and was trading about $2–$3 higher that night. So I went to sleep thinking, “Boy, tomorrow is really going to be something.” Well, it was, but not the way I thought. The next day, crude oil opened $7 below the New York close—a $10 swing from its nighttime levels. That was by far the largest loss on a trade I ever experienced. [Another account of a trading experience related to this same stunning market reversal came up in my interview with Tom Basso in The New Market Wizards. 6 ] With the market gapping so much lower on the open, did you still get out at the open, or did you wait before liquidating your position? I don’t sit and speculate with a loss. I learned a long time ago that if you speculate with a loss to get less of a loss, you end up with more of a loss. [Notwithstanding the massive decline on that day, the crude oil market moved significantly lower the next day and didn’t reach a low until about a month later.] The same trading discipline applies to an error. I have never speculated with an error. How much did you lose on that single trade? About 14% of my equity. Do you remember your emotional response? Shock. I was numb. What is your motivation for writing a weekly market letter? It seems like a lot of work. Quite frankly, the Factor is written for an audience of one. I write the Factor for me. It is my way of preaching to myself all the things I need to be continually reminded of. Don’t you have any concern that by publicizing your trades, there may be too many trades put in at the same price points, thereby adversely affecting the trade? Nah, I don’t think it has any effect. I know you do almost all your chart analysis and trading decisions for the coming week after the Friday close and up through the Sunday night opening. Do you make any new trading decisions during the week? By the end of the weekend, I have my list of markets to monitor for a trade. On rare occasions, I may add a market during the week, but I try to minimize such trades. If it’s not on my weekend list of markets to monitor for the week for a potential trade, then I don’t like to take it as a trade. This is another example of a category of trades that I wished I had kept data on. I bet if you counted up all the trades I ever did that were not on my weekend list of potential trades, they would be net losers. Do you trade intraday at all? For the first two or three days after I put on a trade, I am alert for an opportunity to tighten my stop, even intraday. But with that one exception, I don’t trade intraday. If I sit and watch the computer screen all day, I will sabotage myself. Inevitably, I will make the wrong decisions. I will get out of winning trades. I’ll second-guess an order that I placed when the markets weren’t open, and I made a decision based strictly on the charts rather than being mesmerized by blinking prices on the screen. For me, what works is a disciplined approach: Make a decision, write the order, place the order, and live with it. Your comments about how making decisions during market hours tends to mess up your trading reminds me of an interchange I had with Ed Seykota. I remarked, “I noticed there is no quote machine on your desk.” He replied, “Having a quote machine is like having a slot machine on your desk—you end up feeding it all day long.” 7 The next morning, we continued the interview over breakfast at a place called the Black Watch. (Excellent breakfast spot; check it out if you are ever in Tucson.) Brandt began the conversation by saying that although he had done all right, he was not in the same league as some of the great traders in the other Market Wizards books. He started rattling off a string of names to make his point. Brandt concluded by saying that if I decided not to include him in the book, he would fully understand, and it would be OK with him. Brandt is a sincere person, so he was not speaking out of false modesty—although it was certainly misplaced modesty. I told Brandt there was no chance that I would exclude him from the book. I explained that he not only had a long track record with superb performance, but he also had a lot of valuable insights about trading that I thought were important to share with readers. Brandt had brought some charts along to illustrate certain of his past trades, which is where our conversation continued. This was my most profitable trade ever. It broke out, and never looked back. [Brandt hands me a chart of the New York Stock Exchange Composite Index, pointing to his long side entry in early 1987 on a breakout above an extended, horizontal consolidation—a breakout that led to an immediate and virtually unbroken upside move.] Here is a big trade I had in 2008 when the pound crashed from $2.00 to $1.40 in a matter of months. Again, the market broke out and never looked back. [In the chart he hands me, the downside breakout of a head-and-shoulders consolidation formed at the highs leads to a sudden, huge decline, interrupted only briefly by a minor rebound after the initial downswing. He comments on that minor rebound.] What I have found is that when you have a big move down, the first rally never holds. If there is ever a case where I want to sell into strength, it would be the first rally after a straight-line drop. Often the rally will last for only two days after the reversal day. [He shows me some other similar charts of breakouts from long-term consolidations leading to major price moves.] In all these examples, you are buying or selling after breakouts from longterm consolidations. Do you ever enter trades after breakouts from pennants or flags? [Pennants and flags are narrow, short-term (generally under two weeks) consolidations that form after price swings.] I will if they form during a big price move that has a much further objective based on the completion of a pattern on the weekly chart. But if they just happen on any chart, the answer would be no. I remember once retweeting one of your market observations and receiving a comment along the lines: “Why would you pay any attention to someone like Brandt who recommended going short the S&P 5,000 points lower?” What is your reaction to that type of comment? My philosophy is strong opinions, weakly held. The minute a trade reaches into my pocket, it becomes a weakly held position, and I’ll drop it like a hot potato. I can go from a strong opinion to being out of the market in one day. But in the Twitter world, all they remember is the strong opinion. It’s like whatever you say, it represents your opinion for the rest of your life. They remember the recommendation, but they forget that I was out a day or two later with a 50-basis point loss or, for that matter, a 50-basis point gain. In the Twitter world, there is a tendency to respond negatively if you were bullish and now switch to bearish or vice versa. Whereas, I think that the flexibility to change your mind is actually a strong attribute for a trader. The markets have seen such enormous changes during your trading career. We’ve gone from a time when you needed a mainframe the size of a room to develop and test simple trading systems to current enormous computing power and easy access to trading software. We have gone from virtually no computerized trading to vast amounts of computerized trading. We have seen the advent of trading based on artificial intelligence and highfrequency trading. We have gone from a time when technical analysis was considered an arcane backwater in market analysis to a time when technical-based trading—both chart analysis of the type you do and computerized technical systems—is widespread. Despite all these changes, you are using the same techniques you did at the beginning of your trading career based on chart patterns described in detail nearly 90 years ago in Schabacker’s book. Do you think these techniques still work, despite all these changes? No, they do not. They absolutely do not. How then have you been able to continue to be successful using methodologies that come from such a different time? I have thought a lot about that question. If I were to take trades at every chart pattern entry point Schabacker would have labeled, it would be extremely difficult to make money because markets no longer obey all of the patterns. There was a time when you could just trade the chart patterns, and you would make money. I believe that edge is gone. So, you believe that classical chart analysis on its own no longer works. Yes, I believe that is true. Large long-term patterns no longer work. Trendlines no longer work. Channels no longer work. Symmetrical triangles no longer work. So what, if anything, does still work? The only thing I have found that still works are patterns that tend to be shorterterm—less than a year and preferably less than 26 weeks—that have a horizontal boundary. Such patterns could include head-and-shoulder formations, ascending and descending triangles, and rectangular consolidations. Is it that the patterns you are naming are not so much patterns that work, but instead are patterns that allow you to select entry points that have welldefined, reasonably close, meaningful stop-risk points? Yes, charts will give you the idea of the path of least resistance, but charts do not forecast. There is a danger when people start thinking of charts in terms of forecasting. Charts are wonderful in finding specific spots for asymmetric risk/reward trades. That’s it. I am focused on the probability of being able to get out of the trade at breakeven or better rather than on the probability of getting an anticipated price move. For example, I’m short gold now. I’m looking for the possibility of a $60 to $70 decline in gold. If someone were to ask me, “How confident are you about getting a $60 to $70 decline in gold?” that would be the wrong question. The right question would be, “How confident are you that you will be able to get out of the trade not much worse than breakeven?” You are using a trade signaling methodology that you acknowledge doesn’t have much of an edge. So what is your edge? It isn’t the charts that give me my edge; it’s risk management. I get an edge from discipline, patience, and order execution. A reader of my Factor weekly letter said, “Peter, you get your edge because you are willing to watch a market for weeks before entering and then be out by the end of the day because the market didn’t act right.” And I thought, “My God, someone here gets me.” All that charts do is give me a point at which I’m willing to take a bet. They give me a point at which I can say, “The market should trend from this exact price.” Another way to look at it is: Can I find a bar on the price chart where there is a pretty good chance that the low of that bar will not be taken out? So, it isn’t that you figured out where to enter trades so much as you figured out where you can place asymmetrical trades that have a near-50-50 chance of working. I think that’s a good description. All my profits come from 10%–15% of my trades; all the other trades are throwaways. The same pattern seems to hold consistently year in and year out. The problem, of course, is that I never know which trades are going to be in that 10%–15%. I know your trading falls entirely in the camp of technical analysis, but do you think there is any value in fundamental analysis, even if it’s not the right approach for you? Dan Markey, my mentor, had an interesting philosophy about fundamentals. He thought most fundamental news was nonsense. Dan had what he called the dominant fundamental factor theory, which postulated that, over an extended period, one to five years, there was one underlying fundamental factor that was the driver of the market. All the other news merely caused gyrations around the trend driven by the dominant fundamental factor, and, more often than not, conventional wisdom didn’t have a clue about what the relevant fundamental factor was. You could watch CNBC for a week, and they would never mention the dominant fundamental factor. In fact, if people were aware of the dominant factor at all, in most instances, they were trying to fade it. I think a great example of this tendency was quantitative easing, which was implemented in the aftermath of the Great Recession and was the great driver of the ensuing bull market in stocks. People were saying, “The central banks can’t keep doing this. It’s causing too much debt. You have to short this market.” Do you use Dan’s concept at all? I don’t, but I often wonder what Dan, who died in 1998, would have thought was driving a given market. What advice would you give to someone who wanted to pursue a trading career? The first thing I would ask them is, “If you lost everything you put in, would it meaningfully change your lifestyle?” If it would, don’t trade. If you’re not a good problem solver, don’t trade. If you feel you need to have trading profits accrue on some regular schedule, don’t trade. The markets are not an annuity. I would tell would-be traders to expect it to take at least three years to get even a clue of how they should trade and five years to reach some level of competency. And if you don’t have the three to five years to achieve trading competency, you probably shouldn’t trade. People totally underestimate how long it takes to become a profitable trader. Don’t look to become a trader because you want to make money. I would say that if your goal is to earn a living as a trader, the probability of success is probably only about 1%. Do you realize when I asked you what advice you would give to someone who wanted to be a trader, you just gave me a bunch of reasons why someone shouldn’t be a trader? Oh yeah. If despite all that advice, someone said, “I got you, but I still want to give it a try,” what advice would you give them? Learn not to take a loss personally. The markets don’t care about who you are. What else? You have to find your own way. If you think you can copy somebody else’s trading style, it will never work for you. That is one of the main messages I try to convey to traders myself, but tell me in your own words why you think that is true. One of the main dangers for traders who try to mirror themselves after other traders is that sooner or later, every trader will go through a significant drawdown. When I go through a challenging period, I understand it. If I have 10 losing trades in a row, I can understand that I didn’t do anything wrong as long as I followed my plan. Someone else trying to copy my methodology wouldn’t have that conviction. If, as is inevitable, the approach went through a difficult period at some point, they wouldn’t be able to last through it. That’s why traders need to know exactly why they are taking a trade. That is the only way they will survive through challenging periods. That raises the question of what do you do during those periods where everything you do seems to be wrong, and you are just out of sync with the markets? I just cut size. In the past, during such times, I would ask, “What do I need to change in my trading?” That type of response typically ended up leading me down a rabbit trail that didn’t end well. Optimizing your trading approach for the last series of trades is not a solution, and it will only lead you astray. I try to keep trading the same way. That’s the only way I’ll come out of a drawdown and get back on track. What other advice would you give to someone seeking a trading career? You have to learn to wait for the right pitch. The hardest thing for me early on was figuring out the answer to the question: What is my pitch? What is the pitch that I’m willing to swing on? I think something that every trader has to come to terms with is answering that question. Can you define with high specificity what trade you’re willing to take a swing at? Only when a trader can answer that question is he or she ready to deal with other critical issues such as sizing, leverage, scaling, and trade management. Before you said, make sure your motivation for becoming a trader is not to make money. What is a good motivation? The markets are such a neat challenge. You have to enjoy the process of problem-solving. I think there is great satisfaction if, at the end of it, you can say, “I have found a way to do it, and I am satisfied with the outcome.” What is your advice on missed trades? Live with it. I call these could’ve-would’ve-should’ve trades. I typically am going to have about two pretty significant could’ve-would’ve-should’ve trades in an average year. And I just have to accept the fact that it’s going to happen. Are those trades more painful than losses? They used to be. They used to drive me crazy. [He says this drawing out the “a” in crazy.] How did you get past that? I reduced the number of missed trades by planning and having orders in place rather than waiting for a breakout and then figuring out what I was going to do. Also, with experience, I have learned there’s always another trade that will come along. One of the things that I find amazing is that if I wait long enough, there’s always another great trade that will set up. I am more concerned about the mistakes I make than the markets that I miss. Contrast the characteristics of winning traders and losing traders. I think there are things that the winners have in common. They respect risk. They limit their risk on a trade. They don’t automatically assume they will be right on a trade. If anything, they assume they will be wrong. They don’t get too excited about a winning trade or too bummed out about a losing trade. And the losers? They risk way too much. They don’t have a methodology. They chase markets. They have a fear of missing out. They can’t keep their emotions in check; they have wild swings between excitement and depression. It is ironic that what most people think is most important to becoming a successful trader—the methodology for entering trades—is actually one of the least important elements for Brandt. In fact, Brandt acknowledges that classical chart analysis has lost virtually its entire edge. What is critical is risk management. In fact, the methodology—chart analysis—is merely a tool to identify points in time that are amenable to the execution of Brandt’s risk management approach. Brandt places his stops to assure that he never takes a large loss on any trade, barring those rare circumstances where his stop is executed far below the intended level, as occurred in his First Gulf War trade— the only such trade in his career. The essence of Brandt’s strategy is to risk very little on any given trade and to restrict trades to those he believes offer a reasonable potential for an objective that is three to four times the magnitude of his risk. He essentially uses charts to identify points at which it is possible to define a close protective stop that is also meaningful—points at which a relatively small price move would be sufficient to trigger a meaningful signal that the trade is wrong. An example of such a trade would be going long on a day on which the market closes strong after a major upside breakout, and the low of that day lies well below the “ice line” to use Brandt’s terminology. Brandt’s trading approach is yet another example of a common trait I have observed among great traders: They have a methodology based on identifying asymmetric trade opportunities —trades where the perceived upside potential significantly exceeds the required risk. Some readers may find it puzzling that Brandt chooses to use a protective stop strategy that he acknowledges is so tight that it reduces his overall returns. Why not use an approach that maximizes return? The answer is that an approach that increases return but also increases risk by a greater amount is suboptimal. The reason is that, mathematically, by increasing position size, a method with higher return-to-risk can always be made to yield a higher return at the same risk level than a lower return-to-risk method (even if its return is higher). To be successful as a trader, you have to develop your own trading style. Notably, while Brandt’s primary mentor relied on fundamental analysis and took very long-term trades, Brandt developed a trading methodology that was based strictly on technical analysis, taking trades of much shorter duration, particularly in the case of losing trades. Brandt learned the importance of money management from his mentor, but the trading methodology he developed was strictly his own. Brandt has been quite disciplined about trading his own methodology throughout his career with one major exception. In 2013, after several months of net losses when his trading approach seemed to be out of sync with the markets, Brandt let himself become influenced by general talk among technical traders that the markets had changed. In a moment of weakness, Brandt abandoned the approach that had served him so well for so many years and started experimenting with trading methods that were not his own. All of these dalliances with different approaches merely extended and increased his losses. As a result, Brandt ended up with his only losing year since he resumed trading in late 2006 and, by his own admission, turned what should have been a 5% drawdown into a 17% drawdown. A corollary of trading your own methodology is the principle: Don’t trade based on someone else’s recommendations. In Brandt’s first trade, he followed the trade recommendation of the floor broker who had influenced him to pursue a trading career. Even though the trade proved profitable for the broker, Brandt ended up losing money because he didn’t realize the broker’s time frame for a trade was much shorter than his own. It is uncanny how often following other people’s advice or recommendations will turn out badly. You can learn sound principles from other successful traders, but putting on trades based on someone else’s recommendation instead of your own methodology will usually be a losing proposition. Remember, the next time you lose money on a trading tip: I told you so. When asked what he wished he knew when he started trading, Brandt said, “I am my own worst enemy.” Brandt is not alone. Human emotions and impulses will often lead traders to do the wrong thing. Brandt explained that he is an impulsive person and that if he simply watched the screen and followed his instincts to enter trades, he would self-destruct. Brandt believes that his success is possible only because he employs a precise process in placing trades, one that excludes his emotional responses. In Brandt’s words, “Have a process: Make a decision, write the order, place the order, live with it.” Brandt avoids watching the screen and largely restricts his new trading positions to those identified by his exhaustive chart analysis and trade planning conducted each week between the Friday close and Sunday evening opening, a period when the markets are closed. Brandt’s comments on the adverse impact of human emotions on trading reminded me of William Eckhardt’s observation in The New Market Wizards: “If you’re playing for emotional satisfaction, you’re bound to lose, because what feels good is often the wrong thing to do.” 8 Indeed, the best trades may be the most counterintuitive or most difficult to take. One of Brandt’s best trades in 2019 was a short grain position, which was opposite to the direction he wanted to trade the grain markets. Having a specific process is essential not only to avoid emotional trading decisions, which are usually detrimental, but also as a prerequisite for trading success. Every successful trader I have ever interviewed had a specific methodology; good trading is the antithesis of a shoot-from-the-hip approach. Brandt selects trades that meet specific criteria, and the timing of those trades is well-defined down to the entry day. Once he is in a trade, Brandt has a predetermined point at which he will exit the trade if it is losing money and a plan for taking profits if the trade is successful. Many, if not most, traders, particularly novice traders, fail to comprehend the critical distinction between bad trades and losing trades—the two are definitely not the same. Brandt says that if he can look at a chart a year after a trade and be able to see the day and price at which he took a position, then it was a good trade, regardless of whether it won or lost. In effect, Brandt is saying that the determinant of a good trade is whether you followed your methodology, not whether the trade made money. (Of course, the implicit assumption in this perspective is that you are using a methodology that is profitable with acceptable risk over the long run.) The reality is that some percentage of trades in any methodology will lose money, no matter how good the approach is, and there is no way to know a priori which will be the winning trades. Many traders will have a comfort level regarding trading size. They may do well trading smaller position sizes but then see a significant deterioration in their performance at larger position sizes, even if the markets they are trading are still very liquid at the larger position size levels. Brandt had this experience when Commodities Corporation raised his allocation to the point that he was trading 100-lot orders in T-bonds instead of his prior maximum order size of 20 contracts. Even though his percent risk per trade was unchanged, he found himself thinking about losses in dollar terms rather than percent of equity terms. Now, it may not make sense that trading size should make any difference if the percent risk per trade is unchanged and the market is still fully liquid at the larger order size, but human emotions and their impact on trading are not subject to logic. The lesson here is that traders should caution against any abrupt, large increases in their trading level. Instead, increases in account equity should be gradual to make sure that the trader is comfortable with the increased trading size. Success in trading one’s own account will not necessarily translate to success in managing money. Some traders may be comfortable and do well trading their own money but may see their performance fall apart when trading other people’s money. This phenomenon can occur because, for some traders, a sense of guilt in losing other people’s money may impair their normal trading decision process. It is not a coincidence that the period when Brandt managed other people’s money coincided with his worst drawdown since he returned to a trading career in late 2006. Interestingly, the month Brandt returned all investor money was the low point of his drawdown and was followed by 20 consecutive winning months. Traders who make the transition from trading their own account to managing money should be closely attuned to whether managing other people’s assets impacts their mental comfort level in making trading decisions. Brandt improved his performance by eliminating what he calls “popcorn trades”—trades that have a significant profit but are then held until the entire profit is surrendered or, even worse, until the profit turns into a net loss. The negative experience of these trades early in his career prompted Brandt to institute rules to avoid such outcomes: 1. Once he has a net profit on a trade equal to 1% of his total equity, Brandt will take partial profits. 2. Once a trade gets within 30% of his profit target, Brandt will employ much closer stop protection. Another of Brandt’s trading rules is: If an open trade shows a net loss as of a Friday close, get out. Part of the reasoning here is that carrying a position over the weekend embeds more risk than holding the position overnight on a weekday. And since the assumption is that the position is at a net loss as of the Friday close, for a trader with a low risk threshold, such as Brandt, liquidating the position in this scenario is prudent risk management. However, the primary reason for the Friday close liquidation advice is that Brandt views the Friday close as particularly meaningful, a perspective that implies that a strong or weak close on Friday is more likely than not to see follow-through price action at the beginning of the following week. Insofar as this premise is true, even if the trade ultimately proves correct, there is a good chance there will be an opportunity to re-enter the trade at a better price in the following week. One dilemma faced by all traders is: What should you do when your trading approach is out of sync with the market? Brandt would advise that the one thing you should not do is switch from a methodology that has worked well to some other approach. Now, there may be times when such a radical change is warranted, but only after substantial research and analysis confirm such action. A style transformation should never be undertaken lightly simply because a trader is experiencing an adverse streak in the market. So what is the appropriate action in those times when everything a trader does seems wrong? Brandt’s response would be: Cut your trading size, substantially if necessary, until you are once again in sync with the markets. It is noteworthy that Brandt’s first losing year after becoming a full-time trader occurred immediately following his best trading year ever. I am reminded of Marty Schwartz’s comment in Market Wizards: “My biggest losses have always followed my biggest profits.” 9 The worst drawdowns often follow periods when everything seems to be working perfectly. Why is there a tendency for the worst losses to follow the best performance? One possible explanation is that winning streaks lead to complacency, and complacency leads to sloppy trading. In the strongly winning periods, the trader is least likely to consider what might go wrong, especially worst-case scenarios. An additional explanation is that periods of excellent performance are also likely to be times of high exposure. The moral is: If your portfolio is sailing to new highs almost daily and virtually all your trades are working, watch out! These are the times to guard against complacency and to be extra vigilant. Regardless of your trading methodology, how do you know which types of trades work and don’t work over the long run, and which circumstances are favorable or unfavorable? Systematic traders can answer these types of questions by testing each classification of trades. Discretionary traders, however, cannot test different alternatives because, by definition, discretionary traders can’t algorithmically define what their past trades would have been. For discretionary traders, the only way to determine what types of trades work best and worst is to classify and record their trade results in real time. Over time, this manual process would yield the requisite data and the resulting trading insights. One thing Brandt regrets is that he failed to keep such a log. For example, he believes that trades that were not on his monitor list after his weekend analysis (that is, trades that were formulated as a response to intraweek price action) are subpar performers and could even be net losers. He believes this hypothesis, but he really doesn’t know if it is true. He wishes he had kept category-delineated track records so he could answer such questions. The lesson here is that discretionary traders should categorize their trades and monitor trade outcomes for each category, so they will have the hard data to know what does and doesn’t work. Patience is a common trait among successful traders but not necessarily an innate one. In Brandt’s case, his natural instincts lean closer to impatience than patience, but he has the self-discipline to enforce patience. For Brandt, patience is an essential component of trade entry—“waiting for the right pitch,” as he expresses it. He avoids the temptation of taking every trade idea and instead waits for the compelling trade—one where the upside potential appears three to four times greater than the required risk with near-equal perceived probability. In my interview with Joel Greenblatt, the founder of Gotham Capital, he made a similar point. Referencing Warren Buffett’s comment, “There are no called strikes on Wall Street,” Greenblatt said, “You can watch as many pitches as you want and only swing when everything sets up your way.” 10 Brandt’s largest loss by an enormous margin was his long crude oil position at the start of the First Gulf War. Crude oil prices dropped by about 25% overnight. Brandt just liquidated his position on the opening at prices far below his intended stop. He did not consider waiting for a possible rebound to provide a better exit point. Speculating with the loss in this way would just have made the loss even worse, as crude oil prices continued to sink lower in the following weeks. Although a sample size of one doesn’t prove anything, the implied lesson of “don’t speculate with a trading loss,” is sound advice. A similar rule would apply to trading errors. In both cases, traders should just liquidate the position rather than gamble with the loss. Trading for a living, as Brandt does, may seem like an appealing lifestyle prospect to many, but it is a far more difficult goal to achieve than most people realize. Most aspiring traders are undercapitalized and underestimate the time it takes to develop a profitable methodology (three to five years by Brandt’s estimate). Brandt advises against trading if losing your trading stake will meaningfully alter your lifestyle. It is also virtually impossible to succeed at trading if you are dependent on trading profits to pay your living expenses. As Brandt notes, “the markets are not an annuity”—you can’t reasonably expect a steady income flow from trading. Brandt’s motto is: Strong opinions, weakly held. Have a strong reason for taking a trade, but once you are in a trade, be quick to exit if it doesn’t behave as expected. There is nothing wrong with being dead wrong on a market if you exit the trade with only a small loss. And don’t be concerned that changing your opinion will make you look foolish. Completely reversing your opinion on a market reflects flexibility, which is an attribute for a trader, not a weakness. One of the essential characteristics of successful traders is that they love to trade. This perspective was true of Brandt in his first decade-plus of trading. You can hear it in his description of his early days when he had a virtual compulsion to trade. But by the early-to-mid 1990s, the fun had gone out of trading for Brandt. Trading, in his words, had become a “drudgery.” This radical shift over time from loving trading to dreading it meant that Brandt has lost perhaps the most essential ingredient for trading success, and the wheels came off his performance. Over a decade later, Brandt’s desire to trade re-emerged, and he once again was very successful. The moral is: Be sure you really want to trade. And don’t confuse wanting to be rich with wanting to trade. Unless you love the endeavor, you are unlikely to succeed.

 

Unknown Market Wizards:
A college graduate who started with a $2,500 account and in the course of the next 17 years pulled $50 million of profits out of the market.
An ex-advertising executive who in a 27-year career as a futures trader achieved an average annual return of 58%.
A stock trader who developed a unique trading approach that utilizes neither fundamental nor technical analysis and turned his original $83,000 stake into $21 million.
A futures trader who over a 13-year career has averaged 337% per year without any drawdowns exceeding 10% after his first trading year.
A bellhop in the Czech Republic whose day trading strategy for buying stocks has provided return/risk performance that far surpassed over 99% of both long-only funds and hedge funds. A futures trader who made and lost over one-half million dollars twice before developing a contrarian methodology that led to a 20-year career of consistent trading success.
A former US marine who designed proprietary software to automatically trade market events and has a 10-year record of outstanding return/risk performance.
A futures trader who has averaged a return of 280% per year with an endof-month maximum drawdown of only 11%.
A music major who used his self-taught programming skills to design stock trading systems that delivered an average return of 20% during the past 20 years, well over triple the S&P 500 return during the same period.
A one-time professional tennis aspirant who achieved a remarkable average annual return of 298% over a near-decade as a futures trader.
An equity trader who by combining long investment positions with shortterm event trading has tripled the S&P 500 performance in both return and return/risk terms.

 

Anonymous elitetraders pulling in millions yearly

 

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Interesting read again/Peter B.
Interesting also, he does much better trading his account, than with C Co.
He could have been a whiner all his life, with a single mom, instead he got 2 paper routes as kid.
Looks like working hard was better for him/ than lazy LOL