Insider secrets from a Forex Bank Trader

SO> Hey everybody. This is Shaun Overton with onestepremoved. com and today I'm talking with Batur Asmazoglu. BA> That's good. SO> All right. That's BA> yes. I was worried about butchering that. Not exactly a common name but Batur is Turkish and I'm here in Istanbul. I've been working with him for the past month and I've been working on the same project as he is but we come from totally different backgrounds. So obviously I run onestepremoved. I'm a programming and algo company and Batur's background is that he's worked in every major bank that you've heard of, Credit Suisse, Deutsche Bank, HSBC and everything that he's done in those banks is he's done FX trading so he's made markets, he takes positions for the bank and the great thing about this month is like we're in the time of what it actually is like to be in the center of the Forex world. And Batur has been telling me a lot about his experiences and I thought it would be great for you guys watching to get a sense for how the big banks actually take their positions and what they actually do on a day-to-day basis. We've been having some good laughs. One of the systems we're trying to reverse engineer is from Forex Factory and he sees a lot of conspiracy theories about how all the big banks are out to get you and how they've got this obsession with getting the, getting the most out of every single person and it's just not how it is. And I'm really technologically oriented so my big view with the banks was that they're super sophisticated and they've got this great knowledge and information and scientific methods for why they do things and that's not the case either and I've learnt that BA> Not really. SO> and I've learned that from talking to Batur for the last couple of months so I just wanted to ask him a couple of questions to get a feel for what it's like and then we'll go through it. I don't know exactly how long the video is going to last but it will probably be about 20 or 30 minutes. All right, so Batur thanks for agreeing BA> No problem. SO> to be on camera. BA> No problem. SO> So you started it out working as a trader for a private client here in Turkey? BA> That is correct. I started managing money for one of the local billionaires and then moved on to a fund management house in Turkey. And then move to HSBC, Credit Suisse and Deutsche in that order managing FX positions and local currency, bonds mostly. What I did was mostly Emerging Markets FX trading but I have done some EUR/USD and I have done some Aussie as well. SO> OK and so you just stumbled into working for a billionaire? BA> Well, it's kind of, yes from the same school so that kind of helped but they were basically looking for some young people who they could teach what they wanted to deal with. SO> OK. BA> We have this one guy who was an expert trader. He actually built the whole system up from the ground so I was one of the recruited ones SO> OK. BA> from the school. SO> Very nice and when you got your experience in the banks and you started working, how did they actually train traders? Like when you're an institutional trader, what do they do to, teach you? BA> Well, most people think banks are very sophisticated, and they have plans for everything. The reality is, especially with London investment banking, is actually not sophisticated at all. The people themselves are sophisticated, they come from good schools and strong backgrounds. However, banks have invested very little money since the '80s and '90s in infrastructure and software development. So most of the software is from the '80s. Even Reuters today was made in 1975, I think. SO> OK. Reuters is probably one of the biggest FX platforms in the world. BA> The banks themselves don't really invest much into the people either, because the turnover is very huge. They don't really know who is going to leave when, so basically you're pretty much alone with your instincts, your gut feelings but there is a, there are ways to learn from the older generations. They are usually there to be a mentor try to teach you stuff but there is really no sophisticated way of raising a good trader from the ground up. SO> So you've talked a lot about the lifestyle and the pressures of working in London as a BA> Uh hm. SO> trader and you just mentioned the high turnover. Why? And you've also mentioned a lot of the star traders go to hedge funds. Is that all the turnover? Or how many people wash out? BA> Well basically let's say 10 people start up this, X investment bank in London at some point. If the product that you're dealing with is profitable that mean look for the last five year let's say bonds have been very profitable because of the low interest rate environment. EUR/USD has been relatively profitable but let's say CHF has not been profitable because it doesn't move much, it's not volatile enough so if you're lucky enough to be in the right product market then you have to be better than the seven or eight other traders because basically in a bank most people think there's around 500 traders when they see the pictures of the large trading rooms but the truth is most of those people are M&A people, equity, sales. In the large FX bank which is Deutsche at the moment there is about 70 FX traders so not that many and every year a lot of people leave the school to become a trader so at the end of the day 10 people start into the first year, some of them have already left, at the end of five years there is barely one or two. SO> OK. BA> Most of them in a funny way move by themselves because the pressure of trying to make money gets to you very fast if you don't really have the talent. SO> Right. Yes. You should mention that. BA> But, basically the bank takes you on as a fresh starter. What's different than most people would expect is they want you to start making money right away. SO> OK. BA> In a small way maybe. Maybe it work out for a lot of people but they really don't give you six months to get a hold of yourself and learn about the place or anything so if you're lucky enough to have the guts to try this and if you're lucky enough to get the right trades done at the right time you might have a six-month start SO> OK. BA> but I am personally I'm guessing there's more luck in play there than real knowledge because first six months if things go bad sometimes it's just bad luck. SO> OK and I noticed that a lot of the positions that you talked about BA> Uh hm. SO> not just for yourself but or all bank traders really is not this crazy intraday technical analysis BA> Nu nnn SO> with a mechanical system. It's the exact opposite of that? BA> The truth is about while I was trading at the bank I've seen very little technical analysis at all. The main reason for this is the bank is the market-making exchange. The bank is a place where the market is made when there is no crisis in the market so you if you're the market-maker, if you're the price-maker you can't look at historical data and make up a price quote of events that are happening right now. If you have events happening today like let's say Lehman Brothers in 2008, you need to have a real person sitting at that desk, not looking at historical data but looking at the customer flow most importantly and the events and how they, what they understand from them, translates into the price action in the day One of the main reasons why a trader can't be trading intraday is because constantly you have customers taking prices from you so you don't have the luxury of sitting down and like looking at charts and Fibonacci levels or stuff like that. SO> Right. BA> Just average trading rate of a EUR/USD trader is about 10 to 15 deals a minute when it's when it's really going. SO> OK. BA> So he doesn't really have the time to look at things or anything but if he's a good trader he will have come in in the morning, he will have prepared some scenarios for it with different outcomes in case a data might come in or whatever might happen, so he's going to be prepared for pretty much whatever might happen and the difference basically is, while these trades from the customers flow in, all he does is he buys at some predetermined level that he thought about in the morning He usually doesn't even know the exact size because because of the customer deals always flowing in. SO> Right. BA> You never actually know your position exactly SO> OK. BA> Because there is no software developed for this. SO> So you don't have, you don't know whether you're net long 50 or 70? BA> Oh no. Not really because the average SO> OK. BA> The average trade is any way from 50 to $250. SO> OK. BA> Most GBP or EUR/USD traders carry positions around 200 to $300 worth. SO> When you say dollars that means millions? BA> Yes. Million dollars, yes. And that's basically only to cover the customer flows. SO> OK. BA> So if he wants to put on a large position it has to be around half a billion. SO> I think that's a real key distinction that's probably going to go over most people's heads. So when we talk about trading we're used to seeing the prices just flicking on a screen. They come, BA> Uh hm. SO> from this magic box and I always just thought that there is some super scientific algorithm designed by PhDs that's fluttering as it cross my BA> Yes. SO> screen but that's not the case at all. It's really the banks are taking positions, they are accepting positions, they are making the market. BA> That is true. There is an Algo Department in every bank and they have made money in the last 5 to 10 years but they are proving to be less and less profitable because the more algos out, there are out there in the market the less profits there are to actually get. So yes there are algo trading teams but they've never been more profitable than a good FX trader. A manual trader has never been beaten so far. The largest P&L I've heard from an algo was around $5 million a year I think. SO> Right. BA> That would, with $5 million you wouldn't be able to keep your job as a manual trader. SO> OK. BA> So it's a little different than what people think SO> Uh hm. BA> but I would say the day traders who trade with the brokers mostly trade with the algos. To be able to have access to a manual trader you would have to have significant capital, more than $50 million under management. SO> OK. So that's just hedge funds? BA> Yes. SO> Institutions and hedge funds? BA> Pretty much. Pretty much. SO> So when you're trading that's just a totally different concept? And one thing that tripped me up before was we talked about market making. I only trade when I think I have an advantage BA> Yes. SO> but when you're making a market you don't get that luxury. Why can't you pick your own positions? BA> Well, let's say you're market making for EUR/USD at Duetsche Bank. SO> OK. BA> They have around $20 billion of flow a day SO> OK. BA> and you basically have to manage the larger sizes so around $5 billion of this is going to have to be manually made. SO> OK. BA> You're going to take a position at some point obviously. You're going to be, want to be long, maybe €100, €100 million and then some other guy in a loan hedge fund will come and sell you €500, let's say, €500 million. While you're trying to sell that some other hedge fund from France will come in and they will buy €750 million. SO> OK. BA> While you're actually serving these clients you're getting a very important set of information actually. You're understanding what the European hedge funds, the European real money guys are doing SO> Right. BA> and what the London guys are doing. If you understand the market correctly, you will know why these guys are doing these things but there is a cost to it obviously. The cost is that you're giving them liquidity so for you to hold onto your own position is very hard. SO> Right. BA> So the only way to keep your position is to actually to predict what's going to happen. So if your dollar is going lower because of some EUR negative market news, you have to be as much short as possible pretty much because the customers flow when it starts to fallen, it's not going to give you a break so you can put back your position on or think about it. SO> Right. BA> So people usually do whatever they can in the time they have and then things fall into place in about 2 to 3 minutes but the volatility in that region is crazy. Most people when I read the chat rooms, the chat forums and every thing most people think actually there are traders trying to target certain levels in EUR/USD or anything else. Traders, you'll trade at certain levels but actually if you think about it, the levels are dictated by the customer SO> OK. BA> because wherever you put your stops the market goes to. If you put 1$ million worth of stops it's nothing but, if, let's say 90 percent of the hedge funds in the world puts a stop loss at EUR/USD at 100 pips from here, naturally a EUR/USD trader would have to start buying before it hits that stop because after you hit those stop loss, it's too late to buy €700. SO> Right. BA> So naturally EUR/USD trader starts to build up the position for that stop because when he hits there he doesn't want to lose money. So he doesn't actually try to stop people out but to keep himself in that comfort zone that is actually understandable by his bosses SO> Right. BA> he has to keep buying as the EUR/USD approaches the stop the only way to hedge is buying. Anyone who has traded options would understand this through the Delta Trading. If you have options and if you want to hedge it, as the price moves you have to sell and buy to hedge your positions. It's exactly the same thing. So the closer you get to the order the more of the order you have to close. SO> So for me, I used to work in one of the biggest BA> Uh hm. SO> FX brokerages in the world, and we had this cool tool BA> Uh hm. SO> but only like five people had access to it but you could see the cloud of all the different stock BA> Uh hm. SO> levels on a meta level, so you knew that like 1.33, there BA> Uh hm. SO> are a crazy concentration of stops but you on the desk you're the guy making the market you don't have access to that information like on computer screen, do you? BA> No. We didn't really have that kind of software. I'm not sure why but the investment banks seemed to have stopped developing software in the late '80s. Any software that's developed is mainly in-house where we works and emerging markets in the U.S. sometimes for example have started in the last 10, 15 years really. Most of the bonds pricing, most of the option, even options pricing still runs on Excel. That's all. SO> So just regular Microsoft Excel. BA> As crazy as that sounds because of the complexity of the matters and because the products keep changing faster than the projects SO> Right. BA> it's impossible for an investment bank to actually come up with a software without actually shutting down business first. SO> OK. BA> So they are not able to catch up with whatever is happening in the market but it seems for the time being manual traders are able to trade this because they are still profitable. If we come to point where algos take more of the market than they do now, I think they take around 60 to 70 percent of the market now but if they become larger then it could be problematic for manual traders but the real advantage of a manual trader is you never get a ticket for $1 million or $2 million, your tickets are 250, 500 or any size like that so you don't get 100,000 tickets that value like an algo does. SO> Right. Yes because if you could put through a ticket for 500 million BA> Uh hm. SO> on an electronic platform, it's going to go nuts. BA> Probably. Yes. So with the, the one that interests me is when we're talking about the stops. How do you actually know where the stops are if you don't have the software? BA> Well basically if you're smart enough, you will check them out in the morning. SO> So you have the order book that you can reference. BA> There is an order book. It's not exactly very well organized but this is how it works. There is a salesperson for every hedge fund, every real money fund and the salesperson, people who collect all this. SO> Right. BA> There is an order book where they put in all the orders but these orders won't get executed automatically. It's not that developed SO> OK. BA> but as the market comes close to the order levels, this salesperson will get up and come closer to the book, the closer to the orders, the closer the salesperson. They will remind you. SO> You know that something is up. BA> Yes, basically. SO> So there's really a guy. He just hovers over your shoulder and says, "Buy me €50." BA> Yes. This is why the trading rooms are huge, really. The number of traders is not large at all. SO> Right. BA> In a place like Commerzbank it's five people. SO> So you just have a bunch of vultures wanting to get their commissions, make sure BA> Exactly. SO> their client gets their fill. BA> Exactly. Yes. Very well said. SO> OK, right and the other thing I wanted to ask you about is I know you may markets for an emerging, for emerging market currencies. How you do decide things like what the, is there a spread in your head? Or is it just, I'll sell you Lira for this much? BA> Well, there is a spread but the spread unfortunately is mostly decided by the competition. SO> OK. BA> Smaller banks do the same business, the tighter the spread. So when I started doing both TRY and USD/ZAR, spreads were about five times what they are now SO> OK. BA> but at that point only five banks traded in USD/ TRY. Now there are about 55 banks worldwide who trade the USD/TRY and the spreads have fallen to almost EUR/USD-like levels. SO> Right. BA> So I guess it's the market conditions that really tells you what the spread might be but the competition is so fierce these days and banks really are having trouble keeping customers, spreads are mostly decided by competition. Most of the time it doesn't make sense. Most of the time you lose money on the trades you do. This probably sounds very funny to most people outside banking because as far as I can see everyone thinks the banks keep making money from every customer trade. SO> Right. BA> In FX about 75 percent of the deals actually lose money SO> OK. BA> as soon as they trade because they get very tight spreads from you. SO> Right. BA> Let's say even 750 EUR/USD. It's very hard to get out of your position very fast. SO> OK. BA> What you make money from is not the deal itself but the understanding of the market that comes with it. So if somebody buys €1 billion from you the likelihood of you thinking that EUR will go higher at the right time increases significantly SO> Yes. BA> and if you have the larger size of trading positions you can easily make up the money that you've just lost to the client. SO> OK. So you're basically trading a small loss for the information of where you think the market BA> Exactly. SO> will go? BA> Yes. SO> So and how are you doing that when you're making a market because you don't have control over the situation? BA> Well, you don't really have control over the situation but you know fundamentally what might happen in the market. SO> OK. BA> So if I think let's say, these days emerging markets are trading very weak so basically USD/TRY, USD/ZAR, USD/MXN, everything is going higher so you don't really need to be that smart to keep buy USD at every dip. So when customers ask you for prices basically what you do is you try to buy USD as much as you can in the dips, SO> OK. BA> and if some customers come and buy it from you, you, you pretty much replace it from the market. SO> So how to you get customers to buy from you? Are you getting really aggressive about selling them dollars or buying the dollars, or? BA> Well, you can't really do much but the trader only executes the trades and keeps track of the positions. You really don't have much time for anything else. Basically what happens is, salespeople come over to you every morning. SO> OK. BA> They take your ideas on the market and what might happen SO> Right. BA> If you have solid trade ideas they take these ideas to their clients which are hedge funds and EUR money based. SO> OK. BA> If these funds actually like the trade ideas they will do this trade with you. SO> OK. BA> If you're smart enough to have the right trade idea, hopefully you put them to positions, so these guys come to trade with you. You can give them a tight spread, "I'm going to buy the dollars from you. " Let's say you're trading in these days, you still have enough dollars to make money on your own. SO> OK and how does that work incentive wise because if you're, if you as the trader you're taking all the market risk from those clients but you're also giving them the advice? BA> Well, it's the job of the trader to come up with the trading idea and make money from it. Basically at the hedge funds people are traders as well. SO> Right. BA> They are the better ones. SO> Why is that? BA> When you first start at the bank, you're basically getting paid 3 to 5 percent of your profits. SO> OK. BA> So if you make $10 million for the bank you take home about 5 percent of it before taxes. In a hedge fund that's about 20 percent. SO> OK. BA> So a guy who's been trading well in a bank for about five years, and well, meaning exceptionally well is recruited by hedge funds quite easily. SO> OK. BA> In the first 10 years or so most people, most very good people are taken over by hedge funds. SO> So there's kind of a tier system? If you work for a hedge fund you're probably like an All-Star but if you're a- BA> Well, there are all kinds of hedge funds. I'm talking about the larger better ones. SO> Sure. Yes. There's a lot of, I talk to people that are SO> starting hedge funds BA> Yes. SO> and they are not. BA> Well, they are just too many hedge funds. I'm talking about the ones that are over a few billion dollars in assets under management. SO> Sure. BA> What else can I talk about? SO> Well, the thing I was wondering in the back of my head was when you say you're actually on the phone talking to a guy and he buys €50 million. BA> Uh hm. SO> How is that, you know, you're on the phone, how does that trade get marketed? Are you like scribbling on pieces of paper or? BA> Basically you could, you, we use other stuff called hoots. SO> OK. BA> You don't need to use the phone the way you do. It's like an operator thing. You press a button SO> OK. BA> and everyone kind of hears each other's conversation. The only downside to it is you can hear the guys next to you as well SO> OK. BA> speaking to their customers and their salespeople. SO> So you can kind of, like you're actually in the room physically hearing the prices that are trading and who is SO> buying and who is selling BA> Yes. SO> and you know the traders, like that guy is not as good as that guy. BA> Yes. Pretty much everything. After a while like people who walk into a trading room, first thinking it's just a crowded place with a lot of noise but in a while you will start to be able to tell people apart. You are, you are even able to tell the people's trades apart. When they make a trade that makes money you can tell from their voices. SO> Right. BA> The more time that you spend in there, the better it becomes but it's pretty much like a conference call kind of environment. SO> OK. BA> But the thing is everyone is speaking at the same time. So, it's a bit of a challenge but brokers have been doing this for years and they've almost perfected that. SO> So how do you cope? because now you're working here in Istanbul and managing money for a private client and you don't have that situation, that feedback? BA> It's quite different I have to say. I haven't been trading like I used to in terms of performance but this was totally expected because most of my clients have been through the hedge funds and money management firms have this problem. One of the main problems is as a trader you always have your own ideas but there are other traders around you who can pretty much call you out if you're doing something really stupid. SO> OK. BA> That kind of gives you some kind of security. SO> Right. BA> Trading alone in a room which most people out in the market do is quite different from that. Actually seeing the EUR/USD trader making or losing money next to you gives you a lot - tells you a lot about the market situation right now and it makes trading in those emerging markets much easier. So I have a lot of respect for the guys who sit at home and like try to trade it through. I'm trying to learn it but it's it's not very easy at all. SO> I totally agree. With the, with algorithms we talked a little bit in the last couple weeks about how when the prices are streaming across the screen you mentioned that it is algorithmically driven but there's still a human decision in it. BA> True. SO> You told me something about there's like one really important guy in the bank that decides that the EUR/USD is going to 1.31 today BA> Uh hm. SO> and then they do something with the algorithm and stuff happens. Can you explain more about that? BA> Well, we build up the algo platform for emerging markets FX and that's where I got most of my experience but I've never run it but the way I see it is you have to have a fundamental idea of where the currencies are going. Algorithms are very good at range trading or maybe even breakouts but they can't really tell you anything from the news flow or the fundamental information. So basically you need a very experienced trader to tell the algo, well, not tell the algo indeed but to help the algo get a bias. SO> OK. BA> After the algo gets that bias it can trade around it. So basically in an algo team what you have is a strategist, who is probably a 20-something-year-old trader. SO> 20 years of experience? BA> 20 years SO> OK. BA> of experience. SO> Not 20. BA> No. Not 20 years old, who is not trading in the daily market anymore SO> OK. BA> but maybe writing strategy pieces and then there's a bunch of PhDs basically trying to set up the algo. The thing about the algos is they evolve on a daily basis or it's never done. These guys are always working on something, trying to adjust to the market conditions at the time but basically the strategist makes out the call like if he thinks the USD is going to gain ground against the EUR. He makes this call and he makes another call in terms of volatility. He might say its going to take a while so whatever algo you're building, it should be a trending over type of algo then the mathematicians get into it and try to drive something that actually makes money. Or if its a case like 2008 the strategist might just come up with the idea of shutting down the algo. SO> OK. BA> This has happened before. SO> OK. BA> The point of algo trading is not to be in a position at any given time. Most of the time algos are in a position. SO> Right. BA> All the time of the day but in cases like 2008 where volatility is unpredictable sometimes the best option is just to turn it off. SO> OK so you're making a market, what happens when, if you're the big strategist and you decide, "OK, let's shut the algo off. " The bank can't just stop making a market? You're going to have an angry floor of salespeople so BA> That is true SO> what would you do? BA> Manual trading takes more of the weight in that case. The algo is never 100 percent shut down but there are a lot of different things you can play around with. You can play around with the spreads. SO> OK. BA> You can learn from the algo that restricts customer trading up to a point. SO> So they have just like a big red button that says, "Big Spread" or something like that? BA> There is actually. SO> Is it really? BA> There is a panic button that widens the spreads and it's quite useful. I've used it. You can make the price feed faster than it is right now. SO> OK. BA> In an algo the most desirable thing for a hedge fund customer is the pace of the price feed. They don't want the price to change every minute, every second because SO> Sure. BA> it makes it very hard for them to trade. But if the prices lift or if the volatility is going high, you can, you just have to make it trade at a much faster pace. That's one of the solutions. The basic main solution is to give the responsibility to a manual trader at the end of the day because algos break down at times of unpredicted events. SO> Right. So you guys are kind of like on the floor and you're like the crisis team. The algo does the routine donkey work BA> Yes. SO> and you guys handle the - BA> Basically you still need a human being to be able to tell the difference between hell and just a glitch. SO> OK. BA> One day maybe it will come to a point where algos can do this but I don't think that day is just around the corner yet. SO> So we've spent practically the last month trying to come up with a strategy that's based on our clients BA> Uh hm. SO> manual discretionary trades. What's your general impression of the strategy development process and the challenges? BA> Well, I think the main thing is not forgetting that you're never going to be able to out of, get out of this algo. The manual trade will always have to stay inside SO> OK. BA> every trade, pretty much. It's not going to be a robot that runs by itself and makes money for you. It's just, life just doesn't work that way. So algo doesn't work that way. I'm not disappointed in that sense at all if I can't come up with an algo but if I can't come up with an algo but I think if you know what you're doing, if you know what to expect and if you're ready to spend the time with the algo doing development and doing trading as well I think there is a lot of opportunities for high frequency trading. SO> OK. BA> I wouldn't say an algo is the best way to trade a trend because most of the stuff that I've seen in the chat rooms, in the posts, stuff that we've looked over, human beings still is better at telling trends because the algo is looking at backward data, it's trying to interpolate things, lines between two points in a very non-human way SO> Right BA> but still I think human beings are better at riding the trend and buying into positions that are making money et cetera but the algo is very good at high frequency intraday trading which could be a range trading environment for six hours, it could be range trading environment for six days. I think the real catch here is of course coming up with algos is very difficult but the catch is also coming up with the right environment for this algo. SO> Sure. BA> So what I have learned is you can come up with the algo but you can never leave the algo alone. It's like a child. SO> So the idea of like coming up with your algorithm and just moving to Costa Rica and letting the black box make you money. BA> Just doesn't seem to be happening today. SO> Yes. And with the, it's interesting you mention the range trading because one of the things that we've experienced during this last month is, we're trying to develop a trend trading strategy and I would constantly watch it and fall apart and I kept saying, "This is going to be a great range trading strategy. If only we would stop this trading approach and go to a range. " Look what happens when we run these back -test results? BA> Well, if you think about it an algo basically runs on mathematical equations. How, how interesting these equations might be actually, does not change anything. It relies on historical data. SO> Right. It might be very complicated in terms of formulation but still it will depend on backward data. How the trends starts is mostly, most of the time fundamental reasons start the trend and if it's going to keep going on the fundamental reasons stay there, most of the time. This is a very logical way of trading. It has very little to do with the backward data SO> Right. BA> but in the case of our range trading environment, the backward data is actually very applicable because there is no fundamental reason for a range trade. An algo does wonders in a range trade. There is nothing to understand, so - SO> Trade the chop. BA> Trade the chop, exactly but if you have an idea that you think is going to start into a trend, I think a human being has to do it. We have been trying to build an algo but what we've been doing pretty much is, we have a certain discipline of getting into a trade. Every trader has a certain discipline of getting into a trade but I think personalities are very different between people so everyone's personality actually enjoys a different kind of entry to a trade. SO> Right. BA> Some people might like larger stops. They would not be bothered by the drawdowns. Some people don't like drawdowns but they like to add on to the new positions maybe if a trend is going lower they add on, on higher lows. In any case, I think it's a very personal thing so I don't expect an algo to come up with an idea that would fit every person. SO> Right. BA> If I was trying to develop an algo I would probably develop a set of rules a discipline in trading and then I would familiarize myself with the rules and then I would come up with an algo that runs in mostly range trading environments. SO> OK. So you're going to use your human discretion to apply a grey-box strategy that may be really that runs for what? A couple weeks? A couple months, something to that effect? BA> I think a great example would be EUR/CHF after the central bank intervened in the EUR/CHF there was about six months of doing nothing but a small, bad range but everyone was expecting it to break at some point because SO> Yes, myself included. BA> Yes. SO> I was waiting for that bomb to go off. BA> You have two choices in this kind of environment. What I have done back in the day was take a position for a break and wait for six months which doesn't work very well SO> No. BA> but if you run your algo for a considerable amount of time you will make some money. And as soon as your algo starts losing money you'll understand the trend is starting. I think a perfect example and a very good use of the algo is such situations where you know it's going to trend for a while. Use the algo. As soon as it stops making money use your mind, come up with a fundamental reason why your algo has not been making money in the last few trades and if you understand everything correctly you will be able to ride the trend that's coming. SO> So you can use the algorithms more than define a context and give you some feedback because what I've noticed with trading is that it's such an open-ended problem. Like, you buy and then you have a 50/50 shot of making money BA> Uh hm. SO> and getting a feedback of well, did I make money because I'm good BA> Uh hm. SO> or did I may money because I got lucky, so? BA> Yes. SO> yes, I mean, a lot of people have trouble actually learning. Am I doing something right? Am I on just a lucky streak? Am I on a bad streak? But by doing things like setting algorithms to define context it gives you a defined problem so you start to analyse why it's behaving a certain way. BA> That's very true. Unfortunately most people due to psychological reasons they tend to overestimate themselves. The more money you make the more you overestimate yourself and it is the same for everyone. SO> Sure. BA> Algo kind of gets you in front of that and hopefully helps you handle the situation a little more logically. SO> OK. Awesome and you want to tell everybody about the newsletter that you are starting? BA> Well, I have started a new website, Myndos Capital. It's going to come online in a few days where I will provide people with market information. The main difference from the platforms right now would be, I will use the same kind of stuff that I will be, I would be selling to hedge funds in a bank environment. I would like to actually send trade ideas out and when they don't work out I will send out fundamental reasons which I think the industry is lacking right now. There is so many traders out there who trade through platforms that go through smaller brokerage companies. They actually have great opportunities to talk to each other which they do but they don't really get the fundamental support from anyone like banks SO> Right. BA> You could, I guess one of the main, the reason is the individual customer is too small for a bank to cater to but I guess my website will be helpful in that sense to guide people somewhat in fundamental ways of the markets. Even if my views are wrong that could be used as a trade idea as well. SO> Sure. BA> As long as you take a view I think it's helpful. SO> Awesome. Well thanks for joining us today and thank you guys for listening. Again my name is Sean Overton and the website is www. onestepremoved. com.