Trend Following Risk Management Long Term Survival W Jon Boorman

TITLE: Trend following, risk management & long term survival w/ Jon Boorman (stock trader) CHANNEL: Chat With Traders DATE: 2016-04-08 ---TRANSCRIPT--- Chat with Traders Episode 43. The biggest secret of the best traders in the world is that they’re just like everyone else. However, they’ve worked hard to learn the markets and discover what works and what doesn’t. But how can you hear about these journeys and get in on the strategies and tactics they use? You can do it by listening to Chat with Traders. Here’s your host, Aaron Fifield. What’s up everybody, thanks so much for tuning in and welcome to yet another episode of the Chat With Traders podcast. This week we’re at episode 43 and my guest is John Borman. John has been immersed in the world of trading for over 30 years now and has spent the majority of his time in the institutional space. He’s been on the buy side, the sell side, run a trading desk, been an assistant to a portfolio manager, and has also been a prop trader. But nowadays, John trades independently and does also manage assets for others. His approach to trading is probably best described as a long-only trend following strategy, which we discuss extensively during this episode. Some of the topics we hit on include why the simplicity of trend following can be both a gift and a curse, why John trades the long side only, and how this affects him in a full-fledged bear market, plus a few pointers on position sizing, and John also shares his best tips for long-term survival. I mean, John really was an awesome guest and did share a lot of great wisdom throughout this episode, so I feel like you’re, you’re really going to enjoy our discussion. But just before we get into it, I’ve got something really exciting to share with you, and that’s a new giveaway which has kicked off just this week. Here’s what I’m giving away: a free 90-minute one-on-one mentoring session with one of the Chat With Traders coaches, and there will be 3 winners, seen as there are 3 coaches who I introduced you to the other week. They are Chris Sace, Zach Hurwitz, and Brad Jelenik, each really great traders who take this business very seriously, and they’ve also previously featured on the podcast too. This giveaway is your opportunity to leverage their many years of real market experience with a one-on-one conversation purely focused on how you can become a better trader. So if you’d like to seize this opportunity and enter for a chance to win, just go to chatwithtraders.com/win. That’s W-I-N, and enter your email address. And the cool part about this is once you enter, you’ll instantly receive a unique URL. Share this URL as much as possible, because for every person who enters after clicking your unique URL, you’ll receive an additional 9 entries, and of course that’ll dramatically boost your chances of winning. So just in case you missed it, go to chatwithtraders.com/win— that’s W-I-N— to enter now. Uh, the giveaway will close on the 7th of November this year, of course being 2015, just for anyone who’s listening at a later date. All right guys, let’s get into it. I’m your host, Darren Firefield, and here is this week’s guest, John Borman. Hey John, welcome to the podcast. How are you? Very good, thank you. Thanks for having me. No, thank you so much for agreeing to an interview. I mean, it’s awesome to be speaking with you, and I already know this is going to be a great discussion. So we’re going to discuss your many years on the institutional side of trading, and then the meat of this episode will be focused on your views and beliefs around trend following, which I’m really looking forward to hearing your insight on this. So to get this underway, I’d like to start at day one, right at the very beginning. So John, share with us how you first got involved in markets. And I know you’re quite young at the time, so how did this journey of yours kick off? Well, it’s— I, I guess it’s 30 years ago now, uh, so this is like in the mid-’80s as a teenager. And it was the combination of when I was at college, there was this assignment where you— it was a diploma in business studies, and there was this assignment where you had to manage a portfolio for 6 months. And it kind of fired me with a love for it because I did quite well at it. And you also have to remember that this was in the UK. And at the time, under Mrs. Thatcher’s Conservative government, there was a real big push of share ownership. Lots of nationalized industries were being privatized. So I think British Gas, British Telecom, all these new issues where the public bought into them. Everyone got their 100 shares at a pound each and then got to sell them you know, 40% higher on the first day or something ridiculous like that. So it’s probably not a good thing because it makes you think that it’s easy. And that was definitely a, a good market in the mid-’80s up until ‘87. So that was kind of my first experience of things trading for myself. And having done well in that thing at college, I wanted to then open up an account of my own with a broker, which I did. And obviously I was still ridiculously young and naive and made all the mistakes that novice traders do. And, and actually, I kept trading until I, I got my first job when I finished college. I started working at Schroeder’s which is a big asset manager in the UK, in the back office. And that was in ‘87. And I continued to, on the side, trade for myself. And of course, I was right in the thick of it, trading in and through the crash. And that pretty much wiped me out. And got almost scared of it, I guess, and kind of then backed off and didn’t trade probably for another couple of years after that and just got on with doing my job there, which initially, as I said, was in the back office. But then I later moved up to become in the asset management arm. I became an assistant to a portfolio manager and that then really introduced me more to that institutional side with them of how they deal with things. Okay, excellent. Now, one of the things you mentioned right at the very beginning there which piqued my interest was you said that you made a lot of mistakes early on. So would you mind sharing maybe just a couple of those mistakes? Well, it’s— I mean, they really all stem from just not having a plan, really. I mean, you’re just kind of Flying by the seat of your pants, just not really truly having a methodology, having researched it. And what that probably all stems from is just being too— well, not being patient enough to be able to actually study this and truly learn. And instead, you end up learning by making mistakes the hardest way of all, by losing money. It’s so— it would be— I, you know, I’m sure I used to buy into the whole buy low, sell high mentality, trying to time the market. Just so much of what I don’t do now, you know. So, and I actually often find that on social media now when I’m talking about things to not do, sometimes it’s me talking to myself. You know, it’s almost like you’re reinforcing your process, reminding yourself at the same time as others that, you know, that I’ve discovered the hard way what works for me. Absolutely. Okay, so now just going back to your career in the early days there, so How did you first get your, your foot in the door at, um, the— in the back, your job at the back office there? Like, how did you get into that job? I mean, was it, was it fairly easy for you to pick that up, or tell us a little bit about that? I mean, it’s a very different era, and as I said, that, that was a time of great expansion and growth within that industry. So there were a lot of, um, there are a lot of people hiring. I mean, I, I put out applications to a lot of people. I think I sent out like 50 different letters to people, and I probably got like 3 replies, and 2 of them offered an interview. And I had both those interviews on the same day, and this one offered me the job on the spot. Now, looking back, it’s very low-paid job, and it’s, and it’s in the back office. But you know what, it meant you’re in. And you— it then took me a while to realize where I exactly where I was in within that organization. And you’re— I’m seeing all these trades coming through, which I’m then helping to, to settle and to, you know, do the admin for those. And then I suddenly realized, well, I want to be on the other side of this transaction. I want to be the one either trading this or deciding the allocation. And, and, and so I looked into that. So I guess it made me realize I had an opportunity within that organization if I wanted to take it. And I was quite ambitious at the time. And so I, I would look at these other jobs internally, and they would require these other qualifications that I didn’t have, or, or rather skills that you needed, which now in this day and age will seem ridiculously basic. But it was even just having knowledge of spreadsheets and, and things like that. And I think in those days it was like Lotus 1-2-3 and things like that. So I had to just go away and teach myself those things and, and went and got went to night school and got something in economics and taught myself these other computer skills and things like that so that I could then apply for one of these jobs and meet their minimum criteria, which I did. And, and that, I mean, that was a big, big break for me because then you really, I really got to see that side of the business. I mean, I was talking to— you’d occasionally talk to clients, you’d be preparing client presentations, the performance reports, doing portfolio allocations. And it was that side of it that I enjoyed the most. And I think I showed a particular aptitude for the trading side. And eventually they moved me up to the trading desk where I was then handling all the Far East business for that asset management arm. And I’m 22 years old at this time, so that was quite a responsibility and quite an achievement for me. So I was, you know, you’re handling some pretty decent-sized orders, putting— sometimes we’d put them out to be executed overnight, but I also started to trade some of them during the day with market makers during London hours, where we would, you know, I’d get them to make a price. So then that was my way of handling some of the business there, using my discretion to decide that we might be better off trying to deal this here rather than leave it in the market overnight. Okay, excellent. So later in your career, um, I’m not sure how much further along this was, but I understand that you helped to actually set up a trading desk in London there for the firm you were working for at the time. Yeah, that was the next thing after— I mean, I was— I’d been at Schroeder’s for 8 years, and then I There was a position at what was then Kemper, which later became Zurich and Scudder, and then I think it was bought out by Deutsche. It went through lots of name changes, but that was in ‘95, and I was hired to set up a trading desk in, in London to transfer all their international trading from Chicago to London. And so then that was, um, everything but US markets for them and, uh, and, and all the, um, FX as well. So I, I had, um, again, that was kind of broader experience, uh, because it was the real nuts and bolts of all the other admin and compliance elements that go behind, um a trading desk as well. So I really had to get to grips with that side of it, and, and I did that for another, um, 4 years. So that was, that was my, my entire, uh, buy side thing there, the institutional side, seeing how those kind of PMs, uh, allocate things, how they trade. And because sometimes they had their own ideas about trading, there are others who were very happy to just hand it, hand it to the desk and say, here, look, this is what I need, go ahead and execute it where you think it can be done best. Or, you know, they would give you that, that discretion. But there were others who would have a fixed price in mind. Oh, I only want to buy it with this limit, things like that. Um, which I didn’t think worked particularly well for them. In fact, it would be a source of great frustration to me. You know, you either— do you want to buy this thing or not? And the, you know, limit orders limit performance. There’d be— they’d have these orders where it’s just slipping away from you every single day, and then weeks and weeks later You’ve barely executed 10% of this order and the stock’s gone up 5% or 10%, which was ridiculous. But you’d have other PMs who, they just knew they want to buy this thing, get me in, okay, done. And they don’t mind if you’re then the one initially being aggressive so that we get positioned and then let other people worry about where it’s going from there. And that was, um, that, that in some ways that kind of shaped how I looked at things later on because I actually saw the benefit of that. Once you— now I would now characterize that as, you know, when you get your signal, just take it, um, just instantly acting on it. Not, um, not seeing something thinking, oh, that looks great, I really want that, but I’ll wait for a pullback. And then the pullback never comes. So in working for many different portfolio managers, you really, you know, you get to see what not to do as much as you do, you know, to learn some good things as well. And I’ve been fortunate that I have worked for and with a lot of very good managers, so I definitely learned some good lessons from them. Just so we’re clear on that, so what your kind of role there was, that the portfolio manager has the idea of what stock they want to buy and sometimes what price, and then it was your job to actually execute that order and get them into the market. Is that, is that right? Yeah, it’s different at different firms. Sometimes they would have a, you know, committee that would decide roughly where they wanted their commission business to go to. And then the desk over the course of the year had to try to meet those targets that, you know, roughly we want 10% of our business to go to Kleinwort and we want 12% to go to Lehman and we want 8% to go to Morgan Stanley. And you, you know, you just have to roughly try to then give it to those people as and when it made sense. But Very often, especially when we’re dealing in live markets in Europe rather than putting out business overnight for Asia, you know, you’re dealing with live bids and offers and natural business trying to go where it should go, where the natural supply is. So we would then say to them that You know, sometimes these figures are going to be different because I know you would really love to reward your buddy with this order because that’s where the research came from, but sometimes it wasn’t always that simple because they might not be the Axe in the name. It might be that there’s someone else who was working a pretty decent order in that name that day and that’s where that on this particular day, this is where that order should go. So, you know, that was really your— our role was kind of, um, making sure we get best execution, but also in the long run trying to, uh, fulfill their needs of what their research budgets and things were. Okay, and when did your experience as like an actual prop trader come in? Was that a little bit later, or was this kind of around the same time? Yeah, that was a little later. That in— then after I’d finished at, um, Kemper in ‘99, I, I then went to the sell side and worked for, um, Lehman. And I was initially as a sales trader, so I’m sales trading, uh, pan-European equities to hedge funds and institutions, um, which themselves were mostly in the US. So, so I’d My clients would be people like Templeton or like Lone Pine hedge fund, people like that, or Chilton. And I did that for— that was probably for 3 or 4 years. And throughout that dot-com bear market, which was made it pretty difficult. Um, but then one of the, one of the parts of my job there was that at the time there was— it was a new thing, uh, called, uh, Alpha Capture, where the, the, uh, Marshall Weiss was the client who developed this internal, uh, platform where they would monitor the ideas of brokers, it would be a way for them to assess the signal, if you like, the effectiveness of the ideas that they were getting from their— from the broker community. And the, the better you did in that, the more you got rewarded for it in, in order flow commissions. And I, with a couple of other salesmen on the team as well, we did very well at that. And so that’s what introduced me to that whole concept. It’s— and I actually expand on that in my blog. It’s why I’ve called my blog Alpha Capture. It was something that was quite a big break for me at the time, getting that— being able to work with that client and see what they do. And it was just something that I prospered at. And so it then became, “Well, if you’re gonna do that, you should do that with our money.” So then it was invited to join the prop desk there. And I had a fairly privileged mandate at the time as a generalist. So that rather than being tied to any one sector or market, I was able to trade long-short equity futures and pan-European equities. I mean, it wasn’t a huge book, but it was good enough, and it was a great set up. Uh, that to me at the time, that was like, wow, this, this is my perfect job. Now it’s like I’m, I’m managing money and, um, I’ll get paid on my results. You know, you can’t ask for, for more than that. Uh, but I— and the only problem was at the time the firm was going through a lot of restructuring in that area, and I had like 3 different bosses in the, in the in an 18-month period, and they didn’t really know where to place me or how to characterize what it is I did, because most of the other people in that place were more fundamental-based, and I was really technical. I might have what might have been some fundamental factors to something, but I never quantified the trade in that way. And so eventually when the desk moved off the floor into a separate area, so it almost became like a, you know, an in-house kind of fund, like that was the trend at the time because then they had to move off the floor and separate these things because the regulations were coming in making them do that. Because prior to that, we’d be sitting right behind the market makers, which now would be unthinkable that you could be privy to the kind of information that’s going going on, on the floor. So I was let go from there in ‘04 and that really is the— there’s then a 1 to 2 year period which really forms everything that’s followed. That was really the formation of a lot of my ideas and, um, how I now look at markets really came about in that period. Okay, and I’d like to ask you about that period because I’m interested to know why you chose not to seek out another job doing something similar with another firm, and instead you transitioned more to trading independently. I mean, what was your reasoning for this? Well, I mean Honestly, I did try to get— initially I did try to get another position, and it was actually quite a difficult market at the time. I was trying to then— I was mainly trying to talk to hedge funds about getting a position within a hedge fund because I always felt at the time on my resume that’s like the one thing I hadn’t had. I’d been buy-side, sell-side, run a desk, assistant to a PM, and, and a prop trader. And it was like, it would now be good to continue that money management side and go to a hedge fund. But I had several interviews at different places, but there was just nothing coming through for me. And after about 6 months or so, we just talking with, um, with my wife and, and the family, we just decided that we were going to move to the US, uh, give it a couple of years. If it doesn’t work, we can always move back. But we’d always, um— my, my wife’s American, so we had links back here and would travel over to the US a lot. And we’d always considered that we’d end up, uh, living and retiring there eventually. And so with this opportunity, we just thought, well, why not now? Let’s, let’s just go for it now and see if we can make a go of it there. And, you know, give it a couple of years. We’re still here. I’ve been here 10 years now. So when I first got here, that was really— I mean, that’s when I did a lot of reading and researching of what it is I really believe about markets. And some of the, the book that really helped me with that was reading Van Tharp, uh, Trade Your Way to Financial Freedom, which is an awful, uh, awful title for that book because I always think that gives the wrong impression about what it is. It’s not some get-rich-quick thing. It— but it actually really went through, systematically goes through, uh, makes you break down what is it you really believe about markets, uh, and why, and just strip everything down to, to the bare bones and finding out what time frame it is you’re best suited to, what trading methodology I mean, that’s what it did to me. And, and it really also emphasized the importance of position sizing, and it broke down the, uh, individual components of a system, made you realize how and why things work the way they do. And so, so that was a pivotal thing because I, I then started researching some of these other methods, and trend following was one of the ones that leapt out. I mean, I always felt within his book it kind of lent towards trend following anyway, I think, about being one of the most consistently long-term successful methods out there. And so I read, I mean, I read that, I read Covell’s Trend Following and I read all the Market Wizard books and kind of getting a consensus of what is it these successful people do, what, you know, what are the key, key things. Most of them, it was always about— it was about the importance of position sizing, it was the risk management, it was the cutting losses. And so all of those things resonated with me and was how I then started to concentrate a lot more on trend following. And I started to look into developing different systems and, and finding something that could work for me. Okay, so did you find that your institutional knowledge and, you know, all the knowledge you’d gained over the years up until this point, was that enough to kind of support you? Or, I mean, it kind of sounds like you had to reinvent yourself. Is that a, is that a fair statement? Yeah, I— well, I did. And actually, looking back, I mean, I don’t want to get too— you know, we could go a little deep here, but looking back, it made me realize years later that losing my job back then in ‘04 from Lehman actually, it probably really did affect me a lot more than I realized at the time. And I, you know, I took it pretty heavily and it really just made me examine everything that I had done. And I had been— I’d lost a little bit of money for them towards the end anyway. I mean, as I said, with the changes, I think it was going to be inevitable anyway. That, you know, I probably would have been let go because I didn’t fit into that structure anymore. But I had been losing, and I’d been taking it quite hard. I’m one of these people that if you lose money, it’s— I can’t just say, oh yeah, well, it doesn’t matter, it’s other people’s money. No, to me it matters more. I’m actually very conscientious about that. And so you know, I took it very seriously, the, the position that I was in there. And so I really wanted to examine what it was I was doing and try to, um, get my ideas straight. And I, I had already started that process before I was let go, so it then just made me continue it. And it was, um, yeah, we were in a position that I had that option to be able to do that, and we were relatively comfortable that we, you know, I had the time to then develop things. I mean, that’s one of the great things about that, it gives you time, gives you options. But the real thing is I just started taking everything off the chart one by one. Things that I would use like divergences, stochastics. I mean, now I never use them. And they were— these are all things that I used to use all the time and have them up on my trading. And then I’d kind of examine, well, why is it I really do that? Why did I first start using that? Has it been of any use to me? Why do I use— why do I use 20-day? Why not 21? Why not 22? Why not 19? You know, really start to break down everything that you use and why you think it’s useful to you. And after a while, you realize that there’s not necessarily anything empirical, if you like, about, about these individual things. And it makes you realize not to take them, treat them religiously as Yeah, you know, when you realize that it isn’t the be-all and end-all, well then all of a sudden you take all of them less seriously. And it should really be that if you find they have use, it’s that they have use collectively rather than this one thing says that, therefore I’m gonna do this. I mean, more than anything now I use Price, and that’s what came about from that whole exercise. I would take one by one. I took every indicator off my chart until I was left with nothing but price. And then that was like a— the bell ringing, like, well, there you go. That, that, that is actually all you need. What do you really need to determine the trend and where this thing is going if you had nothing else but price? If you could only have one thing one thing. It has to be price. I’m really keen to actually dig into some of those comments you just made there a little bit deeper shortly, but just before we do, just take us through those few years after you kind of, you know, like we kind of mentioned, you had to almost reinvent yourself and you started reading up on different material and that sort of thing. What were the next few years like? I mean, did you struggle to find your feet and start making money, or did you pick this up pretty quickly? Um, yeah, it was— well, I started, um, experimenting with different systems, and I would put money behind different systems. So I started trading, uh, for myself, but it was mostly Futures, actually. I kind of use some of the basic trend following models that you see people talk about where they might just use, you know, it might just— it’d be like a new 50-day high and exit on a 25-day low or something like that. Some of the basic things you use to model portfolios. And you can add other things to that. You can add trend filters to it that it doesn’t just have to have, in that example, made a, made a new 50-day high. It could also be that it’s done that, but also the 50-day is above the 100 and things like that. So you kind of— so I experimented with lots of different models like that with different filters and different criteria. And, and that, that really is about finding your time frame that works best for you, as well as a kind of a diversified portfolio, just how many different contracts you’re going to look at. And I think I probably had about 20, 20 to 25 different markets at the time. And it was— I mean, I had successes, and then I had other times where when the pullbacks came, they were perhaps a little deeper and harsher than I, than I would have liked. And then that made me re-examine just how much I’m risking in position size. You know, you get used to people talking about 1% or even more And, and I realized for me that was even too much. If I really wanted this to be super comfortable, it would even have to be less than that. You know, it’s one of those things, it’s gauging. Am I checking the futures at night in the middle of the night? Are you, you know, you having to get up and worry about it? You need to get your risk down to the sleeping point. Where you don’t have to worry about it so much. Is there, is there something else that you’re getting out of it? Some other kind of excitement or something from trading? You know, those are normally kind of warning signs. I mean, there’s a difference about being passionate about what you do and enjoying it, but if you really want some kind of excitement or ego gratification, the market is not a good place to find it. I mean, you’ll get crushed eventually. So, you know, you need to have those kind of outlets outside of trading. And so, uh, so it actually— so what happened is it got to the point where, um, I realized I wasn’t going to be in a position to make enough in terms of, say, making a living from it. And, and I believe for most people That probably is the case. They actually need way, way more, uh, than they have. I mean, I, I started to calculate that, um, for that to be really comfortable for me and for, you know, to not need any other source of income and to be totally— you’d need all these other things paid off. You’d need your house paid off. You need your kids’ college paid for and all those kind of things. And then you’d still need, to me, at least a million-dollar trading account. Now, how many people can do that, have those things paid off and have a million to trade? Well, I couldn’t. I certainly wasn’t at that stage. But it made me realize, well, fine, I’ve, I’ve kind of built the groundwork here. I’ve done all the groundwork here and I’ve built a fantastic platform on which to expand. But, and until I’m ready to build on this or to make it actually a client business, um, in the meantime I need to go back to, um, uh, getting some other qualifications and, um, and having another source of income in the meantime. So then I I went back to, um, uh, working on the sell side with— I had a local friend here who ran his own brokerage business, uh, which was fortunate. So I then worked for him for 4 years. So that was from 2008 to 2012. And so I got all my qualifications again for that. So I had to get my 7, my 63, uh, I got my CMT I got an ‘86, an ‘87. I became a research analyst. I started writing, um, technical analysis research, um, and went back to a lot of my hedge fund contacts in the UK and started doing some of that alpha capture stuff again. Um, and towards the end of that is when I’d started to use social media, or rather follow people on social media because I couldn’t use it as I was on the sell side. And I actually grew very frustrated that I see all these people out there with this platform, if you like, for their, for their views and for their ideas. And I got very frustrated that I had no voice. And I’d been in this industry all this time, but now the The movers and shakers, if you like, the people that were making a name for themselves and doing well were all the ones who were able to tap into that community. And I wasn’t. And it got to the point where I thought, I’m just going to have to do this. I’m in my 40s. If I don’t do it now, when am I going to do it? And having to just take a leap of faith and like, let’s, you know, what is it you’re waiting for? Just, just do it. I mean, it sounds— I’m saying it like it was easy. Now I’m saying that because of what I’ve done since and how it’s turned out, some kind of hindsight bias. But at the time, it was a big decision for me. It was a giant leap of faith. And like most times when I’ve had to do that, it ended up being absolutely the right thing to do. And so that kind of Brings us almost up to date because that’s at the end of 2012. I quit my last job and in January 2013 I just started blogging with no, with no audience, with no idea of how it would turn out. And I just started talking about my approach and what I think, what I believe, and, and it resonated with a lot of people. Wow, okay, what a brilliant answer, John. Um, that was really good. So let’s, let’s switch gears now and get into more about your particular approach. So if you could take just a few minutes to give us an overview of your actual trading approach and some of the things you’re looking for, and then we’ll zoom into it a little bit further. Okay, well, um Well, let me, let me start by then clarifying what the different areas I have now, because I have two businesses. I have Broadsword Capital, which, which is an RIA that manages the long-only trend following strategy through separately managed accounts. And I have Alpha Capture, which is really a publishing company, which Sells subscriptions to trading signals on the— well, on my blog, johnboorman.com, but also on the Benzinga Marketfy site. And both are really— they’re using a long-only trend following on US stocks, is what I do. And I mean, I say to people, I really boil it down so that I buy stocks in uptrends and manage risk. And this is all kind— this is all part of kind of, if you like, my conclusion and summary of all the things we talked about previously, of the Van Tharp things, of finding what you really truly believe about the market. And so I will say to people, you know, what do we know? What do we know about markets? We know they’re not efficient. We know we can’t predict them. We know you can just buy and hold and you’ll get your annual average return of 7%, but we can’t tolerate the 50% drawdowns or more that we need to withstand to achieve that. So my solution is I’m going to have a simple rules-based methodology is designed to capture existing uptrends, but it avoids the worst of any severe downtrend— downturn. And how do you do that? Well, uh, you incorporate, uh, strict discipline, risk management. You exit trends when they’re invalidated. Uh, you preserve capital so that you’re in a position of strength when better conditions then return. So that’s what I do, and that’s how I’d summarize it. I buy stocks in uptrends and manage risk. And I mean, there’s a— and just one word on, a quick word on trend following. I know there are people that always have this argument about trend following doesn’t work on stocks, and it really gets down to how you define trend following. And some people, if you’re really strict about the definition of trend following, always has to be that it’s diversified, it’s that it’s long and short. Well, yeah, we’re going to lose those facets of it. That, that’s not— you’re not going to have the diverse diversification from different asset classes. It’s all one asset class, it’s stocks. So yeah, they’re all highly correlated. Long-short, I don’t short stocks, I’m long only. So you lose that side of it. But to me, it’s much more important that it’s about the key principles of trend following to me are really about the risk management, that that’s what’s crucial to its viability. You’re going to have more losing trades than winning ones, but your average win will be far larger than your average loss. So you’re still going to be profitable overall. It’s about— that’s the whole running winners, cutting losers things. So, and, and so what I look for, simple stuff, they’re really simple screens: all-time highs, 52-week highs, they could be 50-day highs, they can be— they just need to be new highs on whatever timeframe. Best suits you. You might be able to trade across multiple time frames, and not everyone can do that. Sometimes it’s better to just have one and stick to it. I, I will use daily charts. I might use weekly if I get a signal on the daily that also coincides with the weekly, even better. You know, the more things that you can pull together, the stronger the signal will be. And I might hold for weeks to months. Um, I sometimes incorporate a fundamental element into my stock selection. Uh, you know, it might be some kind of theme behind something, but, uh, the entry and exit triggers will always be objective. They will always be price-based. Um, And I, I have to do that. I mean, I run— it’s a highly concentrated portfolio. So in a strong trending market, I might only have, because of the way I position size, I might only have 12 to 15 holdings at any one time. But that’s pretty much, that’s pretty much how I go about it. Okay. So in there, you, you said that there may be like a fundamental theme. Underlying your decision to buy into a trend. Are you able to share an example of what this may be? Well, it might be like, for example, the IBD list. We— the William O’Neill Investor’s Business Daily list of stocks that they have, you know, those are all stocks that have strong fundamentals, strong growth. And it’s— well, it’s— use a simple example, it would be, you know, if I’ve got two stocks that made a new all-time high today and there’s one that I’ve never heard of, I don’t even know what it does, and it might be fairly small and illiquid, or there’ll be something like, um, uh, Ulta or Nike or something like that on, and it just happens to be an IBD stock. Well, I already know without having to do much more work, if it’s on that list, I already know that means it has really strong fundamentals. So I kind of like the fact that there’s potentially that other kicker to it, if you like. That’s other fuel. What that might be, what’s fueling, help fueling its, uh, advance. But at the end of the day, I’m only ever going to use price to determine my, my risk, my position size. That’s going to determine my entry, it’s going to determine my exit. I, I never make it that the fundamental element is the driver the, the actual reason, uh, for the trade. Because then if, if that’s your entry rationale, well, that has to be part of your exit rationale. And the danger of that is then, uh, you know, you suddenly have something going against you and you’re down 20 or 20% and you’re telling yourself, oh, but it’s really good value, or, uh, but it’s, but it’s, nothing’s changed about the business, it’s still the same great company, you know. And the I don’t trade companies, I trade stocks. I’m not trading their balance sheet. So yeah, it’s good to know that that’s sound and it’s good and it’s a good business. But at the end of the day, no matter how good it is, if the trend invalidates by price alone, then I’m out. And I might take a look at it again to see if it comes back on my screen. And I’ll happily get in again. But I’m always going to be ruthless about managing risk, and I’ll, I’ll always take what price says about something than what an analyst or a balance sheet says about something. Okay, now if you had to break it down to basics, what would you say are the advantages of trend following? And I mean, why does this approach really resonate with you? I guess what I’m trying to say is Why do you think it’s a good fit for you, and what are the advantages that you see in trend following versus other approaches? Well, um, it is absolutely that it, it suits me, and I think that’s one of the most important things, that something suits your style and your personality. And I know sometimes people have problem reconciling that and saying, well, come on, how do you— how does something suit your personality? I, I wrote a blog post about this with my experience in, in this area from having read Jason Williams’s book The Mental Edge in Trading, which does a fantastic job about talking about the importance of, um, your psychological profile and how it might affect your trading. And by going through that exercise, uh, and, and we can— I’ll, I’ll send you a link to it so that people, you can have it at the bottom of this thing and people can go there and check it out because it really is very insightful. That it, it, it showed me that I was I discovered what I was suited to. You know, it had taken me long enough, but eventually you slowly start weeding out all the things that don’t work for you and you’re left with only what does. And had I have just looked at this blueprint of my psychological profile and my personality years ago, I probably could have found out then, yes, you are, you are suited to rules-based methodologies You know, and you have good discipline, you have low anxiety, low vulnerability, so you’re going to be able to withstand it. That’s kind of the thing it went through. So I already know I’m doing something that I’m suited to, which I think is very important. I mean, the pros and cons of trend following Uh, sometimes they’re one and the same. Uh, the, the, the— because it’s simple, it’s good because it’s simple. But that’s also one of the cons, you know. People will say, if it’s so simple, why doesn’t everyone do it? Well, because simple isn’t easy. Um, the, the things that make it work are the hardest things to do. It’s every, every trade feels wrong. You’re buying something when it’s overbought, you’re exiting when it’s oversold. You’ve got to ignore noise. You’re going to have losing streaks. You’ve got to maintain discipline, not just to take your exits, but to keep taking the entries, to take that next trade. That’s why position sizing is so important, because that’s what’s going to keep you in the game. You’ll have low trading costs. You should trade less often. You’re using end-of-day signals, which means you have a lot less screen time. You don’t need to be sitting there during the day watching every tick. But that also is then difficult because it requires you to do nothing for long periods, and there are some people that really struggle with that. They have to be tinkering, they have to be doing something, and they feel compelled to act. And, you know, so that— so it’s one of these things where the beauty of it is its simplicity, but it’s precisely because of that that it makes it so hard for many people to implement and to execute it. Yeah, I’m glad you brought that up, actually. Almost like the, the cons of trend following, or what about it that makes it hard for some traders to stick with. So yeah, I appreciate that, thank you. Um, now something I’d like to ask you about— you, you’ve touched on it already, um, but I’d like to go a little deeper. Um, and I’m fairly certain this is your personal preference and not necessarily the school of thought for trend following, but why do you choose to trade long only? Well, the, the short answer is because I’ve never found a way to make money from shorting stocks consistently. And I’m, and I’m, and I don’t think I’m alone in that. I mean, I’ve asked other people, well-known managers, when I was trying to get my thoughts together on these kind of subjects, and, and I’d kind of struggled to do it, and I’ve called a couple of people up and said, hey, look, I’m really struggling with this and I just can’t seem to consistently find a way how to do it. And they effectively said, yeah, I haven’t either. And, you know, and this is someone who’s been managing money for 25, 30 years. And it’s like, well, if— thank you. It’s like, if they’ve told me that, then why the hell am I going to bother trying to find a way to make it work? With the resources that they had at their disposal and their experience, and they’ve never found a way to do it. I mean, it’s— the price action is just— it’s different in downtrends compared to uptrends. We— because we look at charts, you think it’s— people get used to thinking that following something in a downtrend is just the same as following in an uptrend. But it’s, it’s not. They move very, very differently. You have short covering rips. You know, markets rise more— they rise slowly, they fall very quickly. And I’m sure people have seen that. We see that recently in the market action we’ve been having now. So it’s the same with with stocks that they’re vulnerable to. If it’s a company that’s in trouble, it might be they’ll suddenly announce they’re seeking strategic alternatives and the thing just rips like 10, 20, 30%, or suddenly they become a takeover target. Uh, you can’t, you can’t backtest properly, I don’t think, shorting stocks because you can’t take into account what the borrow restrictions are, what the real costs were. You know, I’ve, I’ve noticed recently in this, in this action in the last few weeks, when I’ve seen something on my trading platform and something’s fallen heavily and suddenly the little red indicator comes up alongside it that the— that there’s kind of limited— there’s restrictions on that stock and there’s limited borrow and things like this. Well, you never see any of that when you backtest these things. It’s very easy to look at the chart and say, oh, look at this, it broke support here, that would have been your signal to get short. And then you work out how much you would have made. You just don’t know that you would have been able to do that. Because of the restrictions that might have been on at the time. But there’s no way to get any of that historic data. It’s also limited expectancy. The most, the most a stock can decline is 100%. The amount it can rise is infinite. Well, I’d rather have that, that expectancy working for me than against me. I’d rather it the other way around. And so I think it, it requires very specific knowledge of, of a company, the, you know, the real reason why you’re doing it. It could be it’s a declining industry, it has some kind of obsolete product, it has— there’s some other fundamental trend going against it. You know, most of the most successful guys who do short— so it’s not that, you know, they obviously do it well and they’ve made money out of it, and people like Jim Chanos and people like that. But I guess that’s what I’m saying, leave it to those kind of guys. It’s what they do. They’re— it’s a specialist thing. I think it’s way too difficult for people who are used to trading the long side in a bull market and they suddenly then think, oh well, now it’s a bear, now I’ll just start trading the short side, as if it’s just— I’ll just do the opposite of everything I did before. It just doesn’t work that way. Okay, that’s a really interesting answer and perspective. So do you, do you feel that way about regardless of what time frame you’re trading, whether you’re trading maybe intraday or, you know, short-term swing trades, um, or whether you’re in long-term trend following. Do you feel that, that the same way about short trades on all those time frames? Well, for, for stocks on a very short time frame, it, it might be possible for people to do that more easily, um, day trading. You know, where you then don’t have that overnight exposure and you don’t run into those other problems. But you’re still gonna run into— I mean, it depends how much you’re trying to trade, obviously, but you still run into the potential restrictions that are there. And you still— I’m still not sure how you would be able to backtest it. I just think there are more— there’s more trouble than it’s worth there. And for me, it just means when, when we go through those periods where we’re mostly in a downtrend, it just means I have fewer and fewer positions until you’re left with virtually nothing. And if we end up being in a fully fledged bear market, well, I’m going to be mostly in cash sitting it out, waiting until I get opportunities on the long side again. And, and that to me, I’d much rather just deal with it that way. It’s, it’s just, you know, it’s really what works for me, and people have to find what works for them. And I’m sure there are people that do make money shorting stocks, but I think it’s, it’s a really hard thing to do consistently. Okay, no, it’s, that’s really cool to get your insight. And I mean, it’s, it’s quite a unique perspective, I, I feel, from what, um, a lot of traders are taught, especially when kind of getting into trading. Um, yeah, because I mean, a lot of, a lot of what you hear is just like, you know, just do the opposite of when you go long. But you’re saying it’s, it’s quite different. So I mean, it’s really good to get your take on that. Um, so when we are in a— when the market is in an overall bear market, how are you trading that? Are you staying out altogether or are you still looking for individual long trades on, you know, individual stocks? Well, I mean, I, I will look for them, but it’s unlikely that they’ll, they’ll be there. I mean, it may well then be that you get opportunities coming up on shorter time frames, you know, depending how long the, the, the downtrend that’s preceded it. If, if we went into something like— imagine if we went into a bear market that, God forbid, went on like a year or 18 months, something like that. Well, the, the way you’re going to come out of that kind of trend, you’re probably going to have some kind of huge basing pattern over many months, some kind of saucer basing pattern, and then suddenly you’ll start getting uh, multi-month, uh, 50-day highs, uh, even 52-week highs all of a sudden, um, because things had been range-bound for so long. And then you’ll be taking those. It’s— so it’s not that you need to wait for all-time highs again before you get back in, but you’ll then suddenly find you’re getting some opportunities. And it may well be it’s it’s a false move and you get stopped out of anything new that you took. And here we go to a new low again. But, you know, you just kind of dipped your toe in with 2 or 3 positions. And as long as you’re doing it in a way where you, your position sizing, where in the way I do, if you’re only risking half a percent each time you’re doing something, well, you can still tolerate getting a few wrong. Um, until a true trend emerges again. Now you mentioned, uh, 0.5% of, um, you know, capital risk per trade. Do you always have this fixed position size, or do you reduce to an even smaller size during times when you’re underperforming or going into a drawdown type of scenario? I Um, that’s a good question because I’m— there are elements of this which I am looking into, and I’m adaptable on it in potentially being even stricter than I currently am, or introducing something where it’s more ATR-based. Um, but for the moment, for how I’m looking at things right now, it’s Yeah, it’s pretty much— it’s always half a percent. And position sizing, to me, it’s just one of the most important facets to any system. It’s just the— it’s the biggest variable in any system that you control, you know. That— and that’s one of the things that’s a Van Tharp thing. I mean, beyond that book that I mentioned, he, he has since come up with a new, another book, The Definitive Guide to Position Sizing. I mean, that is just the Bible on position sizing. And it’s, I mean, it’s a huge book, it’s an immense read, but it’s, it’s just got everything that, that matters on the subject, I think. You know, that was one of the things about breaking down the components of a system And it— I believe it’s only exits that, that determine whether something is a, is a win or a loss. You know, until you’ve actually got out of something, it’s only once you’ve got out that it then goes in the books as a win or a loss. The position size determines by how much. Entry just determines frequency, how often you’re going to trade. So I kind of look at it that you can’t control how price moves, so you can’t control whether that trade is going to be a winner or a loser, but you can control how much it will impact you, and that’s through your position size. And so that’s what makes it so important. All right, well, let me ask you this. So What if someone has a small account and it may not be feasible for them to just risk 0.5% of their capital, or maybe even like, maybe even 1%, uh, you know, once you factor in brokerage and that type of thing? Are there any pointers you could give to someone in this situation who perhaps needs to risk more than 0.5% of their account? They might just be trading, you know, $5,000 or something along those lines. Yeah, that’s— I mean, that’s, that’s going to be tough. The, the reason why that, uh, becomes more troublesome though is that when you have an account that small, it then becomes more about the trading costs. That very often, all of a sudden, uh, those costs become a much higher percentage of what it is you’re trying to do, especially if you’re trying to do it on a, on a tiny, tiny amount. That, I mean, the answer really is that if you then want to reduce those things, you have, you have wider stops which then result in a smaller amount of capital per trade. If you’re suddenly, um, yeah, if you suddenly— your, your stop is like, I don’t know, 20% away, so it will mean it’s over a longer time frame. You might be using a weekly close, you might even be using— I was talking to someone the other day who uses a monthly close, uh, on how they take positions. Um, you see, the irony is with small accounts you should actually move to even longer time frames with, with wider stops so that you have smaller positions. But actually, most people, they go the other way because they then think that they have to build up their capital, and they end up trading, uh, shorter time frames and trading more frequently. And I actually think it should be the other way around. Okay, that’s, that’s a great point you bring up. Now, just Still on the trend following approach, I mean, I understand it’s likely that, you know, you’ll have a losing year from time to time, or if not a losing year, an extended period of time before you continue to make new equity highs. So if, if that’s the case, I mean, how do you deal with this and how do you control yourself from continuing to trade the strategy without changing it? Yeah, it’s— this really is one of the most difficult aspects, and it’s going to come down again to being suited to it and the, and the, you know, the personality thing. It’s about sticking to the system. You got to keep taking the signals, keep position sizing correctly. And I know that it’s so easy to say, and people will say, well, I know I’m supposed to do that, but how do I do it? No one tells me how to do it. And I gotta be honest, I’m just not sure you can teach that. I think you have to learn it by experiencing it. It’s like telling someone who says they want to lose weight, “Well, eat less and exercise more.” They know that. You know, that you think they don’t know that? They know that, but for some reason they don’t want to do it, and they’ll look for a different way to do it. And it’s a similar thing with trading. It’s, you know, there’s the rule, just stick to the rule, but there’s something else making them not do it. And unfortunately, they’ve got to find out what that is. They’ve got to find out what it is about themselves. If they can’t follow their rules, only they can know why. You know, they have to find out The answer’s in them. They have to find out what it is. If they truly believe in what they’re doing, they won’t hesitate to stick to the system. And I’ve got to a point where I believe in what I’m doing, and I know it’s right in the long run for me. So I, you know, I don’t look at these individual trades as— I think in terms of 1,000 trades. This is just, this is just one of those trades, and it almost doesn’t matter that it’s, uh, whether it’s a win or a loss. It’s just one of the thousand. You just keep taking them and keep treating them all in the exact same way. Because if you know and believe that you’re trading a positive expectancy system, then you have to keep doing that in order to get the final result that you’ll get, you’ll get. So this is why it’s so important that as much as possible you try to develop rules of your own that suit you rather than follow someone else blindly. Because as soon as it gets tough, if you’re following someone else, you’ll abandon it as soon as the, the system suddenly doesn’t match your personality, but it’s still easy for them to implement. You know, you, you, um, you can’t, you can’t change your feelings, but you can change how you respond to them. And, and that’s what people have to be able to answer for themselves. Very well said. Another great answer there, John. Um, now, are there any resources just off the top of your head that you’d, that you could recommend to any other traders who are keen to learn more about trend following? Sure. Um, well, the, the obvious one, trendfollowing.com, is Michael Cavell’s site, and his book is always a great place to start on, on the overall subject of trend following. Um, I mentioned the couple of Van Tharp books, Trade Your Way to Financial Freedom, The Definitive Guide to Position Sizing. Uh, Andreas Kleenow has written two fantastic books in the last— I think the first one was a couple of years ago and he just wrote another one earlier this year, Following the Trend, which is mostly about futures-based system and kind of how CTAs manage money. And then this year he wrote Stocks on the Move, which really talk— although I know he is one of these people that doesn’t like to call it trend following on stocks, and we’ve spoken about this and joked about this. But to me, that is what he’s doing in that book. It is trend following on stocks, but he just doesn’t like to call it that. Might call it more like momentum or something. And yeah, and if you— if someone wants to find out more about the personality side, The Mental Edge in Trading, Jason Williams, I think is a fantastic, insightful book. I’m on my blog, johnboorman.com. You can read everything I’ve ever written in the last couple of years. Everything stayed up there. Always try to stay as transparent as possible on everything I do. And I’m also on the Marketfy platform and StockTwits and Twitter, uh, @jborman. Awesome, awesome. Well, I’ll make sure to include, um, all those resources you just mentioned there, uh, in the show notes for this interview at chatwithtraders.com/43. So thanks very much for sharing those, um, bunch of really good, uh, resources there. So anyone who wants to learn more about trend following, definitely, uh, check those out. Chatwithtraders.com/43. Now, John, just to take us out, would you like to leave listeners with any tips for long-term survival? And if you like, feel free to repeat and reinforce anything you’ve already mentioned. Sure. Um, I, I think you— it’s about having a plan, and you really have to— that, and one that suits you, which we’ve talked about several times already. But in trading terms, it’s about being clear about your objectives. Um, I think it can be dangerous when people try to target returns. You know, they’ll say, well, okay, I want to make X per year, divide that by how many days, so I need to make this amount of dollars per day. I think if you— when you have objectives and goals, you need to make them process-oriented. Not outcome-oriented. You know, stick to the process and the outcome will follow. It’s, it’s about having small incremental steps that you bring about big change. Excellent. All right, John, good stuff there. Thank you very much for sharing this. Uh, before we say goodbye, John, can you just share once again with listeners where they can go to find out more about you and connect with you? So maybe your website and, uh, your Twitter handle. Yeah, uh, my website AlphaCapture is, uh, johnboorman.com, and, uh, I’m on StockTwits and Twitter @jborman. Always happy to connect and, and help people and answer any questions. Awesome. All right, really good stuff, and I’m, I’m pleased we were able to make this happen, and thank you very much for, for giving up the time to do this. Thanks again, John. Uh, enjoy your day, and let’s stay in touch. You’re welcome. Thanks for having me. What’s up guys, it’s just me again. Thanks a lot for listening to that episode. I hope you really enjoyed it, um, as much as I enjoyed speaking with John. He was a really interesting guy, and I mean, I’m sure we could have kept going for much longer than we did. Um, but the funny thing is we actually recorded that interview— it was, uh, 12 AM Saturday night for me, uh, middle of the day for him, of course, being on the other side of the world. So if I was a little bit slow in parts, don’t judge me too harshly. That’s my excuse for it, okay? So just a real quick reminder about the giveaway that’s kicked off this week and will be running through till the 7th of November this year, being 2015. So the giveaway is your chance to win a free 90-minute one-on-one mentoring session with one of the Chat With Traders coaches, and there’s going to be 3 winners. Seen as there will be 3 coaches. So just real quick, those coaches are Chris Sace, Zach Hurwitz, and Brad Jelenik, each awesome traders who have previously featured on the podcast in past episodes. Really insightful guys, and I can promise you’ll learn a lot from them. So if you’d like to enter into this, just go to chatwithtraders.com/win, that’s W-I-N, and enter your email address. 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