Interview with Andrew Allen, Humble Money

August 11th, 2008

For the next interview in the StockTickr Interview Series (RSS feed), I spoke with Andrew Allen from Humble Money. Andrew is an independant day trader and has a chess background.

Read on for a great interview and learn more about how Andrew trades, more about his chess background, and how he got started trading.

StockTickr: Tell us a little about yourself, Andrew.

Andrew: I’m 36 years old and live in Brisbane Australia and have been trading full time for three and a half years. Previously I ran a small business teaching chess to school children. When I was a teenager I became obsessed with playing chess and spent many years attempting to become a professional player, a pursuit that allowed me to see a lot of the world at a relatively young age but also an activity that never had that much of a future as there were simply too many better players than myself competing for very small sums of money.

I had dabbled in the market previously having owned stocks and even made a small profitable trade during the tech bubble, I thought that was pretty neat but never pursued the idea any further. In late 2003 I had become very bored with my job and was just starting to wake up to the idea that I was climbing a ladder that had nothing promising waiting for me at the top so I was looking for a change of career. The choices as I saw them were to get more heavily involved with property investment and perhaps branch off into property development and/or to learn how you could make money from trading. Trading was a natural fit for me as I don’t mind investing lots of screen time and doing plenty of reading and I was used to the idea of being constantly humbled by a game that is much greater than you are. I got serious about learning trading at the beginning of 2004 a year before I placed my first trade, I basically read everything I could get my hands on, attended all the trading meetings and seminars in Australia that were available and started exploring different trading possibilities. I still invest in property whenever I can and see trading as a way to generate a wage presently.

Since 2005 I’ve traded index futures and Australian stocks mainly and since late 2007 I have been trading US stocks only.

StockTickr: How did you get started trading stocks?

Andrew: I originally started trading Australian shares using this ‘wonderful’ new product called CFD’s in early 2005. My main strategy was to focus on a watch list of companies close to their announcement and dividend dates and try and catch some upswings, it was a long only EOD strategy and a large part of my success was the powerful bull market we were having at the time, eventually I realized that an unhealthy part of my returns were being delivered by the bull market and I went in search of some ideas that could work just as well in different market conditions, I also developed a strong dislike of CFD’s and market makers in general. Also if you really need 10:1 leverage at expensive interest rates and brokerage then you are under capitalized.

The main reason I started trading US stocks is because for many months I was reading Trader Eyal’s blog and watching his daily reports and regular profits and thinking that this was exactly the type of return profile I was looking for myself.

  • Reasonably high trade frequency for manual trading
  • Hold times of a few hours but not days
  • A simple and hopefully robust methodology
  • Win rates not too far under 50%
  • Few unprofitable months
  • Short duration draw downs = Brilliant.

I’ve basically been consistently profitable since the beginning trading US stocks and even though it’s a very short track record so far (9 months) I’m confident there is a good chance this consistency will continue as I learn and improve.

StockTickr: Most traders have a horror story about losing their shirt when they first started trading. What’s yours?

Andrew: No horror stories so far, for me the thought of having to work at a job you hate because you need the money is the real horror story, so I have tried to be very careful about getting forced into that position, nothing the markets will ever throw at you is scary if you are able to place it in perspective. I’ve been fortunate in avoiding any large trauma with my trading.

I’ve had a large dose of luck with this however when I consider how many contracts I was holding completely unhedged in various stock indices such as the DAX & FTSE overnight at some points compared to my total capital, it’s just great that the period of my greatest ignorance and exposure coincided with some wonderful bull markets around the world. Bull markets are excellent times to start trading if you can reach some state of self awareness before they end.

StockTickr: Do you trade for a living now?

Andrew: Yes. I see trading US stocks as a wonderful way to make a wage for the moment, certainly more than I could earn in any other job I would qualify for. After a decade of teaching chess my family had given up the thought that I would ever get a respectable job, so I’m quite comfortable calling myself a trader at the moment. The worst aspect of trading US stocks from Australia is that I need to be awake during the night, which means that I’m constantly dealing with jet lag and different sleeping hours.

StockTickr: What single lesson did you learn along the way that has helped you the most in your trading?

Andrew: Stick around.

Read, Learn, Try plenty of things, Some stuff will work, some won’t.. so what? Improve and repeat.

StockTickr: Do you keep a journal and do you consider good record keeping essential to your success?

Andrew: This is probably the strength of both my trading and how my brain works. I like taking records and documenting things. I always take a journal with me and take notes and write down my thoughts, I finish a journal every three months and buy high quality hard covered journals as I want them to last for a very long time. Sometimes I need to read important information many times before I can actually use that knowledge to improve my results, also information can arrive before you are ready to receive it, you simply don’t have the necessary framework to understand and implement that information when you first hear it and if you don’t capture it somehow you are likely to lose it. I have read the Market Wizard series every 6 months or so since I started trading, every time I read those books I see something different or really ‘understand’ something at a deeper level, I wish there was a shortcut for all of this repeat effort but I haven’t discovered it yet.

With regards to trading my primary Excel spreadsheet is very thorough, it’s the end result of all of my trading experience and a love of measuring things, it’s always growing larger (29 tabs so far) as I borrow different ideas from the net and books about how to measure trading performance. Some of the stats I keep track of I have created myself, but almost all of the good ideas I have just taken from other sources. Record keeping is possibly the one area I seem to do very well with in trading, most of my trading frankly is just very simple and not at all impressive, I don’t have an ability to read the market well so I need to compensate by working hard on my analysis and reviews.

Good record keeping is essential to my success, quite a few of the rules that I implement are as a result of my numbers telling me to behave in a certain way even though it seems counter intuitive.

StockTickr: Describe your style of trading. How long do you typically hold stocks?

Andrew: At the moment I’m day trading exclusively, my average hold time for all trades is 2 hours 39 minutes and 9 seconds 🙂 I’m basically your typical momentum day trader looking to hop on for a ride of a stock that is repricing itself. The good and bad points about this is that it’s the market and not the mechanics of your trading that is doing most of the heavy lifting, so you need to be comfortable with the idea of giving up control and letting things move where they may.

StockTickr: What’s your exit strategy for winning and losing trades?

Andrew: A time based stop EOD is the final exit as I’m not holding any positions overnight at the moment. With losing trades I’m almost always exiting at my maximum stop loss level and with winning stocks I use profit targets mainly with an occasional discretionary profit taking stop if I think the price will go further, hoping to catch those rare tail moves. To date this discretion has cost me money however. I’m very mechanical with my trading and one of my main areas for improvement in the future will to work on my automation and programming skills.

StockTickr: What 3 books do you recommend traders read?

Andrew:

  • Day Trading With Short Term Price Patterns & Opening Range Breakout by Toby Crabel – This is an older book which can be a challenge to track down. I found it very helpful in providing some methods to measure and classify price movement. It sort of fitted my personality nicely in that a lot of the analysis is quite methodical, but not difficult to understand or to implement, If any of the math extends beyond very basic probability and statistics them I would be lost.
  • Fooled by Randomness by Taleb – An excellent thought provoker and very well written book. I felt very dumb after reading this for the first time, who was I to think I could make a living from the markets as a retail trader? Perhaps it would be better to invest in some index funds and get another job or start a business? Now I’m more comfortable with my lack of knowledge and consider that if I can make reasonably consistent returns at what I believe are acceptable risk levels and draw downs then being always perplexed is not that difficult a condition to live with. I still like index funds and respect the markets as being pretty efficient but not yet perfect.
  • Adventure Capitalist by Jim Rogers – I think you need to be an investor to generate real wealth, simply earning a high salary won’t be enough if you don’t have the investment skills to complement the income.

Day Trading With Short Term Price Patterns and Opening Range Breakout Fooled by Randomness: The Hidden Role of Chance in the Markets and in Life, First Edition Adventure Capitalist: The Ultimate Road Trip

StockTickr: Other than your own, what are your 3 favorite blogs?

Andrew: Actually Dave I follow your trading results daily at StockTickr to see how I compare, but since you have started including your ATS results the correlation between our results has gone out the window.

This is a list that is always changing but right at this moment my three favourite blogs related to investing/trading are:

  • Sudden Debt – A wordsmith and very insightful analysis as well.
  • Falkenblog – This well written blog helps remind me that I never want to have to rely on my quant skills to generate an income from the markets, there are too many smart people out there, when I recognize this is necessary to compete then I will have to change games. Fortunately it appears as if the retail trader can still operate in a relatively sheltered world, at least for the moment.
  • The Financial Philosopher – Wonderful quotes and wisdom.

I am fascinated by how the most widely read financial blogs are probably not the best blogs in terms of helping you succeed as a retail trader. Just like chess players gravitate towards opening theory instead of working on their endgame (eating fries instead of vegetables) viewers seem to be drawn to the noise and charts a lot blogs, the more opinions about the market (noise mostly) and recent charts with indicators (the more lines the better) the more subscribers you are likely to get, the idea of hard work and continual self review just doesn’t market well.

StockTickr: Do you think one day computers will make better traders than humans?

Andrew: Perhaps they already are better. I have a limited understanding of the subject but I believe some of the best hedge funds in the world find an edge with their computer power and speed. One thing that surprises me is how long it has taken computers to get to the top of the chess world, even today they aren’t invincible, they play at a higher level than all humans but they can still be defeated now and then in individual games.

I can’t predict how computers will change trading, I would hazard a guess and use one word.. ‘massively’.. but I plan on living long enough to find out. I have this philosophy about such sweeping change that it’s best not to let it keep you awake at night, it’s better to be working on your running skills so that if you can’t outpace the hungry lion you at least can outpace most of the other runners.

StockTickr: What technical indicators could you not live without?

Andrew: I can’t think of any. I was heavily into indicators until I discovered all the various bias ideas our brains and thoughts are subject to. It’s not really an indicator as such but I am fond of horizontal lines, much of my trading is based on them. Buy when price hits that one within this time frame, sell if it hits that one, buy my wife something nice if it hits that one, and so on.

I want to test an indicator before I introduce it. If I was to exit a trade at a Fibonacci extension level then I would like to test that idea against other exit criteria and arbitrary levels over 30+ trades to see if it’s adding value. If simple is working well then I try and resist the desire to add more complexity, it’s a difficult thing to resist though.

StockTickr: How do you think the market has changed over the last several years? How have you adapted?

Andrew: I don’t have a long enough track record to know, and I stopped trading ASX stocks long before the general bull market in Australia stalled. However right at the moment (May 08) it’s obvious that the follow through in the US markets has taken a holiday, and there are some impressive reversal moves, the stats I track were telling me something was different pretty quickly so I have done a few things to compensate including becoming more aggressive with locking in profits and become more selective with trades entered, though having said this I’m basically flat for the month of May so if I’m looking to improve further or waiting for the follow through to return. I’m very happy keeping the gun powder dry in what I consider challenging conditions presently, as if you can avoid doing too many stupid things all at once and keep your trading capital intact then the profits can flow quickly when things turn your way. I would like to think I’m flexible enough to change direction and adopt new systems when required, though I’m green and fortunate enough to have not been really been tested in that area yet.

StockTickr: Do you backtest and if not, how do you instill belief in your system?

Andrew: I backtest a lot less than I used to as I’ve worked out how very difficult it is to do properly and with accuracy. Generally I’m happy with an idea I think should work forward tested over 30+ trades (Ideally 200+ if frequency allows) these days. Belief is very important for me, I’ve found I needed a trading style where I am able to keep the length and size of draw downs relatively small, which is why I have gravitated towards day trading where I’m able to trade at a higher frequency than previously. If you have a system that should be hitting equity highs regularly and is position sized so that there are small peak to trough draw downs then one of the huge advantages of that is you can get a tell about when things might have changed before you burn through too much of your capital. If you have a maximum allowed draw down of 5% of account size you don’t need the courage to be trading when you are down 20% or 30%, I used to have that courage but I lost it.

I also do a lot of work in Excel on my trading and testing new ideas, so that helps.

StockTickr: What advice can you offer traders who are just starting out?

Andrew: Have a good think if this is the ladder you want to be climbing, what will be waiting for you at the top? I have a friend who is presently in Mexico and travelling around the US and South America as a tourist at the moment, meanwhile his internet business continues to double every 6 months or so while his employees run it for him. It’s the dream of trading on a beach with a cocktail in your hand except for him it’s a reality, apart for the having to do any trading or any work at all part.

I also have friends who are well and truly financially set up for life from investing in property in Australia. So choose carefully where you direct your wealth creation energies. I like trading and think I’m doing ok results wise, but I’m yet to meet anyone who has created serious wealth from retail trading, you don’t get rich from a salary usually. If you return 50% on your capital, you need to have at least double your annual trading salary tucked away as working capital. I would be advising you to have a closer look at how you accumulated that trading capital in the first place and ask if that doesn’t present you with better opportunities than trading potentially.

If that advice is unwelcome then find someone who is successful at what you are trying to do and copy them as best as you can.

StockTickr: What do you like best about trading?

Andrew: I can choose to stop working whenever and play with my cat ‘Dax’ (no kids yet). I’m also free to take days off and travel with my wife, the flexibility of the work week is an attraction.

Also it’s not really that difficult compared to other competitive sports to make a wage from the financial markets which is very different to the chess world where the talent/money ratio is highly unfavourable.

StockTickr: When did you start your blog and what prompted you to do so?

Andrew: I started blogging in 2005, though the blog has only ever been a small sideline and can be seldom updated at times, I started it as just a way to say hello to the world and to make contact with other traders. When I started blogging I was living in Lithuania so I was feeling a bit isolated from the English speaking world as well.

StockTickr: Thanks for your time, Andrew.

Andrew: Thanks, Dave.

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Stay tuned – there are several interviews on the way. You can subscribe to these interviews via RSS feed.

Previous interviews in the StockTickr Interview Series (RSS feed)

Do you have suggestions for other traders you’d like to see an interview with? Let us know!

1 Comment »

  1. Humble Money » Blog Archive » Interview Said,

    August 12, 2008 @ 4:19 am

    […] from StockTickr has posted an interview with me on his blog. Posted by Andrew Filed in […]

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