Interview With A Verified World Champion Algo Trader
Trader: Kevin J Davey, KJ Trading Systems
1) How long have you been trading?
About 30 years, the last 13 full time. I was able to make that leap from hobby trader to professional trader – “living the dream.”
2) What style of trading / investing do you practice (technically driven, fundamental, systematic, a combination etc)?
Systematic (algorithmic) trading primarily, with some fundamental and discretionary approaches added in. I try to cover all bases with my trading. Diversification can really smooth the overall equity curve.
3) How do you feel when a trade goes against you?
I don’t care at all. As long as the strategy is performing normally – within established historical bounds – the outcome of any one trade is irrelevant. Plus, since I am trading about 50 strategies or positions at any one time, I likely will not even focus on any particular trade.
4) How do you feel when a trade goes for you?
I don’t care at all, other than feeling a bit happy. The danger is every time I’ve gotten too happy, and thought “I‘ve really figured this trading thing out” I usually get hit with a nice drawdown. So, if the down days don’t bother me, the up days should not either.
5) How have these feelings changed over your trading career? (Can you recall how you originally used to feel and elaborate on how this has changed over time?)
There has been an enormous change in my thinking over the years. For me, it really has to do with the number of strategies I trade. Back when I was trading 1 or 2 strategies, I’d obsess over the performance of those strategies. It was a roller coaster! But, over time, as my account grew, I started adding more and more strategies, keeping the size of each relatively small. This is different than what a lot of people do, which is trying to trade big size with one strategy. I always worry “what if that strategy goes bad?” So, by trading small, I minimize a lot of the feelings I used to have for any particular strategy. Instead, I just focus on the overall equity of the portfolio.
6) Do you have any practices that you do away from the trading screen to help you mentally and emotionally handle trading? (e.g. meditation, yoga, running, Tai Chi, kicking the dog, hitting the bottle etc)
My “game” is that after every trading day, my wife and kids should not know if I made money, or lost money, on the day. Win or lose, I have realized that keeping on an even keel is the best thing to do emotionally. I’ve gotten to the point where no one can tell how I did on any day. To me, that is the ultimate in emotional control, and it helps me immensely in day to day activities.
7) Have you always done this?
No, it has been a long process. Let’s face it – it is hard to cover up feelings of winning and losing money, especially with loved ones. But, it is vital to your long term sanity. I’d never be able to trade effectively – execute my trading strategies, develop new ones, etc. – if I stressed over every dollar I made or lost. I think the money has to be secondary to trading with sound practices. Learning the right way to do things, and then following that path, is the key.
8) If not, how have you learnt to deal with the feelings that come up when trading?
It just takes time, but eventually you become numb to winning days and losing days.
9) Can you describe a time in your trading life which really rammed home the point that so much of trading comes down to psychological factors?
I guess I don’t believe psychological factors are the primary factor in my trading. If you have a bad strategy or strategies, all the psychological work you do has no impact. At the end of the day, you still have bad strategies, and psychological tricks won’t help this at all. You need winning strategies, something with an exploitable edge! Too many people focus on psychology, and forget the part about having a good strategy.
Of course, having a good strategy does not guarantee success, and that is where psychology plays a big role. You need to have the psychological factors solved in order to succeed, that is for sure. But, make sure you have a good strategy first!
10) If you could give aspiring traders one piece of advice about emotionally handling the market what would it be?
Develop, and the trade, numerous strategies. It is really neat – when you are trading 10, 20 or 50 strategies, you find you don’t care about any one strategy. If one stops working, you simply replace it. Contrast that approach with a trader who spends years perfecting his “Holy Grail” strategy. He will obviously be emotionally attached to that strategy, and sooner or later that attachment will cause him to make mistakes. Maybe it will be overtrading it, or continually tweaking it, or maybe stubbornly refusing to turn it off when it fails. In the need, though, his emotions will cause his downfall. Not so with a trader who treats his strategies as disposable and replaceable cogs in his trading “engine.”
So, what I am saying is this: first focus on developing strategies with long term positive expectancy. Then, focus on any psychological hangups you might have.
1) How long have you been trading?
About 30 years, the last 13 full time. I was able to make that leap from hobby trader to professional trader – “living the dream.”
2) What style of trading / investing do you practice (technically driven, fundamental, systematic, a combination etc)?
Systematic (algorithmic) trading primarily, with some fundamental and discretionary approaches added in. I try to cover all bases with my trading. Diversification can really smooth the overall equity curve.
3) How do you feel when a trade goes against you?
I don’t care at all. As long as the strategy is performing normally – within established historical bounds – the outcome of any one trade is irrelevant. Plus, since I am trading about 50 strategies or positions at any one time, I likely will not even focus on any particular trade.
4) How do you feel when a trade goes for you?
I don’t care at all, other than feeling a bit happy. The danger is every time I’ve gotten too happy, and thought “I‘ve really figured this trading thing out” I usually get hit with a nice drawdown. So, if the down days don’t bother me, the up days should not either.
5) How have these feelings changed over your trading career? (Can you recall how you originally used to feel and elaborate on how this has changed over time?)
There has been an enormous change in my thinking over the years. For me, it really has to do with the number of strategies I trade. Back when I was trading 1 or 2 strategies, I’d obsess over the performance of those strategies. It was a roller coaster! But, over time, as my account grew, I started adding more and more strategies, keeping the size of each relatively small. This is different than what a lot of people do, which is trying to trade big size with one strategy. I always worry “what if that strategy goes bad?” So, by trading small, I minimize a lot of the feelings I used to have for any particular strategy. Instead, I just focus on the overall equity of the portfolio.
6) Do you have any practices that you do away from the trading screen to help you mentally and emotionally handle trading? (e.g. meditation, yoga, running, Tai Chi, kicking the dog, hitting the bottle etc)
My “game” is that after every trading day, my wife and kids should not know if I made money, or lost money, on the day. Win or lose, I have realized that keeping on an even keel is the best thing to do emotionally. I’ve gotten to the point where no one can tell how I did on any day. To me, that is the ultimate in emotional control, and it helps me immensely in day to day activities.
7) Have you always done this?
No, it has been a long process. Let’s face it – it is hard to cover up feelings of winning and losing money, especially with loved ones. But, it is vital to your long term sanity. I’d never be able to trade effectively – execute my trading strategies, develop new ones, etc. – if I stressed over every dollar I made or lost. I think the money has to be secondary to trading with sound practices. Learning the right way to do things, and then following that path, is the key.
8) If not, how have you learnt to deal with the feelings that come up when trading?
It just takes time, but eventually you become numb to winning days and losing days.
9) Can you describe a time in your trading life which really rammed home the point that so much of trading comes down to psychological factors?
I guess I don’t believe psychological factors are the primary factor in my trading. If you have a bad strategy or strategies, all the psychological work you do has no impact. At the end of the day, you still have bad strategies, and psychological tricks won’t help this at all. You need winning strategies, something with an exploitable edge! Too many people focus on psychology, and forget the part about having a good strategy.
Of course, having a good strategy does not guarantee success, and that is where psychology plays a big role. You need to have the psychological factors solved in order to succeed, that is for sure. But, make sure you have a good strategy first!
10) If you could give aspiring traders one piece of advice about emotionally handling the market what would it be?
Develop, and the trade, numerous strategies. It is really neat – when you are trading 10, 20 or 50 strategies, you find you don’t care about any one strategy. If one stops working, you simply replace it. Contrast that approach with a trader who spends years perfecting his “Holy Grail” strategy. He will obviously be emotionally attached to that strategy, and sooner or later that attachment will cause him to make mistakes. Maybe it will be overtrading it, or continually tweaking it, or maybe stubbornly refusing to turn it off when it fails. In the need, though, his emotions will cause his downfall. Not so with a trader who treats his strategies as disposable and replaceable cogs in his trading “engine.”
So, what I am saying is this: first focus on developing strategies with long term positive expectancy. Then, focus on any psychological hangups you might have.
About Author: Kevin Davey is an award winning private futures, forex and commodities trader. He has been trading for over 25 years.Three consecutive years, Kevin achieved over 100% annual returns in a real time, real money, year long trading contest, finishing in first or second place each of those years.
Kevin is the author of the highly acclaimed book "Building Algorithmic Trading Systems: A Trader's Journey From Data Mining to Monte Carlo Simulation to Live Trading" (Wiley 2014). Kevin provides a wealth of trading information at his website: http://www.kjtradingsystems.com
Copyright, Kevin Davey and KJ Trading Systems. All Rights Reserved. Reprint of above article is permitted, as long as the About The Author information is included.
Kevin is the author of the highly acclaimed book "Building Algorithmic Trading Systems: A Trader's Journey From Data Mining to Monte Carlo Simulation to Live Trading" (Wiley 2014). Kevin provides a wealth of trading information at his website: http://www.kjtradingsystems.com
Copyright, Kevin Davey and KJ Trading Systems. All Rights Reserved. Reprint of above article is permitted, as long as the About The Author information is included.