"I've never really had much success as a discretionary trader. I know indicators insde and out. I know mathematical construction of indicators. I've certainly read a tremendous amount about how to read indicators, but I don't use them."
-- Richard Saidenburg
So what were your early days as a trader like?
My father's a stockbroker, so I was exposed to the markets when I was quite young. In fact, I had learned how options worked by the time I was 15. I learned how to use the Value Line Investment Survey to pick stocks that were ranked first and second for timeliness and safety. So by 1986, when I graduated college, I had made a reasonable amount of money by focusing on companies that I knew: Anheuser-Busch, Coca-Cola, Browning-Ferris and others. I was doing some trading then, but mostly I was investing.
You caught the beginnings of the bull market in 1982, didn't you?
Yes, and I was aggressive. I would use 50% margin to leverage my position. Then after college, I went to work on the floor of the American Stock Exchange (AMEX). I started out working as a file clerk for specialists in the Major Market Index Options pit, and my job consisted of crossing off numbers on a card and then inputting the information on the card into the computer. When I worked up to specialist clerk, I was right in the middle of the action, and I had to keep track of the specialist's positions. Toward the end of my stay there, I worked as an arbitrage clerk, which gave me the opportunity to place some arbitrage positions. After I had been there for 10 months, though, I decided that I wanted to trade on my own.
Did you stay on the floor to trade?
I considered trading on the floor, but I'm not a floor trader; I don't have a floor trader's mentality. So in 1988, I set up real-time quotes in an office. I was using Master Chartist and BMI, or what at the time was known as Bonneville. As a systematic trader, my job is to make sure that my position using the system matches the hypothetical one, so my performance can match the hypothetical performance.
One of the key things to determine is the trading system that best matches your temperament.
Personally, I trade systems of all sorts of time frames. I daytrade; I follow short-term systems; I follow long-term systems. It's all the same to me. I make sure my actual position matches my hypothetical position, and that I'm doing what I'm supposed to do.As you said earlier, that is your job as a systematic trader.
Right. Of course, as I'm now trading client funds, I realize that simply placing stop orders at a certain price level for a very large position is not as effective as using some execution skill because of potential slippage. I work the trade within the five minutes around when an order is supposed to be filled, so in that sense I may be using a tiny bit of discretion, but my goal is still to make my position match my hypothetical position.
What about a black-box system, where you don't know all of the rules? What are your thoughts about that kind of system?
The black-box system can be difficult to follow because it may not match your temperament. And there are other reasons why you shouldn't buy a black-box system.
Such as?
When you buy a system, you should think about buying the system seller's research, not their rules. You want to learn from the research and take that research farther by doing your own research to go along with it. But if you buy a black box, then you don't have access to the research behind the undisclosed rules.
And you can't personalize the system to fit your own needs?
No, you can't. Whenever I've bought a system, I've done so intending to learn the rules and build on them. In addition, it's important to trade something unique. If you're trading something exactly the same as a lot of other people, you're going to be competing for fills at those prices. If you're trading something unique, you may occasionally be competing for fills, but you'll also be the only one doing something at that price at other times, and you'll get better fills more often.
After you develop your own system, when would you consider modifying it?
You want to set a fixed amount of time for trading a plan one year is good for some people, while six months is good for others. And during that period, you have to follow your plan precisely.
