Key Principles For Successful Trading | Simon Ree

Name: Key Principles For Successful Trading | Simon Ree
Uploaded: 2023-04-17T14:15:01.000Z
Duration: 2 h 16 min 45 s

Foreign

Simon Reed, founder of the Tao of Trading and an options expert, talks about his background in finance and how he got into trading.

Introduction to Finance

Simon's interest in finance was sparked by the 1987 stock market crash.

He studied economics and finance at university.

His first job out of uni was as a futures broker.

In 1996, he joined Goldman Sachs where he built a business around options trading.

Leaving Corporate World

Simon left the corporate world in 2017 to trade for himself full-time.

He wrote a book and set up an online education company to help people fast-track their path to successful trading.

Successful Trading

The first stage of successful trading is not losing money.

Most people get into trading with a lottery ticket mentality, thinking they will make billions of dollars without putting in the hard work.

Trading is different from gambling because it involves playing probabilities and doing the work.

Traits of a Successful Trader

In this section, the speaker discusses the traits that make a successful trader.

Key Traits for Success

A certain disposition, understanding of concepts, and temperament are important for success.

Most people who work in jobs unrelated to finance are unlikely to beat the market over the long term.

As a trader, it's important to focus on managing your own portfolio rather than trying to beat the market.

Consistency is key in trading and following simple rules can yield results.

Trading Strategies

In this section, the speaker discusses his approach to trading and risk management.

Risk Management Approach

The speaker considers himself a risk manager rather than a trader and places a high bar on any risk he takes.

He only puts his cash into trades when he sees high probability moments in time to enter the market.

Technical analysis is used to identify trends and counter-trend rallies.

Trading Both Sides of Market

Shorting is fine but you'll get wiped out if you get caught up in a big counter Trend rally so you really have to trade both sides of Market long and short at appropriate times.

Trade Strategy and Hedging

In this section, the speaker discusses their trade strategy and how they use technical criteria to identify opportunities. They also talk about their approach to hedging.

Trade Strategy

The speaker trades single stocks, usually larger and more liquid names.

They buy call options when going long and put options when going short.

Specific technical criteria are used to identify opportunities.

The speaker has built scans for their three or four trading methods that are run every day looking for opportunities.

Technical Criteria

Stocks that meet the technical criteria are ranked in descending order of market caps.

The speaker looks for stocks that make higher highs and higher lows if they're looking for an uptrend or lower highs and lower lows if they're looking for a downtrend.

Evidence is required to confirm what is expected to happen before entering a trade.

Risk management is crucial, with small losses being prevented from becoming big losses.

Hedging

Hedging isn't something the speaker does on a whim but follows a specific risk dashboard and hedging checklist.

Hedging is more relevant in a bull market when everything looks amazing, especially when long some call options in large market cap stocks.

Hedging Strategies in Bull Markets

In this section, the speaker discusses his approach to hedging in bull markets. He explains that he buys hedges when the market is overpriced and likely to revert to the mean. He also shares his strict rule of going to cash if there is a portfolio drawdown of 15% from a high water mark.

Buying Hedges

The speaker buys hedges when the market is overpriced and likely to revert to the mean.

He spends a small percentage of his nlv on buying hedges as part of his risk management strategy.

The speaker is prepared to lose money on hedges and does not view them as profit centers.

Hedges smooth out fluctuations in nlv, which helps manage emotions and make better decisions.

Selling Calls vs. Buying Puts

If the speaker's long exposure was spy calls, he would sell them instead of buying puts.

Buying puts reduces delta and increases volatility exposure, similar to shorting stocks and buying calls.

If the speaker's long exposure was a basket of correlated stocks, he would implement a hedge by spending a small percentage of nlv on it.

Trading Strategies for Bear Markets

In this section, the speaker discusses his approach to trading in bear markets. He explains that counter-trend moves can be massive in bear markets, making it difficult to short individual stocks. Instead, he takes directional positions long and short and trades both sides of the market.

Bear Market Trading Strategies

In a bear market, the speaker takes directional positions long and short and trades both sides of the market.

The holding period tends to be shorter in a bear market, with positions lasting anywhere from two or three days to a couple of weeks.

Counter-trend moves in bear markets can be massive, making it difficult to short individual stocks.

The speaker is far more likely to take directional positions long and short in a bear market rather than putting hedges on top of a portfolio of positions.

Crypto Conference Ticket Sales

In this section, the speaker encourages attendees to consider buying tickets for a crypto conference now rather than later.

Benefits of Buying Tickets Now

Buying tickets now is recommended as prices are expected to go up.

The conference focuses on permissionless and is ideal for those interested in crypto.

Understanding the 2022 Bear Market

In this section, the speaker discusses the nature of the 2022 bear market and compares it to previous bear markets.

Characteristics of the 2022 Bear Market

The current bear market has been different from previous ones due to its surprisingly orderly sell-off.

There has been an absence of abject fear despite a simultaneous fall in stocks and bonds.

Volatility has underperformed most people's expectations given what happened to the market, particularly NASDAQ.

Strategies for Navigating the Bear Market

Following trends and technicals can help avoid mistakes when investing in volatile markets.

Waiting until a trend reverses before buying can be more effective than trying to catch a falling knife.

Comparing Previous Bear Markets with 2022 Bear Market

In this section, the speaker compares previous bear markets with the current one.

Differences Between Previous Bear Markets and 2022 Bear Market

Both previous falls had volatility that exploded while volatility in 2022 has underperformed most people's expectations.

The simultaneous fall in stocks and bonds during this bear market was due to inflation regime.

Impact on Investors

People who bought volatility for protection generally didn't work as there was no explosive liquidation.

Buying a put option worked to the extent that the market went down but didn't work as protection.

Zero Day to Expiry Options

In this section, the speaker discusses the impact of zero day to expiry options on the market and how it differs from previous years.

Short-term Options

The speaker explains that most of the action in the market is happening in zero day to expiry options.

These short-term options exacerbate intraday volatility and help depress implied volatility because most of the action is in people selling Vol not buying Vol.

There has been a lot of hand-wringing about whether this will be the next cataclysm to hit the market, but there is no compelling evidence yet.

The intraday price action seems weird, with epic intraday reversals that are missed when looking at a daily chart.

Economic Data Releases

Every major economic data release is being treated like a major binary risk event, which is unusual compared to previous years.

The market is obsessed with economic data releases and trying to impute what that means for the Fed's next move.

The current paradigm we're in is where every major economic data release is being treated like a major binary risk event.

Market Outlook

Inflation came out at 5% year over year versus consensus estimate of 5.2% 5.3 year over year and month over month was 0.1 percent relative to 0.2 percent last year.

Unless we break out of our current range (3800 to 4200), it's hard to get particularly excited about anything in the market.

The speaker advises keeping risks small and hitting base hits in this environment. It's not a time to extend risk or try to hit any home runs.

Bearish Sentiment and Put-Call Ratio

In this section, the speaker discusses how bearish sentiment can lead to buying and the importance of monitoring the put-call ratio as a sentiment indicator.

Bearish Sentiment and Futures Positioning

The S&P 500 futures positioning is particularly bearish.

Futures are leveraged instruments that can get squeezed if they're on the wrong side of a move.

A strong move up can cause a short squeeze, which fuels further gains in the index.

Put-Call Ratio as a Sentiment Indicator

When everyone else is bearish, it could be a bull argument in the short term.

Extreme short or long positioning can be a warning to lean the other way.

The put-call ratio is a good warning signal for market sentiment.

The combined put-call ratio takes into account options positions in individual stocks and indices.

A drop below 0.8 indicates excessive optimism, while above 1 indicates something bad has happened.

It's not a precise timing signal but an important sentiment signal to gauge market positioning.

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Technical Analysis

The speaker discusses technical analysis, which is a key feature of their process. They explain trend following and mean reversion principles, how to identify what price is doing, and how to make calls on what it's likely to do next.

Trend Following vs Mean Reversion

Technical analysis involves two principles: trend following (buy when above moving average) and mean reversion (be contrarian).

Price is either reverting to the mean, accelerating away from it or chopping around it.

Identifying what price is doing helps make calls on what it's likely to do next.

Identifying Trends

In an uptrend, look for acceleration away from the mean.

If prices have accelerated too far away from the mean, they are more likely to revert back towards it.

Chopping around the mean makes trading tougher; look for individual stocks or sectors where there is a trend.

Probabilistic Edge

Trading involves assessing evidence as it comes along and playing probabilities.

Risk management should ensure winners are bigger than losers.

Trading in April 2020

The speaker discusses trading in April 2020, which was the start of an epic bull market. They explain how to assess evidence and play probabilities when trading.

In April 2020, there was an extremely high put-call ratio and VIX.

S&P 500 was several average true ranges below its mean.

A strong counter-trend bounce was expected as it was exceptionally long way below its value.

Trading involves assessing evidence as it comes along and playing probabilities.

Assessing Market Conditions

In this section, the speaker discusses how they assess current market conditions and make trading decisions based on short-term moves.

Reading Market Conditions

The speaker looks at major indices such as S&P, NASDAQ, Dow Russell 2000 across multiple time frames.

They also look at what sectors are doing and correlated assets such as the dollar, bonds, and junk bonds.

The speaker considers a range of market internal things like VIX, put/call ratio, skew to get a composite picture of whether the path of least resistance is likely to be higher or lower from here.

Basing Trading Decisions on Technical Analysis

The speaker uses moving averages to get a read on short-term trend and medium/long-term support and resistance levels.

Exponential moving averages give a good read on short-term trends while longer term simple moving averages connect levels of support and resistance that are widely watched by everyone.

Identifying Market Trends

In this section, the speaker discusses how to identify market trends by looking at new highs and lows, as well as other indicators such as breadth and moving averages.

Indicators for Identifying Market Strength

New 20-day and 60-day highs and lows can indicate whether the market is showing strength or failing.

Breadth indicators such as the advanced decline line, percentage of stocks above the 200-day moving average, and percentage of stocks above their 50-day moving average can also provide clues about market strength.

Importance of Trend Identification

Identifying trends is crucial in determining when to make a big move.

Sizing down during periods of less conviction is important to manage risk.

Mindset for Successful Trading

In this section, the speaker emphasizes the importance of mindset in successful trading. He discusses common pitfalls that traders face and how to overcome them.

The Desire to Be Right

Traders often believe they need to be right all the time to make money.

Being right only 60% of the time can still lead to success.

Traders need to overcome their fear of being wrong and learn to identify mistakes early on.

Role of Intuition

Experienced traders may rely on intuition based on past experiences.

However, new traders should not solely rely on intuition until they have gained more experience.

English Importance of Managing Risk and Building Intuition

In this section, the speaker emphasizes the importance of managing risk properly and building intuition in trading. He suggests that traders should not rely on intuition alone but instead keep a record of their trades to analyze winning and losing setups.

Managing Risk Properly

Traders should manage risk properly to avoid chasing moves that are already underway or selling out at the bottom due to losses.

Making money in trading means someone else is losing money, so it's important to manage risk properly to avoid significant losses.

Building Intuition

Building intuition takes time, but traders can start by keeping a record of their trades and analyzing winning and losing setups.

Many lessons from trading are subtle, so traders need to be aware of them to learn from them.

English Market Makers and Trading Strategies

In this section, the speaker discusses market makers and how they hedge their risks. He also talks about his preferred trading strategy using options.

Market Makers

As an options trader, the speaker almost exclusively trades with market makers who hedge their risks.

The speaker assumes that market makers are doing their job correctly, so he doesn't worry about whether they're making or losing money on the other side of his trades.

Trading Strategies

The speaker's preferred trading strategy is using options because he believes there's trillions of dollars turning over every day in financial markets.

Currently, the speaker is exploring sectors during earning season.

Earnings Season Trades

In this section, Simon talks about his trades during earnings season and how he takes advantage of the IV rush while avoiding the IV Crush post-earnings. He also mentions having a bearish calendar spread on the cues as a gentle hedge.

Trades During Earnings Season

Simon likes to take advantage of the IV rush and avoid the IV Crush post-earnings.

He has a couple of positions in some tech stocks that are showing good uptrends.

Simon has a bearish calendar spread on the cues as a very gentle hedge.

Trading During Chop Zone

In this section, Simon talks about trading during chop zone and how it's not as much fun for traders. He also discusses how much time it takes to trade and learn properly.

Trading During Chop Zone

Being in the middle of chop zone is not as much fun for traders.

It's just a time to pay back risk.

Time Required for Trading

Learning how to trade properly requires effort, which is why most people don't succeed.

Once you've grooved your swing in trading, it shouldn't take more than half an hour per day on average.

There might be days where it takes an hour or two minutes if you use scans that provide you with short lists of high potential candidates.

Reviewing macro conditions once a week or over the weekend shouldn't be terribly onerous.

Long vs Short Options

In this section, Simon talks about his preference for long options over short options and why he finds being long easier to compound returns.

Long vs Short Options

Simon prefers being long because it's an easier way to compound returns.

Being short options is fine and great in a high volatility environment, but Simon finds he can compound his gains more quickly and easily by being long.

The theory goes that people who sell options pay a fee to get access to that optionality, which is the volatility risk premium.

Advantage of Being Long Options

It's important to identify high probability moments in time to put your cash at work.

Simon has a very high bar on trades that he takes and doesn't take crap shoots or trade intuition.

He does his homework, has his processes, and reviews macro conditions once a week or over the weekend.

Losses are part of the game, but as long as he wins more than he loses and his winners are bigger than his losers, he can make decent money.

Stop Losses

In this section, Simon talks about stop losses and whether he always has one in place.

Stop Losses

Simon always has a stop loss in place.

Knowing When to Exit a Position

In this section, the speaker discusses how he determines when to exit a position and what factors he considers.

Early Warning Signs

The speaker is vigilant about getting out of a position that isn't working well before it hits his OMG level.

If the speaker sees a moving average crossover or a close below a 50 period moving average or two consecutive closes below a 21 EMA while in a long position, that's an early warning sign.

The speaker has his finger on the trigger and will get out of the position if the ATMA crosses underneath the 21 EMA.

Scaling Out of Positions

If a position is working really well, the speaker will scale out of positions usually if he's up more than 100.

The speaker looks at things like average true ranges, support and resistance, Fibonacci targets to decide where to come out of a position.

Options Trading

The speaker is actually a big fan of selling too early in options trading.

He doesn't wait for the price to peak and then start rolling over because then you're just joining the queue of everybody else kind of rushing out of the theater that's on fire.

He always likes to leave a little bit of upside so it's easier to sell the position on someone else.

Risks in Trading

In this section, the speaker talks about risks in trading and why many traders lose money.

Losing Money Trading

The risk of losing money trading if you don't know what you're doing is very large.

Many statistics show that 80% of traders lose money, which sadly is probably true.

Barriers to entry are low for opening a trading account, which is why we see so many financial accidents.

Nobody makes you pass the test or get a license to open a brokerage account.

Brokerages

Finally, brokerages do people a lot of favors by not showing the implied volatility just making it seem like it's some easy purchase.

The proliferation of options has been maybe good for entrepreneurs but bad for retail investors who don't know how to do options trading.

Investment Strategies

In this section, the speaker discusses investment strategies and how they depend on an individual's objectives.

Long-term Buy and Hold Investing

Long-term Buy and Hold investing is suitable for individuals who are happy with a 10% annual return.

This approach may not be suitable for individuals in their 40s or 50s who do not have a large amount of capital saved up as it will not move the needle.

Higher Returns vs. Risk

Strategies that generate higher returns are generally riskier.

Wall Street has been peddling the story that high risk equals high returns, but we need to think about what risk actually is.

Risk is the possibility of losing all, so if you want to maximize your chance of winning, you need to minimize your chance of losing through high probability setups and proper risk management.

Jeet Kune Do

Jeet Kune Do is a martial art discovered by Bruce Lee.

It is an amalgamation of Wing Chun, fencing, and Western boxing.

The speaker has studied many martial arts over the years but resonates with Jeet Kune Do.

Introduction and Conclusion

In this section, the speaker provides an introduction to the program and concludes it with some closing remarks.

The program can be viewed on YouTube at Blockworks Macro or heard as a podcast on Apple Podcast and Spotify.

Episodes are typically released on Apple and Spotify a few hours before they air on YouTube.

Please leave a review on Apple Podcast if you feel so inclined.

You can get 10% off to Permissionless 2023 and Blockworks Research using Code GUIDANCE10. Thanks again and be well.

Understanding Bitcoin Mining

In this section, the speaker explains what Bitcoin mining is and how it works.

What is Bitcoin Mining?

Bitcoin mining is the process of adding transaction records to Bitcoin's public ledger of past transactions or blockchain.

It involves solving complex mathematical problems using specialized hardware called ASIC miners.

Miners compete against each other to solve these problems, with the first one to solve it receiving a reward in Bitcoins.

How Does Bitcoin Mining Work?

When a miner solves a problem, they add new transactions to the blockchain and receive newly minted Bitcoins as a reward for their work.

The difficulty of these problems adjusts every two weeks based on how many miners are competing, ensuring that new blocks are added to the blockchain roughly every ten minutes.

As more miners join the network, competition increases, making it harder for individual miners to earn rewards.

Bitcoin Mining and Energy Consumption

In this section, the speaker discusses the environmental impact of Bitcoin mining.

Bitcoin mining consumes a lot of energy, with estimates suggesting that it uses as much electricity as entire countries like Argentina or Norway.

This is because miners need to run their specialized hardware 24/7 to solve problems and earn rewards.

However, some argue that this energy consumption is justified because it provides a secure and decentralized network for transactions.

The Future of Bitcoin Mining

In this section, the speaker talks about the future of Bitcoin mining.

Some believe that renewable energy sources like solar or wind power could be used to power Bitcoin mining in the future, reducing its environmental impact.

Others are exploring alternative consensus mechanisms like proof-of-stake that don't require as much energy as proof-of-work used by Bitcoin.

Regardless of what happens, it's clear that Bitcoin mining will continue to play an important role in securing the network and processing transactions.