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Algo Trading Strategies with Nick Radge

Nick Radge and Chris Weston discuss achieving a positive expectancy across trading systems

Published October 11th, 2021

Algo trading strategies are a relatively new phenomenon. Also known as systematic trading, in this interview Nick Radge discusses how he started algo trading and creating strategies. Chris Weston from Pepperstone goes deep into the mindset and strategy behind Nick’s trading methods.

Watch now or read the transcript below:

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Video Transcript

Chris Weston:

Ladies and gentlemen, hello and welcome to the third in our series around algo trading. CodeFest is the name of the series. I’ve got today, Nick Radge. Nick, is the head of trading at The Chartist. I’ll let him explain a little bit more about what they do in a moment. I’ve had a good relationship with, Nick, for a number of years and his information will be invaluable.

We’re going to be talking today pretty much an unscripted dialogue between the two of us, about how he gets a positive expectancy in trading, how he builds robust models in a systematic fashion predominantly equities, but I’ll let him explain the different asset classes that he trades and the different systems that he goes about trading as well, whether it’s mean reversion or trend following.

Before we go into talking a little bit about, Nick, if we could just bring up the disclaimer that’d be great to see. Everything that I say today, and more importantly, everything that Nick says today should be considered general in nature. It shouldn’t be considered personal advice. We won’t really go over any specific trade ideas. It’s more about the process and how we go about creating a system and getting an edge in trading. But if you could just take two seconds just to read the disclaimer, that would be absolutely awesome.

Okay. Brilliant, wonderful. Let’s bring, Nick, into the conversation. Thanks, Nick, for giving up your time. Obviously, you’ve been very valuable there. We’ve obviously known each other for quite some time. I know exactly what you do, but I’m not sure if everyone else out there does.

Why don’t you just tell us a bit, before we get into you as a trader, and how you got into the place that you are at the moment?

Can you tell us a little about The Chartist and the solutions and the offerings that you offer there?

Nick Radge:

Sure. Thanks, Chris. Thanks for having me. It’s great to be here. The Chartist was started back in 2005. Basically, we saw an opening in the market for technical analysis and our original offering was just that pure technical analysis, no fundamental analysis. It was charts and everything chart related, but I’ve always been a systematic trader. Over the years, we’ve morphed into more systematic strategies that we offer clients. And today, we still offer the original chart research, which I’m not personally involved in anymore, but the guys that work for me are.  I’m in charge of a lot of the research and management of these algo portfolios that we run on global equities, basically in Australia in the U.S. They cover short term trading strategies all the way out to longer term strategies, which are very popular for many of our clients who manage their self-managed super funds using those strategies. That’s basically our journey. We’ve been around for about 15-16 years in its current format.

Chris Weston:

What clients do you tend to attract? You say that you’ve got short term trading system and a longer term one. But what’s your average clientele? Is it quite diverse or is there a specific person who you tend to attract?

Nick Radge:

Our clients are me, people like me and my wife, Trish. We’re middle aged, we’re quite experienced. We’ve been around the block a few times. We have a solid understanding about risk management and realistic return profiles where reasonably well-capitalized. And a lot of our clients, not all, but a lot of them, as I said, do/may manage their super funds with our strategies. We’re not going to be sitting here hitting it out of the ballpark or anything like that. We don’t take huge risks. We offer diversified portfolios that are easy to manage. Some of those portfolios only trade once a month.

For new people to the market who want to take over managing their own money, it’s very simple. For example, we run an ASX strategy, trades the top 100 stocks. You’re looking at the Blue Chip names, trades once a month. Very hands off. You don’t have to watch the market each day or anything like that. Very simple to understand, very simple to implement and obviously has very good results.

Chris Weston:

I love the idea as well. You’ve got this lifestyle up in Noosa, where you’re going fishing with your mates and you just come back and press a button at the end of the day and it tells you what to do. I think that probably appeals to a lot of people, right? Tell us about your journey to becoming automated because you’ve got quite an interesting story. I think you started off in the future’s pits back in the day, how did progress from where you started out to where you are?

Tell us your journey.

Nick Radge:

I started back in 1985. I was just straight out of high school. I finished high school in 1984, I didn’t go to university. I was seeing a girl at the time and her brother-in-law just happened to work for Potter and Partners, which back in the day was one of the blue ship stock broking firms. He was looking for a jock. I had nothing better else for myself to do. I thought, “Yeah, why not?” So I started working there, just pushing paper, had nothing to do with the front office at all. It was just all back office. But one day I walked past the private client desk and sure enough, there was a guy, one of the private client advisors, and he had some chart paper and he was plotting the five in 10 day moving average crossover of the S&P futures contract.

Nick Radge:

Back in the day, then it was $100 a contract.  I’m looking over his shoulder, I said, “What are you doing?” And he said, “Well, when the blue line crosses the red line you buy and when the blue line crosses back down through the red line you sell.” And I could see the trends, I could see it all. It really just clicked and I’d never traded up until that point. That afternoon I went down to Penfold Stationery shop and bought myself some graph paper and a black pen, a blue pen, a red pen, and started plotting it. And after a couple of weeks, I went into the old Wiley office manager, had been around the block. I remember I was 18. I had no idea what I was doing.

I said I want to trade these futures. This looks pretty good. And he’s just shaking his head thinking really. And as I said, back then it was $100 a tick, whereas today it’s $25 a tick. Anyway, he let me do it. And that was my beginning. I started doing that and that was late 1985. Obviously, you knew what happened in 1987. But actually that was a different story. I did lose everything in 1987. But I wasn’t trading that particular system when that happened. But that’s a story over late night beers.

Chris Weston:

I can’t imagine there would’ve been too many people who are watching this who probably will have lost everything in 1987. I think you probably learned some big lessons in that situation. But we are going to touch on your different strategies and how you came to those strategies.

But if you take your current situation, you manage your own money and you manage your trend following system. Are you now set?

Do you see the future of your portfolios that you’ve set and you back tested and you know their expectancy? Or, do you see yourself continuing just to make small tweaks over the next 10 years or so, or are you pretty much done now?

Do you feel you are in your level playing field to career finishes?

Nick Radge:

Let’s just go back maybe a step.

I’m what we would call a trend follower. For the first 17 years of my career, I actually traded futures contracts. I did trade a few shares here and there. And in the early 90s, I became interested in very systematic style trading. And when I say systematic, I’m not talking about rules per se. I’m talking about actually programming a computer, putting those rules in the computer, pushing the button, and it generates the buy and sell signal.

That was back in the early 90s. And I started managing my own hedge fund back in the late 90s and we wrapped that up in 2001 for a variety of different reasons. That’s when I moved into equities, that was a purely business decision. The amount of money you can manage trading futures is probably a 10th of what you could manage when you are managing equities. That was the business decision to go into equities.

Always being a trend follow, the first thing I do, I took my commodity trend following strategy that I’d been trading successful in commodities and just put it straight on equities. That’s where I started. I actually have some of the original forum posts, I think from 1999 when I was talking about it and nothing has really changed today. I still trade that original system today.

Not much has changed in that period of time. We’ve made maybe two minor changes, but the core elements of that strategy remain exactly today as they were 20 odd years ago. That’s what we call about robustness.

Chris Weston:

That is robust. Yeah.

Nick Radge:

It’s not to say that it kicks it out of the park every single day, week, month, year. No, it’s not like that at all. This is a long term game and you’ve got to be willing to ride it up and down. And that’s a reason why one of my biggest philosophies is that we trade multiple strategies. Okay. I guess if we were to go and visit a financial planner, financial planner say, “Okay, we’re going to build you diversified portfolio. It has had some different asset classes in there, some different stocks.” Well, I’m the same, except rather than a portfolio of instruments, I’m trading a portfolio of strategies.

Those strategies started off all trend following. And back in the GSC, we went to cash in around June or July in 2008, and stayed that way. We don’t trade short. We just went to cash. That’s the best defensive action for most people, not everybody, for most people. It was during that time, I started thinking, all right, well, this is all good and well, having all this cash sitting on the sidelines, but there’s a lot of volatility. What can I develop here that we can participate in the market with this volatility? That’s when I started researching shorter term mean reversion strategies.

Nick Radge:

That became the second leg, I guess, if you like to these strategies. Today I trade seven different strategies across the Australian market and the U.S market and across trend following/momentum, and also short term, write down to add an actual systemized day trade strategy.

Chris Weston:

Well, that’s great.  I want to talk about diversification within a strategy because, obviously we can spend half an hour talking about that in itself. But you say that you’ve got seven different systems and I want to explore the different types of systems from a top down perspective, what inputs go into them, how you created those systems.

But I think what’s really important is you touched on it at the beginning is the objectives. And you have realistic objectives. Now, if you go for each strategy that it’s not a one size fits all, your whole times, your win ratios, your drawdown, all those factors, the volatility in the strategy in itself will be different, whether it’s mean reversion, whether it’s trend following.

From a really top down perspective, looking at each of those different strategies that you run, can you just walk us through the characteristics that you have.

For example, what you get on a mean reversion strategy relative to your trend following?

What are the characteristics that you exude there?

Nick Radge:

Sure. I guess the two key factors that determine any strategy is the win percentage of trades. Okay? And the win/loss ratio. Every single trader on the planet, every single trader will have a winning percentage of trades and a win/loss ratio. The win/loss ratio is your average win to your average loss. Okay? There are two key components.

With trend following strategies, generally speaking, you will be running around that 45 to 50% win rate. Mine are a little bit higher say around 52. My momentum strategies are around 60%, which is considered quite high for trend following strategies. That’s that one side for trend following strategies. In terms of the win/loss ratio, the lower winning percentage strategies tend to have a higher win/loss ratio of around two and a half to one. What that basically means I might only win 50% of the time, but for every dollar I lose, I’ll make $2.50. And that’s your positive expectancy right there.

Nick Radge:

Okay? With the higher winning percentage trend following strategies with a win rate of 60%, the win/loss ratio is around 1.7. I’ll win 60% of the time, but I’ll only win $1.70 for each dollar that I lose, still a positive expectancy. The mean reversion and day trade strategy are slightly different. And I’ll talk about the first two components of that again. The win ratios for those are around 55% and the win/loss ratio is around one to one. Each dollar I lose, I’ll make a dollar back and I’ll win 55% of the time. Now, here is a key differential between the two strategies and something that not a lot of people think about and that’s trade frequency.

When you’re trading a trend following strategy, you’re holding positions for a long time, months, sometimes a year, sometimes longer. Trade frequency is quite low. You’d have a very low turnover. Some of those strategies only trade 12 times a year. You’re holding periods for a long time. And what you’re trying to do is get a high win/loss ratio out of it. But when we go down to the mean reversion strategies in the day trade strategies, it’s a different game we’re playing. And I guess the best analogy to think of is like a casino.

It’s exactly, I’m the house of the casino. I have a very small edge and the way to make money is to exploit that edge as many times as possible. I place up to 200 trades every single night, and I just let the cards fall where they may, if you like. Even though I’ve got a very small edge, mathematically, a 55% win rate, one to one, I exploit that edge a lot. And that’s what gets me going.

This year I can cite my numbers right here. Number of winning days has been literally 55%. And my win/loss ratio is one to one, but that strategy is up 41% year today. And that’s done four and a half thousand trades so far for this year. It’s just exploiting that little edge.

That’s exactly what the house the casino does. That’s why if you go to Las Vegas, you get free drinks, free food, big shows because all I want you to do is get in the door. That’s their sole goal is to get people in the door. And once you’re in the door, you’re going to be tempted, even if it’s a small amount of money to actually go and have a punt. And if you stay long enough, you’re going to lose.

Chris Weston:

I want to touch on the mean reversion 55%. I tend to see a lot of people who are running mean reversions and they tend to have a higher win ratio maybe trading different asset classes. Their risk rewards generally a lot poorer than that, one to one, it could be less than one to one. When you were back testing this, or maybe we explore what goes into a mean reversion and what mean reversion actually means to you.

But when you were trying out, when you came up with the idea of this mean reversion strategy, were you trying things out to get to this system?

Or were you going through the data?

Were you starting with the data then to create the system?

Or were you just trying out various factors? And if you were trying out various factors, how big a data sample, how did you go about doing the back test to get such a large sample size that you avoid?

Things like tacit, over fitting and all these other factors that go into that. How did you start from scratch to create this mean reversion system?

Nick Radge:

Sure. I think there’s probably two questions there. The first is what was I looking at to actually do? And I think I started where everybody else starts and that’s looking at some technical indicator that indicates an overboard or an oversold condition, like an RSI. Okay? That would’ve been exactly where I started. That’s not what I do anymore. We’re going back 14, 15 years. Those kinds of very basic things is where people tend to start.

We’ve all heard of the RSI too. That’s been pushed around by, Connors, and Alvarez and I steer clear of those kind of things simply because everybody else knows about them. And the more people that know about, the less likely they’re probably going to work. You’ve got to think differently.

In terms of dataset, where we tend to start is we pick a universe such as the Russell 1000. And I say the Russell 1000, because all my short term trading is done on the U.S market. I pay on average 30 cents per trade for brokerage. And obviously when you’re doing a lot of trades, it’s going to add up very, very quickly.

The U.S market offers three very important elements for short term trading. One, price. Okay. Very cheap to trade. Commission is a very, very real friction that you need to deal with. And it’s the reason why a lot of traders in Australia fail because commissions in Australia are actually pretty high. Second of all in the U.S, you have the ability to get high trade frequency because there’s so many stocks available to trade. You’ve got probably seven, 8,000 stocks over there that you can trade.

Lastly, you’ve got liquidity. Lots of liquid stocks over there, and that becomes important when you’re moving larger sums of money around.

That’s where we start, the Russell 1000. I’m probably going to jump forward here because I know this is a question you’re going to ask me later on, but we include what’s called delisted stocks and historical constituents.

If you are trading a universe such as the Russell 1000 and you want to go and back test that universe, well you have to test what was in that universe 10, 15, 20 years ago. What was in that universe 20 years ago is completely different to what’s in there today. We have access to a database that allows us to go back historically and say, stock X, Y, Z was in the Russell 1000 back in 2003 through to 2007. And it’s not in there now. Our back test will actually only include that stock in that four year period of time and won’t include it now.

It’s a very, very clever database and that allows you to back test very accurately without any survivorship bias.

Chris Weston:

Survivorship bias. And what about, you touched on the point of costs there, because costs have changed significantly. How does that affect someone’s back test? If you are going to go back say into the 90s, even before that, if you can get the data to go back to really back test that and have the companies that are in there. But trading costs were obviously significantly higher back in those days. How does that change affect your back test there as well?

Nick Radge:

Yeah. Look, this is a pretty interesting question. There’s a variety of things. Obviously, commissions were hugely expensive back then. But also prior to 2000 in the U.S, we didn’t use decimals, okay, we used eighths. Very different marketplace. And obviously in today’s market, you’ve got the ECNs and all the market makers that you really didn’t have access to like you did back then, or that you do now that you didn’t back then. It is very different and we tend to place more weight, if you like, on more recent data than data back in the 90s. It’s not to say that we don’t test a strategy back into the 90s or back into the 80s.

Chris Weston:

Yeah.

Nick Radge:

But you want to see more consistent results in more recent years than you do back then. That’s the most important thing, you don’t want to see the opposite. You don’t want to see really, really good results in those first five or six years back then and not so good these last six or seven years.

But in terms of the question on commission, that’s very good. I don’t really take that into account because I’m moving forward from this point onwards. It’s a changing game exactly as you say. Australia’s very slow to catch up, they are catching up, but still very, very slow in that perspective.

Yeah, look, I just use today’s commission rates to test backwards and forwards because we are moving forwards from this point onwards.

Chris Weston:

I’m going to talk about the inputs, what mean reversion means to you in a second. But if I look at the microstructure of the market nowadays, certainly not in Australia because the options market is so small, but in the U.S certainly in the main stocks.

So much of it is driven by options flow. Now people delve to hedging and it’s just fundamentals don’t really matter at all. Does that idea about hedging flow and sentiment and all these other factors, does that concern you at all? Or is it the fact that you are just trading price that concerns you?

Nick Radge:

We trade price and volatility. That’s all we’re trading and that’s all we’re concerned about. We do our back testing based on tens of thousands of stocks. The testing I do in the U.S market, the database I use is 33,000 stocks. And we don’t do a great deal.

Again, I’m sorry, I’m going to jump forward a little bit here, but we don’t do a great deal of optimization or curve fitting or anything like that. So when you’ve got a setup, if you like, that holds up across 33,000 stocks, you’ve just got to go with it and say, well, it’s reasonably robust. It’s been working for 25 years. It’s a little bit more difficult with mean reversion or those kinds of short term systems than it is with longer terms strategies.

At the end of the day, trends will always occur. You can look at any chart in any year and see some kind of a trend. Trend following strategies, it’s a lot easier to build a lot more of robust strategy. I think when people start moving into the realms of mean reversion, then they start going into that danger area of curve fitting optimization and those things that can really cause some harm down the track.

Chris Weston:

Well, we can talk about optimization in a second. I know you say said you don’t do it so much, but I’m sure there’s a lot of people out there who want to know more about it and you can explain the pitfalls and some of the things that people fall down.

But I want to understand this idea of mean reversion, because when I’m looking at it, I tried more on the index and commodities and FX side of things and that can be different. I think there’s also a lot of different interpretations of mean reversion. Are people actually using a mean or an average of a specific period for the move to come back? Or is it just in your opinion, something that has just moved so far that it’s extrapolated from some reality? And then you think about things in maybe probability terms where you’ve got this very high probability, according to your models that it’s going to snap back somehow. Are you actually targeting a mean, or is it more about the fact that it’s just moved so substantially far?

Nick Radge:

I’ll tell you the basic format of how a mean reversion system can be built. And then I’ll tell you a little bit more about what I personally do because it’s slightly different. The way we do it, or the way to look at it from a mean reversion perspective, and I’m talking equities here and we only want to trade, well, you can trade it on the short side, but let’s just talk alongside. What we want to find are stocks that are trending up very, very nicely.

We can do something very simple, define any stocks above its 50 day moving average as an example. Okay. That’s a stock that’s moving up. Then what we want to do is find a stock that is in that up trend yet in an oversold position. We might say, find a stock that’s above its 50 day moving average, and then find stocks in that universe where it’s five day RSI is below 20.

Okay, and there we have a universe or a list of stocks that are in an up trend yet they’re now considered to be an oversold condition. They’re the first two elements. The third element is, and this is probably the most important element. The third element is what we call the stretch. The stretch is where we’re going to buy that stock tomorrow, so above the 50 day moving average and the five day RSI below 20.

We call that the setup. The setup doesn’t mean we’re going to just go and buy the stock for the heck of it. We’re going to add a stretch to that. The stretch is where we take the volatility of the stock, say the average true range over the last five days. And we multiply it by a factor, let’s say 0.5.

Let’s use a basic example.

Let’s say the share price today closed at $100. Okay. Our two conditions have been met for the setup, it’s above the 50 day moving average. The five day RSI is below 20. The stock closed at 100 bucks. Let’s assume that our stretch is equal to $1.50. That means tomorrow we’re going to place a buy order to buy that stock at $98.50. All right. We’ve got this oversold condition. We’ve got some stretch on it. If it gets down to $98.50 tomorrow, we’re going to buy it. And then we’re going to look to exit it very quickly. And that’s the basic variance of a mean reversion system that we trade.

Chris Weston:

Sorry. Can I just interrupt, you say about buying, you’ve got a limit order based on that stretch.

You’ll do that on the next day. It has to be the next day. You’re just waiting for that maximum point of stretchiness, I suppose.

Nick Radge:

That’s correct. We would subtract that $1.50 off today’s closing price, and that would be our limit buy order for tomorrow. If today closed at $100, we’d subtract $1.50 off that, buy tomorrow at $98 50. You could subtract it off the low, all those kinds of things.

Now here’s an important element that I do a little bit differently myself. I am not really looking for an oversold condition, per se. I’m looking for an expansion in volatility. Mean reversion tends to work better in higher volatility situations, whereas trend following tends to work better in low volatility situations. The benefit of this is that if you can find a strategy that works well in high or a mean reversion system that works well in high volatility situations. Where do we find high volatility? In bear markets?

During a bear market, your trend following strategies will switch off. They’ll go to cash and you’ll be defensive there. But this is where your mean reversion systems kick in. The mean reversion systems kick in because of fear.  I know, probably, many of your viewers were there back in 2007, 2008, but it was sustained panic for a good year. The world was ending for many, many months on end. You would wake up in the morning here in Australia. And the Dow Jones has dropped another 4% and all of a sudden everyone panics in Australia and the market tanks itself.

Generally what we find in high volatility situations very early on in the trading sessions, there’s a lot more panic. And then the market gets a bit of a hold itself and thinks, okay, let’s just calm down. We’ve had a few coffees. Let’s think about what’s going on, settle down and funnily enough, the market tends to come back a little bit during the day.

It’s capturing those patterns that work particularly well. I used to trade our mean reversion strategy back in the late 90s in futures. Interestingly enough, it caught the same pattern that is an oversold condition. It started with S&P. It went to the Nikkei and then to the Hang Seng, and it subsided as we went across to Europe, simply because at the end of the U.S session, Europe had already opened.

I should say the U.S session had opened when Europe was already opened, but the Asian markets hadn’t. There was more of a reaction in Asia on the open. And as a result, you get that mean reverting effect that goes on. High volatility situations is really where it stands out.

It’s also a very difficult time to trade. To give you an example, as I said to you before, I can load up 200 buy orders. And when you see the S&P futures down 4% during the middle of the night, during at daytime, you’re thinking, “Yeah, do I really want to do this?” And the answer is, actually you do, because they’re the things that it’s a big overreaction. And once this all shit has hit the fan and calmed down, it tends to bounce back a little bit. That’s what we’re looking at with the psychology behind it, if you like.

Chris Weston:

Yeah. And just anyone who’s watching this, if you’ve got any questions as we go along, we will have a question and answer time afterwards, but feel free to drop a question in the question panel, and we’ll answer this as we go along real time.

Anything that, Nick, is saying, drop us a question, if you want to probe some of this information and that’s why we’re here. Just the drop the question there as well.

Just going on that point of volatility, you talked about measuring that volatility and average true range. That’s one thing that we see obviously, a lot of people using, but would you use standard deviation, would you use historical volatility for example, or would you use Bollinger Bands to understand that range of that widening effect, effectively of those distributions from a set mean? Is it just the ATR that you use to understand volatility or is it you just look at the chart and you can see it for yourself?

Nick Radge:

Well, we don’t want to look at the charts. I don’t look at charts. Okay. We’ve got a mathematically define. That’s what it’s all about. Okay. Bollinger Bands, that standard deviation absolutely that’ll work. Another one, for example, the distance between say the 10 day high and the 10 day low, the lowest low in the last 10 days, the highest high in the last 10 days. The difference between those, obviously, the bigger the difference, the high the volatility.

There’s a variety of things you can use to calculate that.

Chris Weston:

Yeah, that’s great. And I genuinely, I heard that strategy and I think I hear people using that across asset classes as well. I don’t see any reason why that wouldn’t be something that you could check out on other strategies as well. I want to talk about trend following because obviously I’ve known you for years as a trend follower.

You’re one of Australia’s pioneer, when I say pioneers, I suppose. But you obviously someone who’s been central to the space for some time. And I see the system as set up to short volatility. The whole micro set up is set up to sell volatility. You’ve got funds that can only go long.

Central banks are there to target the S&P. Any kind of drawdown, they step in. They don’t want to see financial conditions tighten. You’ve got so many inflows going into mutual funds buybacks, the whole works, everything’s set up to sell volatility.

You say that trend following tends to work in a low volatility world, which as I say is, the system is tending to set up. Let’s talk about your trend following system. I want to start off straight away with, you talk about win ratio of 60%, which is very high. But your profitability, is it very right tail? Do you have a significant right skew to your PNL effectively, when you win, you win big and they’re on the tails?

Nick Radge:

Absolutely. That’s the only way it can work.

Let’s just deviate for a second and talk about classic trend following. When we talk about classic trend following that’s where I started and that’s when you trade a portfolio of diversified commodities, wheat, sugar, soya-beans, gold, so on and so forth. That’s what I used to do back in the day. And I used to trade long and short, but now I only trade long only equities.

My defensive stance is going to cash. The way I look at it is it’s quite rightly, it’s looking at that right tail. The right tail means we take a lot of small losses. And then when we get on a big winner, it’s a big, big winner. Last year, for example, my aggressive U.S strategy, we rode Tesla. That portfolio returned 97% last year. And I can tell you the tip, that was all Tesla.

This year, that same portfolio is up 36 or 37%. And it’s all Moderna. The way we want to look at this is, I didn’t know Moderna was going to do it this year. I didn’t know Tesla was going to do it last year. I don’t know what’s going to do it next year. I don’t have to know. All I know is the leaders will bubble to the top and I simply catch them. I guess the way to look at it is like a hitchhiker. All right. Let’s say we’re sitting in Brisbane, and let’s we want to travel to Sydney. Well, if we’re in Brisbane and we want to travel to Sydney, we’ve got to get on the southbound lanes of the motorway to head south. I’m pretty sure anyone in the northbound lanes is probably not going to Sydney.

The analogy there is you want to stand on the right side of the road. You want to buy stocks that are rising. You want to buy stocks that are already going in the right direction. You don’t want to buy stocks that are going down and hope for them to turn around because some stocks don’t turn around.

Just going to have a look at ANP, just keeps on keeping on going down. The next analogy with hitchhiking is that we don’t know what ride is going to be captured. Okay. We stand on the side of the road, long enough. We know a car will stop, but we don’t know which one. Same with stocks. We know a stock will trend. We don’t know which one. We’re just going to stand there, wait for it. Be patient. And the last thing is we don’t know when a stock or when a car does stop and we jump on board that ride. We don’t know how far it’s going to go.

We might get a lift from say Brisbane to Byron Bay. And if the car’s going to stop in Byron Bay, we’re going to hop off and find another car that’ll keep taking us south until we get to Sydney. But we might be lucky enough to catch a ride that takes us the whole way to Sydney. And that’s the way we’ve got to look at it. It’s not about predicting. It’s simply about buying strength. And when that strength is over, we hop off the ride and wait for something else to come along. Simple as that.

Chris Weston:

I’ve got a question from, Sam.

Sam’s written, do you ever target a notional? I guess what he means from that is when your position’s working, when the stock’s moving in the direction you’re going, we’ll talk about risk management in a second, but as that position, the exposure is increased, the share price is going up. Would you say that I want to just continue to have a hundred grands worth of equity and maybe just take some down as the prior price goes off, or would you just use a trail stop loss just to keep that going up or would you actually use a notional?

Nick Radge:

I don’t know about, how do I put the term notional? I know notional is notional funding, but vol targeting is when you remove positions if they’re getting too big for the portfolio or adding to positions if they’re getting too small. We don’t do that. We ride the position for everything that it’s got from day one. We don’t pyramid. We don’t do anything like that. We keep it as simple as possible. We don’t take profits until that trailing stop has been triggered. And in terms of notional funding, we don’t do any leverage or anything like that. It’s purely cash, cash based.

Chris Weston:

Yeah. Great stuff. Let’s talk about the system and we’ve got a couple more questions coming through, which is great to see. Keep them coming. Let’s talk about your trend following system. I don’t know if you want to reveal your secret source effectively, but how does your system pick up a trade when you press that end of day button and it tells you what to buy and what to sell? That trigger that tells you what to buy, how is it determined? What constitutes strength in your system there?

Nick Radge:

Sure. I trade three different types of trend systems. We call Them trend/momentum. There’s two momentum, if you like, or two trends. You’ve got what’s called absolute trend following. I trade two of these kinds of system. Absolute trend following would be the old turtles when you get a breakout. Say for example, our weekend trend trader strategy, which I trade, very, very popular strategy. It’s traded all around the world. I just traded on the Australian market last year. My portfolio made, I think, 56% return. It trades on a weekly basis and it’s buying a 10 week breakout, so 100 day breakout, channel breakout is as easy as it comes. Again, a stock that’s making a new 100 day high is obviously trending up.

We are simply buying strength. That’s one of the strategies, and that’s called an absolute trend following strategy.

Another kind of strategy that I trade is what’s called a relative momentum strategy. These are a little bit different. With an absolute trend following strategy, we’re looking at the stocks independently. I’m only going to buy the individual stock if it makes 100 day high. And I don’t care about what any other stock is doing.

But when we’re trading a relative momentum strategy, what we’re actually doing is we are ranking the strength of all the stocks in our universe. Let’s say we’re trading the S&P 500. What we’ll do is we’ll say right, rank these strokes from the strongest to the weakest, and then I’m going to go and buy the 10 strongest.

Then at the end of the month, I’m going to do that again. If one of those that I’m holding is now ranked number 11, I’m going to sell it. The one that’s moved into the top 10, I’m going to buy it. Then I just keep following that whole process, literally. What it’s doing is it’s keeping me invested in the strongest stocks, which are in the stronger sectors. I don’t have to predict.

As I said, I’ve got Moderna, it’s not because I predicted that Coronavirus was going to need booster shots, all that kind of stuff. The market knows that and the market is pricing that in. We’ve had Moderna for six or seven months now, not because I was smart enough to figure that out. I’m certainly not, simply because it was the strongest stock in the universe. So we buy them and that’s all we do. When that strength whines, it will be replaced by the next strongest stock, whatever that may be.

Chris Weston:
And you touched on diversification within strategy. We still have yet to explore that. But if you’ve got a basket of stocks and you might have covered this, and I apologize if we couldn’t cover [inaudible 00:40:38] ground. But do you have a filter or limit by sector, for example, if you have too much of a concentration within healthcare, would you limit that exposure and allow the system to maybe pick up some more energy? Or how does that sector concentration play into the diversification risk there for you?

Nick Radge:
In simple terms, no, I don’t do that. In Australia, we really can’t do that because some stocks are such a large percentage of the sector. Really, the sector is the stock. You look at CSL, that’s the pharmaceutical sector right there. Telecommunications is Telstra. You can’t do that. You can do it a little bit more in the U.S.

Chris Weston:
That’s right.

Nick Radge:
But no, we don’t do that. And I’ll be a little bit facetious here. Okay. Let’s say that gold goes to $10,000. Do you want to hold airline stocks or do you want to hold gold stocks? Do you understand what I’m saying?

Chris Weston:
Yeah.

Nick Radge:
But if gold is going to go for the mother of all runs, you don’t want to be holding pharmaceutical stocks. You don’t want to be holding banking stocks. You want to be long to the gunnels of gold stocks. That’s what you want. That’s my philosophy. And some people say, well, that’s not a smart way to do things. It’s going to create volatility. Yeah, and it’ll create extra volatility. But at the end of the day, that’s how you get your outsized returns because you will capture the mother of all runs every few years. And that’s going to be the make or break. Tesla last year, Moderna this year. I don’t know how far Moderna could go, It might’ve gone as far as it’s going to go. If it breaks down, I’m off and then I’ll get on something. It could be microchips, it could be Nvidia, and AMD, and these kinds of things. You don’t know. But when there’s, especially now, I am super bullish technology, the next 10 years, who knows what’s going to come out.

Nick Radge:
You look at Amazon, Apple, Microsoft, these are the kinds of stocks you would have said, “Gee! I wish I bought them 20 years ago.” And nothing else. You don’t [inaudible 00:43:00] Boeing 20 years ago, or those kinds of things. You want to be on the big, big trends, the big life-changing trends. And so that’s the way we look at it. It might not be the way to look at it, but that’s the way we look at it. We have no sector specifics, if I’m going to be all in pharmaceuticals, so be it, there must be a reason for it.

Chris Weston:
Well, you talk about using volatility. Do you use volatility as a scanning situation? For example, if a company has closed above a certain Bollinger Band, let’s say that you turn off even rarer, three standard deviations comes up and it’s making higher highs. Does that come onto your radar as something that’s going to start trending? How does that initial volatility move play into something that comes onto your radar that could be scanned?

Nick Radge:
An ideal situation, you want to have a combination of a stock breaking out to a new high point, but doing so in a low volatility environment. That’s your best opportunity right there. And that would suggest if we were going to talk about basic chart patterns, a breakout of a low volatility environment would be a base breakout. And I’ve posted on Twitter, some examples of stocks, going to have a look at MAYA, for example, classic example. It’s been quite some time in a basic formation volatility, it contracted, it contracted, it contracted, then it went bang, it broke out.

Nick Radge:
That’s what we’re ideally looking for. But I should say that we don’t eyeball the charts to find that. We want to try and program that into the computer so we can go back in time and say, “Hey, I’ve got this idea of finding stocks that break out after a low volatility period of time. Is that profitable? Yes or no.” We can take those ideas and we can test them. And it’s quite amazing people have a lot of logical ideas that don’t test out particularly well at all, even though they do seem logical. But I should say with trend following strategies, the entry is probably the least most important part of the whole equation.

Chris Weston:
Yeah.

Nick Radge:
It’s not what causes the money, it’s not what creates the profitability or the positive expectancy. What creates the positive expectancy is riding that trend that comes from that and expanding that win/loss ratio to the maximum that we can.

Chris Weston:
Yeah. Having dealt with retail clients for a long time, I think that the hardest thing that a lot of people, everyone says a retail guy broke, taking large losses and there’s obviously a truth to that. But I find what a lot of retail traders find very, very hard to do is hold on to winners.

Nick Radge:
Yeah.

Chris Weston:
Yeah. People are obviously not systematic. And that’s what systematic trend following systems solve, the ability to just let the system ride and let it breathe and go for it five times all, for example. I think that’s really good. I think that a lot of retail traders just find it very, very difficult. You’ve got to be right every single time. Therefore, you surrendered the profits, cut it off and everyone’s happy. Letting it ride out is really important. But then in terms of the stop loss, you talked about having a trailing stop loss. You want to talk us a little bit more about that because I look at the Commodity Trading Advisor world nowadays, and maybe it’s be a PR tool, but they’re certainly exploiting the fact that they’ve got really sophisticated volatility targeting regimes and all these other factors. I’m not sure if you do that, but you use a trailing stop loss. You want to talk us a little bit for about how you set that and how it steps up?

Nick Radge:
I’m a traditional trend follower. I don’t do any of this vol targeting or anything like that. I want to keep it as simple as possible and ride those trends for everything you got. If you just look at something like a Tesla that we bought, I don’t know, at 120 bucks last year and rode it all the way up to 600. I’m remembering when I bought that people saying you’re a bloody idiot, that thing’s not worth that amount of money, yada, yada, yada. And they were saying the same thing at $600 and that’s fine. I don’t have an opinion on it. I know my opinion is if I’m wrong, I’ll get out. That’s all I need to know. And to do that, we use a trailing stop. Now, we use a proprietary trailing stop. Anyone that follows my Twitter feed, you’ll see some charts. I post sometimes with a red line and I get the question, what’s that red light?

Nick Radge:
And the red line is our trailing stop. It is proprietary. We’ve used it for many, many, many years, and it is dynamic. It’s not based solely on the stock itself. It’s actually based on two different things. One is the stock and one is the underlying index itself and it ratchets up. What we want to do is when the market is trending higher. Let’s say the broader markets such as the all ordinaries or the S&P 500 is trending higher, we want to be open to being long. We want to have positions and be fully invested because of the market’s going up. However, when the trend of the broader market turns down, then we don’t want to close the door. We don’t want to slam the door shut. We want to close it slightly and move that trailing stop up and lock in some of those profits.

Nick Radge:
In other words, not give it so much room to move. And this is a very important thing because what we find is a lot of stocks that are leaders they will tend to consolidate. And then once they’ve consolidated, they’ll move again very quickly. You don’t want to close them out simply because they’re consolidating because they’re going to be the leaders again in the new trend when it comes along. And this is a defensive mechanism, what it allows us to do. And we’re in that mode right now in the Australian market, we’re in a defensive position. Two things happen. We don’t take any more buy positions and we will move our trailing stops up to a lot tighter. And as a result, as the market turns lower, we’ll slowly cash out of the market and be done with it.

Chris Weston:
[crosstalk 00:49:12]. Sorry, I was going to say you made a call the other day saying that you were raising cash levels. I mean, anyone who’s watching this video in a year’s time, probably it will be relevant. But how are you saying things at the moment with your systems and what are you advising your clients?

Nick Radge:
Yeah, we are now in a defensive mode, we are suggesting that the trend of the market is now down in the Australian market, that is. And as a result, what’s going on is we’ve tightened our trailing stops rider. We’re not taking any new long positions on. And if our trailing stock gets tagged, we’re out of the market and starting to raise cash. I think from top of my head, I’m probably 20, 25% cash. It’s only early days there yet. And if the trend in the market turns back up again, I’ll continue to hold those positions that I’ve got. And then I’ll start adding new positions on for those, the trigger, any new buyer signals. But if the market keeps going down, I’ll slowly go to cash and if need be, I’ll go 100% to cash.

Chris Weston:
Yeah. Great stuff. All right. A couple of questions coming in. Some of the questions you’ve answered, but I’ll let you touch on them for their benefit. LES APAC, would you recommend systematic traders in Australia to move to U.S markets given the greater opportunity there?

Nick Radge:
Look, I think if you’re relatively new to trading or you’ve got a small capital base, then I’d probably stick with something very simple in Australia, just your home grown market that you don’t have to worry about currency and those kinds of things. We’ve got a very simplistic ASX momentum model that trades once a month, it’s got a 22% annualized returns, very simple to operate. You can operate it with a $20,000 account, something like that. It’s pretty straight forward. But I would say that if you’ve got a little bit more capital, getting towards $100,000, then yeah, I reckon you should be trading maybe two different markets, one in Australia, one in the U.S just to get that diversification. That would be my recommendation. If you’re doing any short term trading, ideally, probably the U.S simply because commission drag here in Australia is pretty high. Liquidity is pretty low. And you’ve got a lot more opportunity in the U.S, certainly for short-term trading.

Chris Weston:
Yeah. Good stuff. And one other question around the turtles approach. Richard Dennis, back in the day, he came out of an amazing philosophy. I guess this is not the question in itself, but how much did the turtles situation influence you if at all? And can those certain situations, that same philosophy be applied today?

Nick Radge:
Yeah. Well, I actually had a lot to do with the turtles back in the day. I was on the trading for the Sydney Futures Exchange, and we used to execute a lot of the business for the turtles. And it really tweaked my interest as to why these people would just come in and start buying thousands of contracts. And it was pretty interesting. I guess I’m one of these guys that take an interest in this kind of stuff. I’m, “That’s a big order.” I’m not one of those guys. It’s like, why the hell are they buying? What’s going on there to buy that size? And then you wouldn’t hear from them for four weeks and then they’d come back again. And then I guess when I went to Singapore back in the mid 90s, because I spoke English, I have a lot to do with a lot of the U.S hedge funds and those kinds of guys, because the other guys on the desk didn’t particularly speak good English.

Nick Radge:
It became very interesting to see what these guys were doing. And I became friends with a couple of them who worked for those turtle companies and that kind of stuff. It was very interesting and yes, that kind of stuff still works today. Funnily enough, I got an email just yesterday. Someone saying, “The turtles doesn’t work anymore. Can you tell me why not?” Am, well, it does work.

Chris Weston:
Yeah.

Nick Radge:
The principle remains the same. They’re just using different parameter settings because the markets are a lot noisier today than what they were back in the 70s and 80s.

Chris Weston:
Sure.

Nick Radge:
When I say that I mean, back in the day they used a 20 day breakout and a 50 day, what do they call it? A micro break one. Today, it might be instead of 20 days, using 100 day or 150 day or a new 52 week high or something like that. You’re just giving more scope for the position to develop and move. But it’s the same today as what it’s always been.

Chris Weston:
Cool. I just got one question before we wrap it into the summary from Joos Schoeman. I know we touched on it earlier, but just for his benefit, do you scout part of your position out at a predetermined level?

Nick Radge:
No, I’m all in or all out.

Chris Weston:
Great stuff. Okay. Now we’ve touched on your mean reversion and some really great, great advice there. And I think some of that can be back-tested across different asset classes, not just equities. That logic still remains. Trend following day trading systems, for people out there who are creating systems, you talked on it earlier and we never really touched on it. But how do you find that diversification across applying all these different systems at one time? Are you able to quantify the edge that, that gives you?

Nick Radge:
Look, let’s use this year as a very good example. I run two momentum strategies in the U.S markets. One trades the Russell 1000, and one trades the Nasdaq-100 constituent lists. U.S markets, same style strategy, just two different parts of the market, if you like. Now, the Russell 1000 strategy went with a bang at the start of the year. And I think we’re up 30%, very, very quickly by about April. The other strategy, the Nasdaq-100, we were still holding Tesla and as you know, Tesla sold off. So we went into drawdown. In fact, that portfolio took quite a steep drawdown. Had I been relying on the Nasdaq-100, I would’ve been in a drawdown. But because I had both of them, the equity was slightly higher for the period. And that’s a good example of the diversification.

Nick Radge:
The thing here, Chris, is that a lot of people if they are aligned on a single strategy and every strategy, every strategy has periods of drawdown and periods of no equity growth. And for the average retail trader, that becomes very frustrating. They want to make money every day, every week, every month, every year. Get real, that doesn’t happen. Okay. Forget the pipe dream like that. To overcome that, what happens is if someone gets frustrated with their strategy, I’ve been trading this for two weeks, I’m not making money. There’s got to be something better. Well, you’ve probably got a fairly, perfectly good strategy. You’re just not allowing it. You’re not allowing that positive expectancy to come out. And they’ll tend to give it up and go looking elsewhere. But the strategy is probably perfectly fine. I mean, I have people who joined my service, and even though we can show a track record back to 2006, they’ll try it for a month and say, “No, this strategy doesn’t work.”

Nick Radge:
And it’s, okay, whatever, it doesn’t bother me. But this is the impatient logic of a lot of people thinking professional traders make money every day, every week, every month. They don’t. It’s a long-term game. I haven’t been doing this for 35 years because I’m super good at it. It’s, I go through bad periods of time, but to get through those bad periods of time, I add other strategies in there which may offset the ones that are having a rough time. And that’s exactly what happened. I actually get quite smooth equity growth across these different strategies. Yeah, it happens everywhere. For example last year, my two ASX trend following systems, one, which is the one I’ve been trading for 20 plus years, finished the year down 3%. The other one that I trade finish the year up 56%.

Nick Radge:

Had I been relying solely on the one that was down 3%, probably would have been pretty disheartened, a little bit annoyed, frustrated. Someone worse than me would have said bugger it, I’m going to try somewhere else. That’s just basic real time examples of what I’ve been through just the last two years.

That’s why we do that. All of these strategies have a long-term positive expectancy. They’ll all make money over the longer term. I cannot make money. It’s impossible not to make money. But getting from that point to the point of making the money is the challenge, the journey. And this is a key ingredient, I think, between a professional trader and an amateur trader is having the patience and the where with all, to get through the tough times and allow the good times to come along. Because a lot of people won’t.

Chris Weston:

It just shows you’ve got a real belief in your system. I mean, ultimately that’s it.

Chris Weston:

That’s the situation. One more question. I’ve got Tim’s talking about, he’s currently trading in the Australia market, wants to move to the U.S. He wondered in your opinion, what you do in terms of currency movement, currency fluctuations is something you embrace or do you actually hedge out that currency fluctuation?

Nick Radge:

Yeah. I hedge it out and again, I use a systematic approach to do that. Personally, I will use Aussie dollar futures because that’s the cheapest way to go about it. And I just use a simple breakout method to do that. I’ll plot the Aussie dollar. And basically, if you’re getting a 100 day breakout on the upside, your long U.S equities, you’re getting Aussie dollar strength, so I’ll go and buy the futures. And then I’ll just do the reverse. I’ll reverse that hedge off, if we get a breakthrough 100 day low, simple as that. That’s just the way to do it. You’re looking for big movements in the currency though, not little ones. You don’t want your hedge mechanism to be a trading system on its own.

Nick Radge:

It’s got to be there for hedge. You’ve got to be looking for big moves. At the moment, the Aussie dollar is trending down. I have no hedges on in the currency, but if that starts to break up again, and I think I looked at it today or yesterday, it’ll need to move up around 78 and a half cents to put that hedge on. It’s still a fair way away. That’s what the big moves we’re talking about.

Chris Weston:

Yeah. Great stuff. I think there’s a lot of people trading other stocks in different markets that are probably thinking about exactly the same stuff. And it’s no coincidence. Pretty a good way to finish this. Robert Spitz writes, where do I find Nick’s blog and websites. I’m going to make this a two-part question, Nick, if people want to find more information about you, where did they go? And secondly, I believe that they can go to your site and download an e-learning guide or an ebook about some of these concepts you’ve been talking about today?

Nick Radge:

Sure. You can go to thechartist.com.au. That’s our main website. We have a sister website called tradelongterm.com and that’s a US-based strategy. And yeah, we have a free traders blueprint, which can give you the basics of what we’re talking about here. It doesn’t really go too much into systematic kind of stuff, but it goes into positive expectancy, those kinds of things, and how to create that, how to manage positions, how to manage stops and those kinds of things. And then you can systemize that if you’d like. But yeah, we’ve got a two week free trial. If anyone wants to have a little look at what we do by all means, go and have a go with that. Obviously, we’re here to fully support anyone that does that and happy to answer any questions that people may have.

Chris Weston:

Great stuff. If anyone wants more details around Nick’s services, we will put a link to his website in the description here. If anyone wants more information, you can reach out to me and I’ll pass that on as well. You can find me @ChrisWeston_PS. But I want to say thank you to, Nick, today. He’s been obviously very gracious with his time. He’s talked about some really great concepts that he’s developed over the last 35 years, multiple strategies which give you a bit of a taste for how he weighs about building robust systems. I’m sure there’s a lot of information there that you’ll want to get your safe into. Do reach out to, Nick, or reach out to me and I’ll give you Nick’s details. And obviously, learn from Nick and his team there at The Chartist as well. Thank you for your time, Nick.

Nick Radge:

Pleasure, Chris.

Chris Weston:

Great stuff.

Nick Radge:

Thanks for having me.

Chris Weston:

That’s good. And yeah, as we’ve talked about in some of the other webinars, Quasar, who runs our LATAM research effort, we’ll be doing a series posts here, just to talk about some of the concepts that people have heard. Obviously, they can’t go into deep strategy around, Nick’s situation, but going into trend following using some of the systems that we have at Pepperstone, which would be very different from what, Nick, uses. But if you want to get more information about some of these courses that we’re doing internally, then obviously reach out and you can find the link on the website as well. But once again, thank you, Nick. Hopefully we will see you seen. Anyone who’s watching this on the recording leave a message. Obviously, if you liked the video hit the like button, it would greatly improve the channel as well. Thanks guys.